The business area Orkla Aluminium Solutions is organised through the Swedish company Sapa, which is headquartered in Stockholm. This business area is currently the largest in Orkla in terms of sales as well as the number of employees. Sapa is a relatively new member of the Orkla Group and has undergone major changes over the past year. Sapa became part of Orkla through Orkla's take-over of Elkem in 2005.
Background for Orkla's ownership - structural development
Elkem embarked on a needed restructuring programme in 1992. Operational improvements paved the way for the sale of those parts of the company that were mainly engaged in supplying raw materials to the steel industry. The resultant capital was reinvested in activities which were more specialised and closer to end users than Elkem's activities traditionally had been. The main areas for reinvestment were the acquisition of the majority stake in Sapa in 2001 and 2002, and operations in the field of solar energy. As a major stakeholder and through board representation, Orkla actively supported Elkem's restructuring during that period.
Elkem's successful restructuring and the investment in Sapa were pivotal in 2005, when Orkla made a bid for Elkem and subsequently acquired the company. At the same time as it acquired Elkem, Orkla put in a bid for the remainder of Sapa, acquiring 100 % ownership.
In June 2007, Sapa's extrusion operations were merged with similar operations at Alcoa. The merger made Alcoa co-owner of the joint extrusion operations. The new unit is a clear global market leader in the manufacture of aluminium extrusions.
The Sapa Group
Sapa was founded in Sweden in 1963. Through a combination of acquisitions and investments in new manufacturing facilities and the merger with Alcoa's extrusion operations, the company has grown, reporting total revenues of NOK 25 billion and approximately 14,000 man-years in 2007.
The bulk of Sapa's revenues comes from aluminium extrusions. The extrusion industry is fragmented and features a large number of smaller-scale competitors, making it ripe for restructuring. The industry's structure lays a foundation for achieving economies of scale, as well as for the exchange of knowledge between the two former competitors, Sapa and Alcoa. Alcoa's operations brought Sapa scale, broader geographical coverage, better production capacity and more expertise, but at the same time their earnings did not measure up to Sapa's in a historical perspective.
Throughout its history, Sapa has repeatedly penetrated new markets either by opening new plants or through acquisitions and the company routinely considers opportunities for further structural growth. For example, Sapa has only limited activity in aluminium extrusions in Asia, so the region has high priority. After the end of the year, however, Sapa signed a letter of intent to acquire the Chinese extrusion company, Kam Kiu. This means that Sapa can offer Orkla a strong potential for future growth. The company is actively involved in three core areas, as indicated in the figure on the next page, and with employees in 27 countries.
The use of aluminium metal is the common denominator for all segments of Sapa. Aluminium has several characteristics which are invaluable to many customer groups. The most important is its light weight, combined with its high strength and resistance to corrosion. It takes very little energy to recycle aluminium, a positive trait from the environmental point of view. These advantages have helped boost the growth rate for aluminium products.
While Sapa is well established in mature markets, it is also present in a large number of countries with far more rapid growth. Heat Transfer is very well positioned, with production in China, and the extrusion business has manufacturing facilities in several European countries with rapidly growing markets.
Profiles
Sapa Profiles makes, processes and provides surface treatment for aluminium extrusions. Since the merger with Alcoa's extrusion operations, Sapa is by far the world's largest manufacturer of extrusions and is the market leader in Europe and North America. The company has customers in a large number of industries, and the mix of the customer base varies from country to country. The most important end-user market is the building industry, which accounts for about half the demand. Another important customer group is the transport sector, where the automotive industry as well as makers of other means of transport (trains, vessels) are important customers.
Production flexibility every step of the way allows a wide range of options and possibilities to adapt products to a large number of applications. This explains the wide diversity of the customer base.
Sapa Profiles has more than 40 major extrusion fabrication facilities. In addition, there are a number of smaller facilities of varying size and capacity, as well as several distribution centres.
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Building System
Sapa Building System delivers building systems based on aluminium extrusions, and is thus a major customer of Sapa's extrusion business. Building System is mainly based in Europe, where it is among the largest suppliers in the industry, but it is also involved in projects in Asia and Africa. Customers include architects, developers and subcontractors to the building industry.
