Investing heavily in the African industrial gases market, Helen Carmichael speaks to Managing Director Tjaart Kruger and discovers how Afrox is advancing.

Afrox has faced challenges such as South Africa’s power outages and the structural changes required over the last year. But as an experienced and key supplier in this unique region where investment continues at a high rate, the future holds considerable promise for Afrox.

Afrox was founded in 1927 as African Oxygen and Acetylene (Pty) Ltd and expanded into Africa a year later. BOC acquired the company in 1935, prompting a name change to African Oxygen Limited in 1957.

The next landmark was the launch of Handigas in 1955, followed by Afrox’s listing on the Johannesburg Stock Exchange (JSE) in 1964.

Afrox’s approach to its market was to establish the first electrode manufacturing facility in 1972, which continues to support its success in the welding industry today. Over the last decade the company’s expertise in gas equipment manufacturing has seen Afrox products gain worldwide acceptance, exporting to Europe, America and the South Pacific.

Afrox’s expansion into the healthcare business in 1983 and continued investment over the next 20 years built one of the biggest private hospital groups in southern Africa, before relinquishing control in 2003 to a BEE consortium. More recently, the BOC/Linde merger in 2006 saw control of Afrox pass to The Linde Group.

What followed was a change in operating structure and saw Afrox embark on a record capital expenditure programme of R1bn in the last fiscal year.

Healthy business
Afrox is proud of its long association with the hospital business which can be traced back to 1983 when the company bought an 85% stake in Ammed, the JSE listed hospitals group.

Over the next 20 years Afrox Healthcare grew to become one of the largest private hospitals group in the country before relinquishing control to a BEE consortium in 2003. Afrox continues to supply medical oxygen and other medical grade products to the healthcare sector for use in public and private hospitals, GP’s surgeries and the homecare market.

Afrox has grown through both acquisition and organically. For many decades South Africa was seen as the economic powerhouse of Africa and the company expanded in line with local and foreign investment. But Afrox has not been alone in this market.

Air Liquide has been in South Africa for years, and 1972 saw competitors Air Products and the then Fedgas enter the South African market.

Afrox’s business also expanded into Africa in line with BOC strategy, formally a UK Group, which itself entered Africa in support of former British colonies. Afrox boasts one of the best distribution infrastructures in southern Africa, built up and invested in over many years.

A key factor is that Afrox is an African business, publically listed on the JSE and Namibian stock exchanges.

A new structure
Under The BOC Group operating model, Afrox’s industrial operations business was divided into two lines of business: Industrial and Special Products (ISP) and Process Gas Solutions (PGS).

ISP involved cylinder and liquid fabrication gases, special and medical gases, Handigas (LPG), welding products and two welding product factories. PGS tailored solutions to meet the needs of large consumers of product in key market sectors, by supplying dedicated on-site production units, either by pipeline, or in liquid form by tanker. Each line of business had its own management structure.

Since the Linde acquisition, a fundamental change has been the streamlining of Afrox’s management into a single, more efficient, reporting structure. The company has moved away from the BOC global reporting lines of business to The Linde Group’s regional structure - meaning clearer lines of responsibility and reporting, reductions in operating costs, a more efficient and productive company, and the ability to produce service offerings that will result in superior earnings growth.

According to Kruger, the successful merger of Linde AG and the BOC Group heralded the beginning of a journey to refocus and modernise the organisation. He believes that the new group represents the best on offer in the global gases industry, bringing particular strengths that give Afrox access to best-in-class technology, products and know-how.

The company also has the ability to leverage global best practice while retaining the flexibility to make local decisions appropriate for the characteristics of the markets it serves. Hence Afrox’s R1bn capex programme in the last fiscal period alone.

Afrox is aware of the competitive challenges posed by rivals but policy is not dictated by it. “A competitive market place is not only good for our customers but equally good for spurring innovation, keen pricing, identifying of efficiencies, resilience and change,” Kruger suggests.

“Afrox did not become the overall number one gases business in sub-Sahara Africa by simply allowing competitors to undermine its competitive standing: We have traditionally combined a keen competitive instinct with good technology, innovative and timely solutions, first-rate staff and unimpeachable integrity – a preferred partner and preferred employer.”

Investing in success
In the last fiscal year Afrox invested a record R1bn in capex programmes. The construction of state-of-the-art facilities at Afrox’s cylinder filling hub in Germiston and its MIG-wire factory in Brits are expected to have a positive impact on relieving product shortages in the current year.

In addition, the company invested in LPG importation storage facilities in Richards Bay, in bulk tankers and cylinders, to try and mitigate shortages of LPG experienced in previous years. Afrox also commissioned three new air separation plants at Wadeville, Lydenburg and in Richards Bay – which will provide off-take for the merchant market.

During 2008, the Kuilsriver ASU and liquefier will be commissioned for supply to the merchant market. A CO2 liquefier at Sasolburg will also come on-stream, again for merchant demand in the bottling and hospitality markets, which have experienced shortages in the past.

Afrox is the largest full-spectrum gases business in Africa, and is the market leader in almost all areas of the supply of industrial gases and welding products, except for Tonnage, where in South Africa it is somewhat smaller than the largest competitor -
Air Products.

African markets
Growth in many sub-Saharan markets outstrips most developed economies today. GDP in some African countries is an impressive 20% (Angola) at the moment and that means key growth potential for Afrox.

