By Bob de Wit, Richard Renner, and Jaco Lok
In less than ten years after the purchase of a mining company Billiton continues to lose money from RoyalDutch / Shell, the leader Billiton Brian Gilbertson has completed what Shell has failed to finish strong in 23 years for the parent company Billiton. Through the merger with the Broken Hill Proprietary Company (BHP) of Australia, Gilbertson had created in mining and metals conglomerate second largest in the world that is worth about U.S. $ 30 billion. Although it seemed a very successful company as a whole, including the prospect of BHPBilliton good. BHP-Billiton agreement, code-named ‘Bardot’ because the bankers penginvestasi consider beautiful, which is seen as ‘the suitability of the sensational’ which provides good news for shareholders of BHP and Billiton. However, only six months from the appointment of master Gilbertson resigned in January 2003 due to ‘differences can not be resolved’. Is this a sign of the emergence of problems for Billiton? In the context of increasing economic and environmental problems without a leader who dared to take the risk and opportunistic, will Billiton loses momentum? Or whether the synergy is large enough to avoid terpelesetnya Billiton return to the situation where a bad performance?
mining truck
Royal Dutch / Shell
Company Royal Dutch / Shell Group originated from the alliance in 1907 between the Dutch company N. V. Koninklijke Nederlandsche Petroleum Maatschappij (Royal Dutch Petroleum Company) and the British Shell Transport and Trading Company Ltd.. The Group operates worldwide in the base oil, natural gas, and chemicals. Shell is known as a company that always tries to find a new innovation. Explicitly plan their strategy well executed and controlled, and have achieved high performance performance in the international oil industry. Shell invests in an active and creative on-demand market and drastically alter the petroleum industry, and to allocate significant resources to create new activity-based long-term vision.
‘Shell Group Planning System’, the annual strategic planning cycles, is well-known method to be used as scenarios to formulate a vision to run the company since the 1970s. Although the strategic planning process requires attention to the financial consequences of the new plan, it is not focused on financial analysis. According to Shell’s focus on the financial details will close attention away from thinking of innovative strategies. Only after a process of planning and after the development or adjustment of vision, the new company include an investment proposal. In this phase, detailed financial analysis to evaluate investment proposals made in the least capable of operating criteria is undertaken and a minimum rate of return from such investment.
Each Shell operating companies to concentrate on one or more of the following activities: exploration, exploitation, production, transportation, and sales and marketing. Companies that operate responsible for financial results, and to enhance and maintain the current activity. These companies will probably consult with a group of service companies or through them, with a group of other companies. Service companies to bridge the activities of groups of companies to provide advice and used that company groups on financial matters. They also link investment planning companies that operate and distribute its shares. In addition, the company running the service with highly efficient all the activities which are all determined centrally.
Distribution Plan for Shell in the 1970s
In the late 1960s major oil companies indicates a strong desire to divide the periphery activities
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such as hotels and office furniture, and more about other related activities such as coal and metals. Between World War II and the late 1960s major oil companies have spent more than two decades of steady growth. The demand for increased oil production, and international oil companies become very large companies, the size, number of activities, and financial prosperity. However, during the 1970s energy market stability the world over. Oil demand falls in line with rising oil prices, and governments as consumers begin to realize that the limited supplies of oil and gas.
Many oil companies focus pada industry expansion into metals and mining, as these companies have similar characteristics oil industry: secara international deployment, extensive project long term economic and political risks, government, as well as international trade and transport. The impact of metal and mining companies became the target of most major oil companies. Shell also is included. Shell believes that the division will ensure long term sustainable growth. Metal sector are seen as potential drivers and stable source of revenue. In addition, the prospects for the future of metal is very promising period. Short-term future of oil and gas industry looks strong, but Shell is concerned about the long-term issues such as increased strength of OPEC countries and the limited supply of oil and gas. Shell is generally agreed that the level of strong growth in the oil industry can not continue.
