Chemical Distribution and Logistics in Eastern Europe
UTS Group Provides Services Along the Chemical Value Chain in the CIS Countries
The Commonwealth of Independent States (CIS) consists of ten Eurasian countries formed following the break-up of the Soviet Union. Three years after its inception in 1991, United Trading System (UTS) was established as a distributor of chemical products in the region. Since 1994, UTS has organically grown to become both the largest and the most influential chemical distribution company in Russia and the other CIS countries. By 2018 UTS Group, headquartered in St. Petersburg, Russia, included 16 companies employing 420 people and generating an annual turnover of around $200 million. Michael Reubold asked Sergey Andreev, deputy managing director UTS, and Lars Hjorth, managing director UTS Scandinavia, about the current market situation in the Commonwealth of Independent States (CIS) region and beyond and the strategy for the company ahead.
CHEManager: UTS has been providing chemical distribution services in Russia and the CIS countries for 25 years. What were the milestones developing your company in this quarter century that has also seen political and economic turbulences affecting the area?
Lars Hjorth: If you look at the 25 years of history of UTS you will see that every one to two years there was an important event expanding our regional presence, infrastructure or competences. We developed a clear strategy to expand our business.
A very important step was, in the year 2000, going beyond St. Petersburg. Today our company has offices in Moscow, Kazan, Rostov-on-Don, Ekaterinburg and Novosibirsk while headquarters remain in St. Petersburg.
The next move was the exploration of the neighboring countries. We started our internalization in Ukraine in 2003 by establishing our own company and continued in Kazakhstan and Belarus with local offices and warehouses.
A wise idea was to go to China almost 10 years ago. UTS Shanghai is a full-fledged legal entity that supports both our sourcing and exporting activities. Today, more than 25% of products that we distribute have Chinese origin. With many Chinese suppliers we enjoy a long history of relationship and exclusive terms of cooperation.
And, this year we opened our own office in the city of Vadodara, in the heart of the Indian chemical industry.
But this path was thorny. For instance, UTS group was strongly hit by the global economic crisis 2007–2009 and abrupt devaluation of local currency. Contrary to many companies and banks having their roots in the 1990s we have survived and became even stronger thanks to the commitment and believe of the team, the help of our suppliers such as BASF, and the loyalty of our customers. The commitment of the team was so strong that people were eager to return part of their salaries thinking that the company payed more than it could in these difficult times. We did also use our own regenerated financial funds.
Then there was 2014 with Maidan in Kiev and the Crimea. At this time, we could not even imagine what would happen in the coming years. The exchange rate turbulences of the Russian Rouble, Ukrainian Hryvnia, and Kazakhstan Tenge to the US dollar did affect the business strongly. Can you imagine how to do chemical distribution under such circumstances? Nevertheless, we have left this crisis behind us, too, and managed to adapt to the new circumstances inclusive politics. Nowadays, we manage our business in Ukraine via Sweden, and Ukraine became our growth leader in 2018.
Having an international exposure, we also feel the pulse of international turbulences such as the change of environmental policies in China or the trade dispute between Beijing and Washington. Even Brexit may have an impact on the costs of material from the UK. We try to follow those trends and take precaution measures to minimize the risks.
Somehow, there is a painful contradiction between obvious globalization of international trade and the era of internet with sanctions and limitations that have recently become a common practice. We think that UTS has developed a strong ‘immune system’ that helps us to endure future challenges, but we always remember that there might be a ‘worst case’ scenario.
“A visible easiness of doing chemical distribution [in Russia] opens doors for new competitors in the market.”
How would you describe the chemical distribution landscape in Russia and the CIS countries in terms of the number of distribution companies and services offered?
Sergey Andreev: The Russian state has taken tremendous efforts in the last years to prevent violation of the customs and tax legislation in Russia. Those violations were a big challenge for us in the past. But now the situation has changed, there is one ‘set of rules’ for all. With exceptions, competition has become much more civilized. A visible easiness of doing chemical distribution opens doors for new competitors in the market. European distributors like Brenntag, IMCD, and Telko became more visible.
We see three major groups of chemical distributors in the Russian market — general distributors, both local and international, having a broad portfolio of products; specialized distributors focused on a certain product line or an industry; and those who we call ‘logistic companies’ — mostly commodity traders without any clear strategy in the market.
We adhere to “general distribution” and firmly believe that diversification of the portfolio is a cornerstone of a sustainable business. We are convinced that a distributor like UTS needs both commodity and specialty products in the portfolio — it is only the question of ability to drive different business models within one organization.
What differentiates UTS from your industry peers?
S. Andreev: We differentiate from our competitors through what we call ‘value added distribution’ — a combination of product portfolio, technical service, marketing and financial strength. We continuously work on the improvement of our offering and recently launched new services for our customers like product blends and door-to-door logistics for dangerous goods in the Moscow region.
