One morning some 50 odd years ago a young PhD student called Ross Brown woke up with a realisation that if he stayed on that track he would end up as a professor in a university. That day changed the engineer\\$quot;s direction of life and led him to the leadership of a $200m turnover business, Cryogenic Group.
Before the interview with Ross went any further, the 71-year-old reminisced, setting the scene in order to fully appreciate his entrance into the industry, and the link between rocketry and industrial gases.
\\$quot;In the late 50s and early 60s the cold war was at its height. The activities of the United States were heavily directed to closing the \\$quot;˜missile gap\\$quot;. There was a concerted effort to concentrate on ballistic missiles and space capabilities. The Southern Californian area became the centre of high priority activity and an enormous amount of technical talent amalgamated to execute this mission.
As the aerospace rocketry activity grew in Southern California, a number of smaller companies were established to respond to these requirements. One of these companies was a government-sponsored think-tank called Cosmodyne, now part of the Cryogenic Group.
\\$quot;I joined Cosmodyne where my role was devoted to controlling rockets and keeping both men and equipment alive in space.
\\$quot;When the deployment of ballistic missiles took place the government redirected Cosmodyne to concentrate, what was then an enormous amount of technical talent, on the issues of deployment. A big part of the problems we handled was associated with fuel or oxidizer handling for these liquid fueled rockets, and much of that was at cryogenic temperatures.
\\$quot;As we passed the deployment stage and began putting men on the moon, Cosmodyne shifted its technological activities, as did many of the small companies in Southern California, to apply the new technologies to the handling of industrial gases. Much of the technology used for rockets was shifted into industrial gases and many of the companies started to look toward these new opportunities. Cryogenic Group is a compilation of these small companies that have come together over a period of 20 or 30 years and set themselves in industrial gas
Ross Brown became the leader of this service technology organisation in the early 1980s. \\$quot;This was probably because I was (a) the least skilled engineer and they did not want me messing up things in engineering and (b) because I understood what a balance sheet was,\\$quot; he laughed. \\$quot;So they shifted me out of engineering into administration and that is where we are today.\\$quot;
Challenges of the industry
Consolidation, according to Ross, is one of the major trends within the industry. He says consolidation has been occurring the last 20 to 30 years in the gas industry and as a consequence, what used to be a fairly technology driven specialty chemical business, has become largely a commodity business.
\\$quot;The industrial gas companies have been negotiating this transition over the last 20 to 30 years and they have been doing it rather well. There were too many gas companies, and so consolidation keeps going on. The latest one, Linde \\$quot;“ BOC, is just an example of that process. How far that can go, I don\\$quot;t know, but it must be getting very close to its end.
\\$quot;Now the economy of the world has to adjust to the change from $20 a barrel of oil to this morning\\$quot;s $70 a barrel. The two major costs in industrial gas are power and capital. The change of the fundamental cost of power changes the balance between capital and operating cost. Industrial gas producers are very much aware of the change and are attempting to negotiate this economic dislocation to their advantage.\\$quot;
Capital equipment boom
The rising raw material cost continues to be a burden to the industry regardless of business location. But according to Ross it is just a fact of life, as is the inflationary activity in equipment. \\$quot;This has to be offset by the gas companies by the knowledge that the balance between operating cost (primarily power) and the amount of capital equipment they invest in, is now shifting to place more emphasis on capital equipment.
\\$quot;They (the gas companies) can now spend more dollars to save a kilowatt of electricity than they could five years ago. The equipment itself is escalating in line with raw material inflation (aluminium and copper, in particular), but they are not out of line with the cost of energy.
\\$quot;The steel inflation is heavily driven by China and construction. That has slowed down a little bit as China swings from a net importer to a net exporter. Therefore I think gas companies can see the products they buy inflating correspondingly.\\$quot;
Ross explains that the industry is now in a period of capital equipment boom after a long recession. \\$quot;After 9/11 every board of directors went into paralysis as far as approving capital equipment projects. This coincided with the recognition of Wall Street that the return of investment was not as attractive as they would have liked it to be. Consequently, the gas producers hurdle rates rose, along with the risk.
\\$quot;We went through about five years under-investment in capital in the industrial gases business. This was mirrored in many other industries and was not unique in industrial gases. We have now emerged to the opposite side where there is a big rush to order capital goods.