It is important to remember that Afrox is no stranger to these emerging economies, but has been managing operations in more than 11 African states for decades. As far as growth is concerned, the explosion in mining, oil and gas operations across the continent aims to unlock the value of the vast wealth in natural resources that Africa holds.

In tandem, many of these states have fast growing consumer markets, like Nigeria, for example, and Afrox supports businesses that focus on consumer goods, leisure and health sectors.

“The key, as I see it, is for Afrox to become a High Performance Organization,” says Kruger.

This quest is not empty business school phraseology; Afrox has set non-negotiable results targets for operating profitability, revenue growth, market share, facilities management, research and development, safety and environment, and people development.

A far-reaching appraisal is being conducted that includes an assessment of brands, installed capacity, equipment fitness and readiness, skills, technology and management capability, and shortfalls in delivery against expectation.

“Our objectives are to defend and improve our core business, pursue stretch targets whatever the prevailing economic environment, and develop growth opportunities within existing defined products and geographies.”

Power outages
At times, Afrox has had trouble keeping up with demand, as Kruger explains, “We have been caught off guard by the demand for our core products driven by the expansion in the economy.”

As a result, the company is sharpening its focus on the core capabilities, through the R1bn capex programme. Kruger believes that this has created enough capacity for around the next four years, and the company is actively assessing future demand.

A stable power supply is not necessarily guaranteed in South Africa.

In fact, the economic growth experienced by South Africa has caught most businesses off guard – Eskom, the national electricity generator, is no exception.

However, the billions being earmarked and spent on new electricity generation capacity provide exciting business opportunities for Afrox in the future.

Looking ahead
The ability to supply, reliably and on time, will significantly improve as 2008 unfolds, Kruger says. The company’s longer term financial aspirations are to grow the top line by around 15% and the bottom line by a few percentage points more.

Positioning Afrox to exploit opportunity requires long-term strategic thinking and adaptive practical implementation in a changing world.

“It is our intention that manufacturing excellence becomes a cornerstone of Afrox in future.” The strategy is defined as positioning Afrox’s capability with market need; in practical terms this means least unit cost, reduced complexity, plant level focus, formalised facilities planning, standardised protocols, disciplined housekeeping, and optimised staffing as well as plant reliability.

“Our equipment and product exports continue to grow and our African Operations will continue to gain in geographic footprint.” Its percentage contribution to the Afrox group, now in excess of 15% of group operating profit, is anticipated to increase steadily in the future.

“A major goal is not to be deflected from the task of honing Afrox’s competitive advantage for the future and ensuring we are prepared to withstand tougher times and are able to capitalise on opportunity,” says Kruger, “whatever the prevailing circumstances.”

Afrox will not compromise on safety standards for any reason. “The way we operate is comparable to the best safety standards found anywhere in the world,” says Kruger. “Our commitment to safety, health, environment and quality is actually a key differentiator for us when it comes to many tenders.”

Afrox’s safety products business is extensive, as are its service offerings to carry out important safety surveys at customer sites.

“In one sentence, let me say this: Safety is 100% of our behaviour, 100% of the time.”

Industrial gases are used in one form or another in almost every sector of the economy.

Naturally, it follows that as the economy expands, so does the demand for Afrox’s core products. “We foresee continued growth in demand for industrial gases, and as long as we remain focused Afrox will continue to reap the rewards.”

Key success factors for the sector as a whole include ongoing investment to ensure businesses meet growth demands. In South Africa, major investment in infrastructure projects and a boom in consumer spending have driven demand.

“These trends will continue to have a marked impact on our core business going forward.”

Kruger thinks that the gases business, in the long run, will not be without its challenges.

“Major issues in the electricity generation sector provide opportunities and challenges to the way we operate.”

Skills retention is another issue in South Africa and this is unlikely to change in the near future.

But as Afrox continues to hone its capabilities and expand supply capacity, Kruger expects continued expansion in markets such as home and health care, hospitality and emerging alternate energy markets, such as LPG and hydrogen.

“We are already a major player in the consumer LPG market, via our Handigas brand, and along with The Linde Group we are participants in the emerging hydrogen energy market,” he says.

“Our focus on these and any emerging market is basically driven by demand for our products and through our own innovations to meet customer needs.”

The structure of any profitable company is market driven and influenced by changes in the economies in which they do business. According to Kruger, it is more about an organisation’s ability to change, innovate and adapt to meet the need of its customers and the environment in which they operate that drives a company like Afrox.

That’s what it means to be a High Performance Organisation. “Let’s be frank about this. The only constant today is change.”

About Tjaart Kruger
Afrox’s Managing Director, Tjaart Kruger, took over the reigns of the business in April 2007.

Over the past 25 years, Kruger has held various senior posts with South African companies, more recently with Tiger Brands, in the positions of managing executive for Adcock Ingram Pharmaceuticals Division and managing executive of the Grains Division, which he grew into a business with a R5bn turnover.

He is a chartered accountant and a commerce graduate from the University of Johannesburg and participated in the Harvard Business School management development programme in 1995.

Kruger is a keen cyclist, runner, plays golf – with a 12 handicap – and is passionate about breeding and riding horses. He has two daughters, aged 22 and 24, and his wife, Ina, is a keen horsewoman with a taste for the difficult discipline of dressage.

Kruger also enjoys relaxing and working on his cattle ranch in the North West Province.