One of our strategic targets is to have state-of-the-art logistics both in terms of service and cost efficiency. Already now we know how to manage cargo from any part of the world to Russia, Ukraine and CIS countries, and our logistics comprises the ports of St. Petersburg for the European or Vladivostok for the Asian route as well as railway from Europe or Asia. We know how to do the customs clearance in full compliance with the law but cost efficient.
“There are nine time zones between Moscow and Vladivostok. Transportation & Logistics is our ‘license to operate’.”
Are there differences in the business of chemical distribution in Russia and the CIS countries compared to Western markets? How, in your opinion, do the roles of chemical distributors differ?
L. Hjorth: I don’t think that there is a tremendous difference in terms of business model. You buy a product as efficiently as you can, and you sell it as profitably as you can. However, there are nuances. Western markets are strongly regulated and protected by legislative initiatives like REACh. Our markets are exposed to the materials from all over the world with limited regulation. On the other hand, the Russian market is protected by customs barriers and as a chemical distributor you must know how to deal with it. Chemical markets in Europe are driven by sustainability and ‘green’ chemistry. Our markets are often cost-driven in the face of weakening purchasing power of the population and an expanding low-cost segment. In other words, it’s not enough to offer a product — we need to offer a range of products for different cost segments.
Another expectation of our customers is information about new products, trends and formulations. This is the reason why we take every opportunity to offer trainings for our customers hand-in-hand with our suppliers. Chemical distributors in our market are an important source of information and education. Relationships and mutual trust continue to play a very important role in our markets contrary to Europe that relies more on the processes and institutions.
To our knowledge, chemical distributors in the West do more in terms of formulations, repackaging, logistical services, etc. We are confident that Russia and the other CIS countries will follow the trend.
In Western countries, distribution and logistics services have separated to a large extent, establishing two different markets with specialized companies. Do you expect the same development in Russia and the CIS countries in the near future?
S. Andreev: We follow the experience of European companies that take over logistical and transportation services for a supplier. This is a logical development of the specialization and focus of companies on their core competences. However, our markets are different. Look at the territory of our activities and you will immediately see why. We source products from the EU, China, India, Brazil and many other countries. There are nine time zones between Moscow and Vladivostok. Transportation & Logistics is our ‘license to operate’. To make a judgement call about the future we probably need to explore the European model in more detail, but we think that the market and level of competences is still not mature enough for this kind of split.
What are the current market trends in chemical industry in Russia and the CIS countries and how do you take advantage of them?
S. Andreev: First of all, Russia has become self-sufficient in commodity polymers — PP, PE, PC, PVC, etc. Several projects are under implementation or planned, like Zapsib by Sibur, a new ethylene complex by Nizhnekamsk, projects of Rosneft and Gazprom in the Russian Far East, and some others. Their successful implementation will lead to further capacity expansion. This means that there will be an abundance of monomers — inclusive acrylics — and commodity polymers.
Secondly, in the last five to seven years Russian mid-size companies have successfully launched production of specialty chemicals like amines, polycarboxylates, acrylic dispersions, redispersible polymer powders, chemicals for road construction, crop protection, etc. All these products had been 100% imported in the past. Economic sanctions against Russia have a negative impact on the economy but they also have their flip side — the development of the local industry and import substitution. I think many European suppliers still have not realized this fact and wonder why their Russian business is declining. For us it’s as simple choice — either we are out of the market with imported goods or we cooperate with local manufacturers. We always respect and strictly follow all agreements with our external suppliers but also try to explain that without localization or rational compromises both of us will drop out of the market sooner or later.
We permanently explore new opportunities and new market segments. Only in the last two years we have successfully launched solvents, water treatment chemicals, personal care ingredients, raw materials for sealants and adhesives. There are many more opportunities that we could chase but we are very selective in terms of our portfolio and always check if it fits our ‘DNA’. We have not run out of ideas and our three-year opportunity pipeline that we revise on an annual basis has a value of $ 180 million.
“We see a discrepancy between the modern portfolio of our European suppliers that is getting more sustainability-oriented and the requirements of our local customers.”
What are the biggest challenges for chemical distributors in Russia and the CIS countries?
S. Andreev: The biggest challenge are low growth rates. Russian GDP only grew around 2% in 2018. The other countries are not much different. Main reasons are demography, lack of investments, especially FDI, and some other factors. Despite a comparably low inflation — 4.2% in 2018 — and comfortable oil prices the real income of the population has not been growing for several years. In turn, margins of our customers are under increasing pressure. We also permanently monitor indirect economic indicators like the ‘average supermarket bill’: it has newly declined in 2018, especially in the regions outside of Moscow. We have to adapt to those realities.
