In conversation with Jim Ratcliffe | London Business School

very warm welcome everybody I'm gonna be very brief about introduction because Jim is well-documented in the public domain but just to give you some of the highlights to remind you he's an alumnus the school very proud of that and he's founder and chairman of the petrochemicals company INEOS he started his life as it were his no not his life but he started out with a degree in chemical engineering from Birmingham and his first job was with Esso he then broaden his skills by becoming a management accountant good move I thought that too and came to I'm one too by the way for this dish and came to to London Business School graduating in 1980 he joined court olds after long Business School and then he moved to the venture capital company Advent in 1998 he partnered with John Hollywood to lead a management buyout of inspect group and this is bp's specialist chemicals division and any of the word INEOS derives from that first takeover over the next 10 years in else brought a huge amount of manufacturing capacity mainly from the oil majors to build what is now one of the world's leading chemical companies more than 50 plants in 11 countries and sales of over 40 billion dollars actually might be pounds by now maybe it might be great out of date so that 50 now it's 50 thank you very much fifty five billion dollars Turk nap he's currently building eight super tankers to transport gas from the US and he's also involved in trying to persuade the UK to go ahead with fracking and has got substantial licenses to do so when he's given permission but life is not all work he's very keen on keeping fit an activity which and the Radcliffe family includes walking to both both north and south poles with dad now to the business of the morning I'm going to ask Jim some questions mainly related him as a leader an entrepreneur and then throat open to questions from the floor because we have a very very large number of people who wanted to be dead here today and couldn't we've filmed this today so they can have the benefit of today's session so today is sort of not alas off the record in a sense that it's on the film somewhere so I'm just warning you Jim I mean about that before I say something about Corbett over to you anyway so without further ado John can I go into my questions so as I'm going to focus more on the sort of personal leadership ones because a lot of the purely business ones in terms of facts are out there Jim's given a number of interviews over the last year or so so first of all Jim didn't have a clear idea as when you left university or even when you left here what it is you're gonna do did you have a sort of vision in your mind about how things were going to develop I hadn't I'd always had an interest I suppose in doing something myself at some stage but I do remember having lunch lunch with you about a year ago and I don't know whether you know but when when I was here which is back 1978 to 1980 Andrew was a lecturer in finance and accounting and we had lunch recently so we knew each other a little bit obviously I was amongst a hundred I think there were a hundred in the in the NB a year at that time so I wouldn't really be expected Andrew to remember me but he did he just say that he doesn't remember me but he didn't for a minute think I would ever be as successful as I turned out to be so not one of my best insights so and I think I probably would share that really I don't think I don't think I had that interest in possibly doing something entrepreneurial or something myself eventually but I have to say I followed quite a classical career really until an OP it I received a phone call when I was about 35 I work for hotels which is a sort of a manufacturing industrial company for quite a number of years ten years I suppose after London Business School so so I sort of did my conventional degree that was three years of Chemical Engineering I qualified in accountancy in my my own time in the next few years work for us a petroleum essay sent me here for two years I then joined portals I had a conventional industrial career with hotels and then I received this phone call at about the age of 35 or 34 from some headhunter asking whether I'd be interested in going into the venture capital world and the reason I said yes to that apart from the fact that we're going to triple my salary and they were going to give me a better card in the chairman of Cortez was thriving at the time was which is a fact they gave me a BMW 535i which sounds quite attractive I've always remembered that in my recruitment campaign really cars cars talk but I took it because I took that role in venture capitals because it it's sort of I felt it would probably give me an opportunity of maybe seeing something which I might be able to do myself which was not likely to happen in an industrial company like Cortez where you know you just you know you step your way up the ladder and those sort of conventional sense no great vision to start with you know in a sense an inkling but not inkling not know I wouldn't say you know that was my keys drive smoke because I mean you know came back to to having my mother would tell you that I always used to say I wanted to be a millionaire but maybe most kids say that I don't know because also it was then quite late as it were in your career it wasn't as if you started in your 20s is it no this came it's getting quite late well yeah but I think the world has changed a little bit you know with a lot of these modern companies you know the googles and Facebooks and what-have-you they they're very young things aren't there for young people and they're started by young folk but if you go back you know 20 or 30 years I think 40 40 was a you