Potential division of the project must meet two criteria in the Shell. Compared with traditional activities (usually done) the importance of new activities that should be considered, including potential changes that occur and the capital investment required, and new activities must be related to the traditional activities of walking. In 1984 the Non-Traditional Business head of Shell, Mr Van der Toorn, explaining the philosophy of the division of Shell: ‘… Shell is one thing that cling to is a moment we will run out of oil. At that time Shell wants to participate substantially in new and profitable industry with growth potential … is very important for us to look for opportunities in industries closely related to our strengths. We do this by investing selectively in a limited number of new activities. ”
Underlying rational thinking to get into the business of metal is formulated as follows: (1) the metal is – like oil, gas and chemical products – raw materials for industries and companies in a wide range, (2) the metal industry to explore, exploit, process, recycles and sells non-ferrous metals (metals other than iron and steel), industrial minerals and related products. Shell carries on business in oil, gas and chemicals; (3) Shell tried to use the knowledge intensive geological, drilling, and technology, in fields other than oil and gas.
Both types of industries are moving with geological and geophysical methods, both of whom produce raw materials into products before they may be used; all products must be shipped in large quantities by specially constructed ships; sales and marketing in both the industry often focuses on the same client; both industry requires high capital investment, and both industries are very good relationships with host country government and diplomacy skills. These similarities convinced Shell that metal, or more specifically ‘non-ferrous metals’, could become the fourth leg of Shell’s portfolio of businesses together with the oil, gas, and chemicals.
Non-Ferrous Metal Industry
Metal industry can be divided into raw metals and metal processing industries. The most important raw metals are iron and steel industry, with government involvement (supra-national) is strong. Other metals are categorized as non-ferrous metals industry. Aluminium is non-ferrous metals in the world’s most important. Due to the millions of its production, aluminium is ranked third in the iron and steel. Non-ferrous metals other key is for copper, zinc, tin ore, nickel, tin, gold, silver, magnesium, titanium, and tungsten (wolfram). Non-ferrous metal industries operate around the world, and can be sub-distributed in the exploration, metallurgy and mining, metal processing, and sales. Metal inventories of non-feerous scattered around the globe, and each type of metal has only deposit that is not a lot of inventory. Most buyers are located in industrial areas of North America, Europe, and Japan.
Ore and other metals (except for very rare types of metal) is a commodity, like sugar and coffee. Price is determined by the number of supply and demand and can greatly fluctuate dramatically. In the wave of the economic cycle five dominant buyer of the metal – construction, capital goods, durable consumer goods, packaging and transport – changes in the form of metal consumption greatly affect the market price.
Companies are vertically integrated which includes all activities from exploration to the sale, such as integrated oil companies, only appears in aluminum. Crucial factor in aluminum industry is a broad-scale economies, high capital intensity, the need for cheap electricity and technologies that need specialized treatment. Six major joint venture was initially dominated the aluminum industry for years, from mining bauxite (the main ore of aluminum) to the aluminum processing: Alcan, Alcoa, Kaiser, Reynolds, Pechiney, and Alusuisse. Competition is limited and prices are static characterize the period from aluminum market dominance by ‘the Big of Six’ (reference to the six big companies that dominate the market aluminum). Large companies are integrated forming a de facto cartel and keep prices high and stable. Stable high price is combined with increasing demand provides a promising outlook for the aluminum industry which led to unimaginable investment boom in the 1970s.
Buying Shell’s Billiton
Upon deciding to enter the world of metals, Shell began to develop some individual-based projects, such as exploiting the magnesium storage area north of the Netherlands. Shell then realized that somehow the acquisition would be better and faster than raising activities of the sketch plan. Target company that is required is that we are actively pursuing international exploration and walking with European headquarters in the West.
Billiton is the chosen target. Billiton is a Dutch company that is actively running the mining, metallurgical and non-ferrous metals throughout the world. Billiton was founded in 1860 when the group of entrepreneurs / Dutch entrepreneur to run a tin mining concession on the island of Billiton in Indonesia, now called Pacific Islands. Having been actively operating for 75 years only on the exploitation of tin ore and tin production, the company expands its business in 1935 to the mining of bauxite (aluminum ore) at the Bintang, Indonesia, and in 1939 in Surinam, the other Dutch colonies. After Indonesia nationalize all mines bauxite at 1958, bauxite from Surinam became the main activity Billiton. During the 1960s Billiton divides its activities into several activities under it, not only related to activity, but also industrial and construction activities. The strategy is to create an integrated industry chain management, to secure the stability of demand and allow another run in the field of contract.