Another challenge is local currency fluctuation. Gradual sliding is not a problem but sharp declines lead to financial shocks. Cashflow of the company is a measure permanently watched. Contrary to multinationals we do not have access to unlimited resources and always have to find the right balance between financial stability and growth. Nevertheless, we are absorbing all those risks for our suppliers.
On a personal note I would add that it’s a pity that there is no strong local association in Russia — neither of the chemical industry nor of the local distributors. It could help to advocate the interests of the industry much better.
Issues driving the global chemical business are innovation, resource efficiency, digitalization, and — as you already mentioned — sustainability. How are these ‘megatrends’ regarded in Russia and the CIS countries?
S. Andreev: Actually, we are squeezed between the interests of our suppliers and our customers. It’s not only the West but also China is following the megatrends. The chemical industry in China faced enormous changes in the last years leading to industry consolidation and survival of sustainable suppliers. This led to shortages and price hikes of materials and raw materials. Russia has an abundance of raw materials, significant territory and economic challenges that have an impact on the roll-out pace of those “megatrends” in the country. Nevertheless, also here things change driven by the awareness of the public and advanced management and governmental efforts.
Russia is turning its’ face toward alternative energy, preservation of water resources, and sustainable agriculture. Several advanced companies like Sibur have introduced Responsible Care principles in their business. This trend will inevitably strengthen in the future. Finally, we all live on the same globe! However, at present, we indeed see a discrepancy between the modern portfolio of our European suppliers that is getting more ‘green’ and sustainability-oriented and the requirements of our local customers. I do not know why, but ‘green’ is almost always expensive. In such cases we have to do double work — to have a product to satisfy the ongoing business, and to push new chemistry into the market as this is the future anyhow.
We also would like to use this opportunity to ask European manufacturers not to ‘write-off’ Russia from their strategies in terms of a ‘green’ and sustainable portfolio. We strongly believe that also in our markets the megatrends will find their home. As UTS, we are fully open for such a cooperation. A couple of years ago I participated in an event where a representative of a US mid-size company explained their strategy of “costovation” — a combination of cost advantage and innovation. I think that’s exactly what we need in our markets.
In Western countries, digitalization is heavily discussed as a disruptive force that could urge chemical distributors to rethink and change their business models. How do you see the influence of digitalization on your business in Russia and the CIS countries?
S. Andreev: Digitalization in general is rapidly penetrating all spheres of our lives. Nevertheless, the disruptive impact of digitalization that we saw in entertainment and communication or retail is not so easily transferable to the chemical turf — due to specifics of manufacturing, transportation and handling of chemicals. There is no doubt that this is the future, but we at UTS rather take a pragmatic approach: there is a demand, there is a solution.
We are making two important steps in the direction of digitalization in 2019. In January, we launched a new ERP system for the group, and in May we are going to roll-out a newly developed website. The ERP system will give us a totally different quality of management reports, detailed P&L and more precise consolidated reports for the group. The new system is expandable towards automatic order transmission to UTS in Sweden, digital document turnover, CRM and HR data base. The new website will have a modern design and will be adoptable to smartphones and tablets. It will offer much better product search opportunities for our customers and will later comprise an expert system for customers’ self-service.
We have established contacts with one of the digital chemical platforms in Europe and make our first experience there. One of the challenges where we have not found a solution so far is the digitalization of logistics, first of all, the traceability of orders. The number of IT specialists and programmers in the company is rapidly growing. However, we take step-by-step approach also considering our limited resources.
What are your key success factors?
L. Hjorth: We think that our key success factor is people, even despite digitalization. We took measures to strengthen our human resources in 2018, first of all towards attracting talents to the company, and trainings — both technical and commercial. Our employees have got access to recommended webinars and online training tools.
And what is your strategy to develop UTS in terms of product portfolio, services offered, regional presence, or supplier and customer network?
S. Andreev: Looking into the future we will continue to expand our portfolio through new products as well as our own formulation and blending capabilities. Our strategic task for 2019-2020 is to further strengthen our position in the most prosperous region — Moscow. We keep investing in human resources, new ERP systems, both hardware and software.
“We have an international ambition and will continue to strengthen our international network.”
L. Hjorth: Strategically, we have an international ambition and will continue to strengthen our international network. And we do have all preconditions for that. We will continue expanding our product portfolio through new partnerships with mid-size European companies, new Chinese and Indian producers as well as local champions. We plan to produce more products under our own trade name, both locally and outside of Russia and will chase up re-packaging and formulation opportunities.
In terms of regional presence we will focus on kicking-off our India business and plan to source goods for $ 10 to $ 15 million annually from this country short-term. In 2019, we are planning to diversify our customer work towards closer cooperation with leading local and international accounts. In other words, we do not lack ideas what to do and will always keep an ambition to be no. 1 in our markets.