know 40 was the day that I set off on my own and and that you know I'd accumulated 20 years of experience when I was 40 you couldn't he'd be quite tough to set off in chemicals at the age of 25 or 30 you'd just be you're just a boy I really would have known experience no knowledge no no sort of presence really no one would talk to you or listen to you know that is so it chemicals is slightly different to some of these modern camera and I mean Kim see a little bit about the startup in itself all right so the sort of what led into you move from Advent to say I'm gonna do something completely different this is this is a quite different kind of opportunity it says something about what happened what your thoughts were at the time well I you know if you work in I mean some of you might take an interesting about to couple you know it's well paid and it can be very interesting but you know there are a couple of lessons in which capital which you need to understand one is that and bear in mind I went into venture capital in the very very early days of venture capital so there was little knowledge or understanding of the nature of it really in those days because bear in mind I went in there in 87 I suppose it was I mean there wasn't that much venture capital or private equity around there but there so I went I was sort of given a desk like this there was nothing on it nobody tells you what to do and they just say go out there and do some deals and spend some of our invest some of us spending our money invest some of our money and the two lessons I learnt quite quickly was that if you did bad deals you got fired and if you did no deals you've got fired so it was quite a sort of focused environment really because you you know you had to go out there do deals do good deals because you had to invest the money wisely and what-have-you but eventually so I spent five years doing that the first deal I did was appalling but you know this it's part of the learning curve I suppose then I did want to sort of Reece motives and then I came across a deal which was really interesting which was buying this fine chemicals division of BP and it was an area obviously relative you know to my background which was chemicals and materials so there was an entrepreneur at the time who were sort of interested in finding a business in chemicals which he had already been successful in one venture and he was sort of 55 or something like that and I you know spent a bit of time seeing whether I could find a biz for him to hop into was a chief executive put some money in and in the end the pair of the two of us paired up and we both went in I remember talking to Advent Advent international as the venture capital firm talking to them about the possibility of hopping across the fence and becoming an entrepreneur rather than a venture capitalist and they day they were quite cut it was the biggest deal had ever done at the time I'd say and it turned out to be the most successful deal subsequently that they'd ever done so I think they they they increased their money by about 10 or 11 fold which is quite good in venture capital normally you're looking at two or three times but they hadn't they just couldn't understand why anybody would want to hop over the fence into that world of risk and what-have-you rather than a very nice salary in venture capital but they though they were reasonably comfortable with it so this one did hopped over the fence and I'm as far as I'm aware I'm the only person that has ever done that in certainly adren it's very uncommon like surprises my own company and did you do the kind of realisation come this was something which was going to be different and you were going to as it were this was going to be a life-changing event did you what what sort of prompt where the frustration in venture capital the frustration in venture capital is that you spend an awful lot of time working on deals you'll do maybe one in ten then when you do them you sit on the board but of course you're just an advisor on the board you're sort of an observer but you know some some of us feel like we could do it better than the incumbents and that was always my face it's frustrating sitting on the board when you feel you could do a better job of running out so when I got the opportunity of doing that that was you know and so that's a totally different environment managing it being responsible and in those days it's probably maybe I don't know it's the same today you had to put you know you had to put your all your worldly goods on the table so I had to put all my equity 100% of the equity that I owned at that stage in-house and chattels and what having on the on the line so you're very focused and they wife and children everything and then you know you had a fantastic period as it were as you quiet one after the other of these of these major plants around the world did you in terms of the growth strategy and the sense of moving from here's one operation to a quite different kind of worldwide operation was it a kind of process whereby you thought as it were each one is incremental or did you feel at some stage actually moving to a completely different world and we've got to handle this very very different play as an organization so everything the growth period how is the approach to managing that well if I mean we sort of it involved really that in that period that was that company that we started was in 1992 so I was 40 about strange when I hopped over the fence that business inspect which started with this acquisition of the fine chemicals division of the P what we finished up doing but it was an evolution really was up to two or three things one we sort of spent half our time trying to get the assets to run better and we can talk