In the late 1960s Billiton is active in more than 80 participation. All activities are divided into three divisions: mining, metallurgy, and industrial. Billiton in the financial world the impression the Netherlands close to the seller of several commodities. In most industrial companies Billiton is best in the form of medium-sized companies. Although very good financial results, financial institutions have major doubts whether the company will be able to exit from the status of ‘his cukup’. Billiton may not refuse to invest in all activities at the same time and will change its structure in the not too distant future.
Shell Billiton approached the board of management, who admire the greatness of Shell, to express his interest within the takeover of such ownership. Shell said that he was only considering the takeover between ourselves and will pull its offer if Billiton reject their proposal. Billiton received a foreclosure. Billiton accept a takeover bid based on two arguments:
1. Shell’s financial capability and technological capability Billiton will consolidate and strengthen the position of the economic scale. Billiton realize further growth in the future will require major financial resources and improving its technology. Additionally, as a result of increased economies of scale in the metals industry, political risks and consequences of the failure of major mining projects to be too heavy to be borne by companies the size of Billiton.
2. Shell’s guarantee of freedom and a key position within the company group. Billiton has approved that will become the nucleus for all mining and processing of ore and non-ferrous metals. Billiton would be relatively independent by becoming a separate division with the Royal Dutch / Shell Group and promised to be able to participate in all important decisions.
Extra information from the less important becomes the projection of the position of a stronger competitive which is almost the same as multinational companies the Big Six in aluminum, a base that is stronger for expenditure on research and development (R & D), the positive effect of activities of mutual benefit , increased political power, that it is very important especially in developing countries, and the entrance to the contacts from around the world in Shell’s business and financial.
On July 13, 1970, Shell bought Billiton for 423 Dutch Gulden. According to Shell, a benefit is very significant. First, because size is a significant Billiton, Shell can get into the metals industry quickly. Billiton is the perfect base which can become the fourth leg of the Shell Group. Without this major acquisition Shell will require forty years to develop in the mining business and Shell did not have enough patience. Second, the strong diversification of Shell’s Billiton enables fast becoming an important producer of the variety of non-ferrous metal, especially tin. Third, the vertically integrated structure is a major advantage for Shell. In one fell swoop Shell has bought competencies in exploration, exploitation, processing, marketing, sales, and research and metallic ores. And last, the two companies are both derived from the Dutch (Shell 60%, Billiton 100%), which eliminate the differences in culture and language.
Absorption into the Organization of Shell’s Billiton
After the merger takes place remains relatively independent Billiton, where he has become multinational companies in a multinational company. Organizational structures have become similar to Shell. A small group of shareholders also control the many operations of the company, and a service company, Billiton Metals International B. V. (BIM), provides centralized support. Together with Shell, the board of management in each operating company Billiton is responsible for financial results and long-term plans for activities that do. Even so, BIM plays a very active role in strategic planning centered and very focused on creating synergy.
BIM Service Company provides advisory company operating in the fields of exploration, production, transportation, processing, marketing, some metal applications, and extensive project management in the metal. BIM is also connected with operating companies owned by Billiton and evaluate economic development, planning, and investment. At the level of the Shell Group, Metals Panel, a committee formed for the metal coordination. In the future direction of this committee is set for the operating companies owned by Billiton and other companies in the metals division. BIM services company responsible for achieving and monitoring scenarios in Shell ddalam possibilities of economic development, social, political and worldwide scale. The basis of this scenario is the company’s plans and the division can run, and adapted by Billiton in the metal-specific issues. Mid-term plan was prepared in each type of metal and in each operating company, which then approved by BIM, which also has an important role in the investment approval annually.
Before 1970, the head of Billiton was more focused on financial and administrative support to the operation of companies that tend to run independently. The planning process across different business strategies for the development of evaluation projects and activities do not exist. After 1970, Billiton is expected to design strategies based on existing information and predictions widespread condition in the future. Management Billiton berpengalamannya not hampered by them in this type of long-term planning. This process then makes a decision that disappointed Billiton and Shell. Many years after the takeover setting director (managing director) Slechte host Billiton recognizes as an example that can be blamed on the loss Billiton difficult cooperation between Shell and Billiton. He says: ‘philosophy Billiton mines are not as expected. They just looked at the new people from Shell. They think: if people say that Shell, who are we to dare to have different tdak pendapathal it right, remembering the people Billiton has a professional knowledge of metal.