Building System's most important product groups are windows, doors and facade systems. The company also supplies products for special applications, e.g. advanced sun screening. The products are adapted to national regulations, local building customs and, to varying degrees, also to individual projects. This flexibility can be provided in a cost-effective manner thanks to families of products with interchangeable components that can be individually adapted.
Heat Transfer
Sapa Heat Transfer manufactures thin aluminium strip for use in heat exchangers. Customers are generally subcontractors for automotive manufacturers. Many of these have production facilities on several continents, so they expect global suppliers. Sapa Heat Transfer is one of the three largest suppliers in this industry. In contrast to its competitors, Sapa Heat Transfer is not active in any rolled aluminium product areas other than heat transfer strip, meaning the company is free to focus its production and technological development on this product area.
Heat Transfer's main manufacturing plants are in Sweden and China. Due to strong growth in volume, in 2007 it was decided to increase the capacity of the facility in China from 50,000 metric tonnes to 80,000 metric tonnes per year. The expanded capacity is expected to come online in 2010.
Value added through operational improvements in Sapa
Although Sapa has historically had the best results among the major competitors, several smaller competitors enjoy good profit margins. Doubling in size by virtue of the Alcoa transaction reflects Sapa's ambition to generate economies of scale in future through more knowledge transfer across the organisation and by increasing opportunities to invest in solutions which will accommodate customers'needs in an even better manner. At Sapa, the three most important areas for improvement are more customer intimacy, continuous cost reduction and improved Environment, Health and Safety.
Sapa aspires to be in position to influence customers'solutions through either improved design or lower costs. The best results are often achieved when Sapa works closely with the customer right from the design phase for a new product or when an existing product is to be upgraded. This requires that Sapa not only understands its own process, but also has the insight to appreciate customers' processes and the end users' needs. By the same token, Sapa must be able to convey to customers the myriad of possibilities that aluminium extrusions hold for them.
In addition to expertise, greater customer intimacy often gives rise to demands for special surface treatment or secondary treatment. Sapa has comprehensive experience in this field.
Sapa's new structure will lead to certain economies of scale associated with costs, mainly through common procurement and administrative services. Notwithstanding, it is decisive for long-term value creation that operating on a larger scale also offers more opportunities for in-house training with regard to equipment and process control and, at least equally importantly, with regard to organisation and working methods. This will add to the momentum of Sapa's improvement efforts which are based on Genesis, Sapa's version of the Toyota Production System.
Sapa employees routinely handle large quantities of metal, often at high temperatures, which is transported and machined. This and other factors engender a risk of on-the-job injuries. At Sapa, however, exceptionally high priority is given to preventing injuries in the workplace.
Sapa has tens of thousands of customers and hundreds of thousands of products. Sapa has a decentralised structure to accommodate its customer mix and meet its operational improvement targets. This implies that each individual country/region bears full responsibility for production and sales in its area.
Goals
2007 has been one of the most exciting years in Sapa's history. The merger with Alcoa's extrusion operations doubled the company's size. Diligent efforts have been invested in an integration process which has progressed both more quickly and smoothly than expected. Long-term plans have been devised for the development of the new Sapa, where the most important areas are customer intimacy, continuous operational improvements and safety.
When it comes to safety, the goal is to have no on-the-job injuries. The company has initiated numerous improvement measures, including better training and routines, and individual workplaces have also been adapted.
The continuous improvement efforts are primarily run through Genesis. Although most employees have received training on the system, goal achievement is still some way off as Sapa strives for Genesis to permeate all operations and make its mark on the company's culture.
Especially in Sweden, Sapa has had close relationships with its customers for a long time. This has given the company insight into customers' value chains and their end-users' needs. Sapa has worked with its customers to develop new products, new areas of application for aluminium and new designs. This way of working is currently being adopted throughout the Sapa Group. To support this work and improve in-house processes, initiatives have been taken to enhance expertise, not least by recruiting more engineers.
A strong, productive business platform was established in 2007, but bringing the strategy and plans to fruition will call for investments in organisation and equipment and this will necessarily be a long-term process. Over a three-year period, Sapa aims to improve its underlying operations enough to obtain an EBITA margin of 5-6 % and a return on capital of 15 to 20 % over a business cycle. At the same time, further expansion is also a goal, especially in Asia.