a bit more about what we mean by running the assets better in the business better in other words sort of creating more profit from a set of assets and we spent half our time looking at new deals and building the group by equity so it was a combination of improving what we got and acquiring and we sort of developed this approach where it just happened to be the case at the time that there were there was a revolving door through a lot of the major chemical companies and oil companies he got a new chief exactly come in he always wanted to set out his own store which would be slightly different to his previous that his predecessor and so he sort of it it doesn't happen so much in Germany but it certainly it does happen quite a lot in the UK in the United States you know the ship would be steering this direction they'd move it slightly to the left or slightly to the right and therefore these things would become non core or non strategic and they'd and they'd sell the Lordan Nessus they they still could be very good businesses which what happened to be the case so we sort of I wouldn't say we preyed on the blue chip majors but we we just kept our eyes open for when they were letting go of what we would think would be a decent business and just because they changed in our strategy doesn't mean that business has become less good or I'm also so we really did those sort of three things for a series of six years before we finally sold out but initially it things happened quite quickly because we we'd made this acquisition in September 1992 the following year we bought a fine specialty chemical company in the United States we bought the BP one for 37 million pounds we then brought a small speciality chemical company in America for 11 million dollars and then 15 months after the initial deal of BP we went public for a hundred and sixty four million pounds in those days those were quite big numbers you know so you know by within 15 months we'd all made ourselves a small fortune only so I'd made 25 or 30 million of that stone in 15 months it's quite quick and then but then we carried on building the group we carried on building the group and we sell the group for about a billion dollars in 1998 and at the same time started anyone's but I think then looking at the you know looking at the history over that period in terms of the management of this increasing group of companies and being quite small have been really very very large what changed if anything about the style the way in which you run the company well inspect was inspect was big enough where you could be you could be heavily involved in pretty much everything because it you know it was compared to any us which is obviously enormous you know you could get your arms around inspect which was all fine specialty chemical companies and we have maybe 10 businesses in the end so but you could keep a pretty close watch on it I mean ultimately if you want to sort of go from something small to something large you have to become you have to be able to delegate and become reliant on people who work for instead of one of the keys one of the keys in our development is to get people to behave like owners rather than employees because if people behave like an owner you don't you don't need you don't need policemen watching over them all the time because you know they're generally striving to be successful in the business that they're managing and that that's what we we finished up doing an inspect by allowing people to take equity in their individual components of the business that they were operating which is part of the venture capital philosophy you know we want people's I know we want people totally in venture capital it's totally committed from a positive and a negative you know positive in the sense is going to make a lot of money negative from the point of view that if it fails you lose all your worldly goods whereas we we sort of operate on the positive side of that not the negative side of it but we do operate a business where we have a very very small head of head office and people are fully responsible for running their component their business so you know in any us is one of the bigger bigger companies in the world today so fifty five billion dollars is roughly our size which is very very big but we only have 20 people in head office if you look at BASF or Dow who are our two sort of principal competitors and chemicals they would have you know one or two thousand and head office a friendship with lots of policemen in that office looking after IT in HR and tax and legal and whereas we expect people to run these businesses very independently and run them as if they're their own business so they're responsible for their own IT their own HR their own legal their own and we just have a few people in head office that keep an eye on things and we and then you might say well how does that how does that work because you finish it with all your businesses going off in different directions but we operate a federation so so all the IT people from the various businesses get together from time to time and they try and develop best practices across the group or they'll help other people in the group I'm saving a challenge so you can't get it too it's just the that's the in EOS ma if you look at BASF it's completely different self driven from head office Exxon is all driven from head office and you know the people out in the in the businesses have limited ability to make decisions any others a different model and it's a model which where you can we can continue with a gross agenda because what what then happens is you finish up with these individuals running these businesses once they've develop a certain amount of confidence and they've developed a skill