Another difference between Shell and Billiton organization proved to be an equally large problem. In the metal world famous words: ‘one can only talk about metal after working a minimum of 20 years.’ For this reason most metals company focused on one or only some types of metal only. However, Shell’s plans for Billiton is to become a multi-group metals (not only handle one type of metal), which are divided geographically with activities from upstream to downstream. Shell makes the distance between upstream activities (exploration and exploitation) and downstream (processing, refining, transportation, marketing, and sales) in Billiton, because the technique is useful and can be executed in the oil industry. However, the characteristics of activities from upstream to downstream oil proved not to be applied in the metal industry. In the oil industry only a few major oil companies who can run a sinifikan upstream activities, and in hundreds of industrial metals industry is able to run the method. Downstream oil sector to provide certain products to certain markets (eg fuel vehicles), while there are thousands of applications to metal for each section a different market.
This deviation from the policy-in the field of conventional metal after the takeover of Billiton is the introduction of job rotation in Billiton. In the metal business takes time to panjang bagi seseorang benar did feel sesuai dengan branch of the executable, the mana rotation pekerjaan menjadi exceptions. Billiton deviate from this practice after 1970 because Shell stresses the benefits of job rotation. Workers are also prohibited Billiton to deepen his experience during the high growth period Billiton. Many of the workers who are not competent Billiton in filling upper management positions, so many new managers and specialists come from Shell. Those people do not bring specific knowledge and experience in the field of metal, and often return to the field of oil, gas, or chemicals a few years later. Inclusion Billiton workers in the new cooperation is also limited. Although Billiton not hasty in making working together to learn from new activity in non-ferrous metals, some people Billiton get the opportunity to engage in such cooperation.
Despite an abundant sense of closeness, a new merging the two companies should familiarize themselves with each other each other. Corporate culture, systems and processes that are different in crucial areas. Shell assumption of an important and obvious similarities between Billiton and Shell’s activities must be balanced with the realization run where the difference is also equally important. There are fundamental differences in the application of technology, competition, markets, and the characteristics and applications of its products – a difference that Kadan proved unavoidable.
Aggressive Growth Strategy Billiton
Shell’s aim is to develop quickly Division of Mines and Metallurgy new. Billiton would create new projects, establish cooperation with several partners, and took over the company, to be substantial and tervariasi division rapidly. Shell gives Billiton 25 years to reach its target, because it expected a sharp decline in the petroleum industry in the mid 90′s. Mr Swart, Group Managing Director of Royal Dutch / Shell at the time, said: ‘Shell in 1990-1995 will be asking the question of whether Shell has its purpose in achieving a strong position in the metals industry, since then the oil industry will start to drown. ”
The new metal division must grow to at least 10% of the sale of Shell. This means Billiton must be a company with an asset base of U.S. $ 12 billion. In the context of the total sales of the metal industry, the goal of some managers Billiton is not realistic. Billiton activity in the metal industry at that time in a limited volume, with activity only in the bauxite mining and tin. Billiton 40% of sales realized in 1970 outside the metal industry. Depressed by his new parent company, a hodgepodge of subsidies is not realistic to quickly push it to make changes. In recent years Billiton activity completely focused on mining, metallurgy, and sales of non-ferrous metals.
After this period of restructuring Billiton ready for a more rapid expansion. The first plans include expansion of existing sectors, the development of an extensive global exploration program to discover and develop ore mines, and participate in a lot of cooperation. In the field of research, new ideas developed in the processing of ore and metal production. Most of the initial growth from the acquisition of Billiton. Through this acquisition the company Billiton is fast becoming an internationally spread surrounding the entire spectrum of non-ferrous metals. After a period of restructuring from 1970-1972, the total number of workers increased between 1973 and 1979 from 4100 to nearly 6000 and sales grew rapidly (see table 1).
Around 1977 began Billiton invested heavily. Hundreds of millions of dollars spent in research, exploration and promising new projects even when the metal industry is in deep crisis. In the middle there is a strategy of expansion Billiton Aluminium, which was developed in the mid-1970s. Shell aims to create Billiton one of the six or seven of the world’s largest aluminum company. Billiton who was then focused on mining alone, but by 1975 the strategy changed to also include fusion and filtering. Vertikla integration is also needed to gain control over all activities of aluminum, from bauxite and alumina to produce aluminum. Billiton to invest in co-main partnership in Brazil, Australia, and Ireland, with a total U.S. $ 2.3 billion. Developed operations in Surinam (bauxite and alumina), and in Guiena (Boke) for bauxite mining. The peak of penginvestasian Billiton in 1977-1978 and 1980-1984 associated with the expansion into the aluminum industry (see table 2).