\\$quot;This demand is pushing down into raw materials. We, for instance, are on allocation for aluminium. We can\\$quot;t buy as much aluminium as we would like. The allocation of our resources places us in an awkward position with our historic clients.\\$quot;
Technology camp followers
Many equipment manufacturers have changed significantly over the past ten years, as has the Cryogenic Group. According to Ross the reason is fundamental rather than cost related. He says the capital expansion of industrial gases and other industries takes place more rapidly in societies that are on a steep development curve. Both Europe and the US are mature compared to \\$quot;˜new\\$quot; markets such as China, India and Southeast Asia, which are still at the steep part of the curve. These countries require enormous amounts of capital goods and the related technology that goes with it.
\\$quot;Cryogenic Group has changed substantially over the last ten years primarily due to globalisation. At this point 65 per cent of our products are used outside of the US and Europe and I expect this to be over 75 per cent in five years.
\\$quot;We have followed the industrial gas companies\\$quot; activities in these \\$quot;˜new\\$quot; areas and established bases that are close to our customers. We are client driven and where they go, we follow. We are technology camp followers.
\\$quot;It is important to be on the same time and culture zones as our customers. As a result, we have pretty extensive activities in rapidly industrializing economies. We entered China in 1991, India in 1994, and have activities in Korea and Malaysia. We also have production plants in Australia, UK, Germany and Switzerland.\\$quot;
What is Cryogenic Group?
Opposed to the common understanding that Ross Brown and Cryogenic Group\\$quot;s success derives from exceptionally good business sense of buying, restructuring and selling businesses, the truth lies far from that. According to Ross, whilst the group has acquired a number of businesses over a period of time, most of its growth comes organically, from internal activities.
\\$quot;I can recall only three instances where we\\$quot;ve actually sold a business, and those three instances resulted from special circumstances,\\$quot; Ross defended the claim.
Cryogenic Group is privately owned by a group of engineers who are all active in the business, Ross Brown being one of those. He says the business has all the strengths and weaknesses of any engineering-driven
company. Accordingly the management is conscious of their roles within the professional company.
\\$quot;We all enjoy technological activities and look after the business with a great deal of care. However, we have never driven for growth; it has been the by-product of doing things well. Whilst we have an orthodox management structure, we try to minimise the amount of what I call corporate overhead, which means that we have very small staff primarily limited to legal, internal audit and general supervision activities. General managers for example have a great deal of latitude and control over their own destinies.\\$quot;
Cryogenic Group enterprises are partly (15 per cent) owned by its non-founding key employees. Ross says they push very hard to increase the employee ownership in the enterprises because according to him the aspirations of the group need to be closely aligned with the aspirations of the people in the business.
\\$quot;This is a people business. We have to keep an environment in which they feel fulfilled. This entails certain monitoring, but it also means that they need to feel good about their work, their position in the industry, and they need to feel they are advancing technology and doing things that are meaningful. So my job is to create and maintain that environment for them.
\\$quot;Our business model is heavily weighted towards relationships rather than transactions and we view our clients as friends and people with whom we have personal relationships. This special and close relationship with our clients places an unique emphasis on maintaining our high business ethics.
\\$quot;We are fundamentally a technology service company and we have to build trust with our clients. We have, for instance, a very small sales organisation but we have a very strong technical and account management staff. We work very hard to maintain those relationships and that colours the kind of organisation we have become.\\$quot;
So the world is changing and the Cryogenic Group is changing with it. Many areas are developing and industrialising very quickly compared to others that are rapidly maturing and requiring other kinds of activities.
Also Ross admits that many areas in Europe are very mature and business opportunities less fecund. But still he feels that we are living in an exciting environment caused in part by the change of oil price.
\\$quot;Projects that were not economically feasible 10 years ago are now possible, like the adoption of technologies that produce or conserve energy. All these things are an engineer\\$quot;s dream. If I were a young engineer I would jump up and down with joy at all of the opportunities crying for a sound technical solution.
\\$quot;We will be pretty occupied for the next decade just by adjusting to the current economic dislocation caused by the change in the value of energy. Applying the new emergent technologies will make this an exciting industry.\\$quot;