Discover top 7 industrial gas business realities that drive sustainable business success
You’re a business manager from the industrial gas industry who want to get insight into industrial gas business realities that will help to craft and executing your business strategies successfully.
Business Reality 1: The Industrial Gas Business is Executed Locally
- The industrial gases business may have become global but is executed on a local basis
–Operational and commercial efficiency at the local level is key as are key customer relationships
Business Reality 2: The Industrial Gas Business is Secured with Business Contracts
- The business secured with medium to long-term contracts
–On-site contracts vary between 10-20 years, with a 15-year norm (good EBITDA generation)
–Typically large on-site contracts are “rolled” well before the end of the contract for an additional period with price reduction through depreciation spread
– Small on-site contracts, using modular standard plants may be for a shorter duration, but these too are frequently “rolled” before the end of the period
–Bulk contracts usually negotiated to 3-year terms in Europe, the legal limit
–Most bulk contracts also include equipment hire and services, which are not subject to time constraints.
– Change of such installed equipment is at a significant cost to the gas consumers and this deters change of supplier, for minor differences in pricing, at the end of the contract period.
–Almost 50% of business is medium to long-term in length
Business Reality 3: The Merchant Industrial Gas Business is the Cash Cow
- Price improvement in recent years in the merchant gases business (commission based cylinder business) is likely to persist
–High asset utilisation rate encourages the trend
Business Reality 4: Efficient CAPEX Management is Critical
- Capex requirements very dependent on the business mix (OSP, bulk and cylinder) and demand for gases
–Successfully reduced (from a high level in the late 1990s), current level now on the low side and will need to increase
–The industrial gases business remains a capital-intensive business – thus creating barriers to entry for other companies.
Business Reality 5: Most Profitable Markets Where 1-2 Gas Companies Dominate
- Industrial gases remain moderately profitable (13%-18% EBIT margin – Average 15% of sales)
–Most profitable markets are the existing domestic markets for each player or one where 1-2 gas companies dominate
–Constant overheads reduction, supply chain efficiencies are still possible.
Business Reality 6: Consolidation on Regional and Local Level
- Consolidation continues on a regional and local level (“asset swaps”, JV’s)
–Production Joint Ventures are legal in most jurisdictions, provided the marketing of the product is done independently and both parties can be shown to bear the appropriate share of production costs.
–There are two main reasons for such ventures: a) shared risk on entering new or difficult territories and b) achieving economies of scale in territories where market share would not allow either partner to build the world-class plant.
Business Reality 7: Industrial Gas Business: Get Smart, not Big (Only)
- Industrial Gas Business is a very technology-intensive business. Leaders create and execute new business models such as
- industrial gas supply chain leadership,
- total gas management,
- global information business leader for seleted sectors
- global key account business model using the power of the internet
- smart retail information business model for generating clients globally and highly profitable income
–Gas production and distribution technology can be bought
–Application know-how is important but does not have the long-term competitive advantage it once had (companies can develop and offer similar applications once they are in the public dom
Gain and customers buy on evaluated cost).