Growth continues to be the most important strategic direction for 13 years after the takeover. Shell to invest more money into Billiton in a few years after 1980 than in the entire previous decade since the decision-alihannya. Billiton was convinced that the new investment company will prepare for his kindness of further economic recovery. Shell Billiton not know that the investment is paid as a project, but as a long-term growth to short-term acquisition. It is understood that the exploration, development, and research is very expensive but necessary to obtain a strong position in the long term.
Downstream effects on the Industrial Structural
1970 marked as an unexpected decline in the growth of metal demand. The first significant decline occurred in 1973 during the first oil crisis. The second decline coincided with the second oil crisis in 1979. Although the crisis of the industrial total production capacity continues to increase at the same level in the post-World War. As a result, overkapasitas and large imbalances in the metals market is facing the biggest characters in the 1980s. During this period of non-ferrous metal industry fell to the level of depression. Industry affected by over-capacity, low demand and falling prices. This led to widespread losses across the world, cost cutting program, and eventually closure of the mines and factories. There is also an over-capacity in world markets when demand increases, but prices remain low.
Shell estimates of the metal industry has become telalu optimistic. Depression in the aluminum industry, the main interest in the growth strategy Billiton, continued until the 1990s, although there is a brief recovery in the late 1980s. Jatuhya aluminum demand mainly associated with the collapse of industrial activity around the world in the early 1980s. However, high-cost policies of the aluminum cartel also contributed to the crisis that encourages the increase of aluminum plastic substitutes, especially in the areas of construction, packaging, and transportation. The impact of a declining demand is a permanent disruption of supply over aluminum – as a result of massive investment in the 1970s. With all the investment coming from developing country governments whose interests are not always the main profits, the Big Six companies from the aluminum market is slowly losing control over the industry. This largely reflects their inability to counteract the restrictions aluminum prices in London Metal Exchange (London Metal Exchange) in 1978 and Commodity Exchange (Commodities Exchange) in New York in 1983. Until then, the price of aluminum is determined by the Big Six. Fluctuations in the price of aluminum has since become seumum other commodity price fluctuations.
Downstream structures in the metal industry is strongly influenced Billiton, which continues to make the most of the losses that occurred in the 1980s (see table 3). Economic growth in the late 1980s to make a change, although in a short time, like after 1989 the world economy deteriorated again, falling metal prices, and came back to haunt the industry losses. The following years showed a worse rate as demand remains low while the supply continues to rise.
With bad financial condition it is not surprising that the diversification policy in question and discussed more than once during the 1970s and 1980s. Billiton is widely argued that diversification would spread the risk as it will not really depend on the decrease of one cycle of the metal. For certain periods some of the activities listed Billiton profits, but after 1980 the price of all non-ferrous metals is so low that no other metal that can compensate for losses in other metals. The bad results Billiton in investment projects are also surprising. From time to time in the same project was also developed after Billiton has analyzed the market and following trends. Habits of adaptation and imitation makes Billiton became participants in the project at the time certainly marginalized by the market over-capacity and is wasted.
Rationalization and Strategic Re-Orientation
During the 1980s Billiton slowly draw a conclusion that the market situation will worsen, and change the direction to the road company. New activities will be postponed, and will only run a project that could provide results behind it. It also makes the company appointed concentrations in bringing existing project into operation and the efficient exploitation of the installation and will run the factory. Top managers Billiton host Van der Graaf said in 1983: ‘Our policy now is to complete the project, and make it operational. New investment company will only be available on existing and proven today. We feel there are structural changes in the West, as the result of which the development of the future is less predictable than in previous periods. We must be careful with the new expansion plan, because the errors that occurred will never be compensated.
In 1983 approximately 100 of the 430 workers laid off from the BIM. Workers were mainly running the new project. Exploration program is also reduced. On consolidation in 1984, cost cutting, elimination of unprofitable activities, and activities that are generally profitable growth strategy Billiton has been replaced.