set which they would learn in in any US which is you know how to how to acquire acquiring things is it's difficult you know the majority of acquisitions fail eighty percent of acquisitions are disappointing but you know they learn that sort of skill set by working up on transactions in their sort of career in us then you finish it with individuals running businesses who he wants to develop their own businesses and they create the opportunity for growth rather than it being me which it was initially in this model is this your model in a sense that one you felt was the right way to do this for this group of businesses in these circumstances what did you take the model from somebody else is there any kind of this is something well I think it's having work for Esso and core tells you can see you can you can see things you can see ways of doing things I don't like profligacy yeah you know I mean I don't like I don't like people I like people to spend money in the way in which they spend their own money not spend money in a different way because they're working for a corporation I don't I don't I don't see any justification for that and you know I don't I don't like you know bureaucracy can smother organizations you can he takes away all the you know it's quite difficult sometimes working in these businesses if head office is telling you what to do all the time you lose your motivation you lose you dry you know sort of accountability without the responsibility which is quite stifling really simulation in 2008 you know you had a bad time yes big downturn figured the business matically in terms of volumes and so on how did you feel you know here is a business which you've built up to really substantial business how did you feel you know to be on so much on the threatened Hamlet how did you get through it personally this must have been very very difficult but like going to the South Pole really it was quite I mean firstly just it's there's a little lesson I think in what happed was in 2008 which was I mean if a chemical company or a manufacturing company goes through a difficult period then and you know volumes collapse which is what happened in 2008 you know volumes collapsed and revenues collapse so both volumes and prices collapsed so that comes you know the consequence on turnover was was enormous in any US for two quarters but what happened to in that period of time is you liquidate your working capital so lots of cash comes in because working capital liquidate so you know it's it's not quite as bad as you know you know business is predominantly about cash and not about profit you'll discover that if any of you run your own business you'll be more interested in cash than profit but itself insulates itself to a degree in a downturn because cash comes out of working capital so we had no cash issue in 2008-2009 but we had a technical breach of a covenant so the second lesson is don't ever allow yourself to technically breach covenant Africa it's a very bad experience and it opens the vault it opens the doors to the vault so all the banks compiled into pile into the vault basically every breach the government then the back the banks have got all sorts of powers that are very unhealthy if you breach the covenant and what happened in EOS is we at that stage we own two very large refineries one down in Marseilles in the South France one up in Scotland and in a refinery you've got a certain amount of oil just washing around keeping the equipment wet basically so if you build a refinery you've got to put a certain amount of oil in just to keep the thing circulating so that oil is is it soiled that you never sell its oil that you would liquidate the day that you closed the refinery so the oil in the refund is a bit like the metal in the retirement and in 2008 those of you may recall the price of oil collapsed in the summer from a hundred and forty eight dollars to forty eight dollars at the end of the year so price of oil dropped by a hundred dollars in six months and 2008 after Lehman's whimpers and we had ten million barrels of oil keeping our t refineries work well ten million times $100 there's a billion dollars and if your if you did your management accounting like under myself you would realize that that you have to take to the profit and loss account a reduction in the in the value of the stock you take to a profit and loss account so we had a technical loss not a cash loss the value of the oil keeping the refineries wet fell by a billion dollars the value of the metal in the refineries probably fell by two billion dollars but you don't have to write a softy profit and loss again so it doesn't affect cash and you know that oil today is probably back at $48 actually but it's in the meantime it's been up a hundred and eleven dollars for but it's irrelevant because it stays in there and so until you finish but that was a technical breach of the covenant because you know we have a covenant which is Eva da related and that was a constituted technical bridge that opened the doors to the vault and then in 2009 the banks took eight hundred and forty five million euros out of the vault so that's what caused the stresses in any office was the fact that we had a technical bridge for covenant and then the bank took all the cash out because they could and all the banks were highly highly distressed if you remember in 2009 because all the banks are going bust because all their balances had have been blown apart because all their assets had collapsed so fortunately we survived but you know you know it was quite stressful as a consequence of as a consequence of that nobody could anticipate you know when we when we established on our banking agreement we have lots of banking agreements it wasn't we'd never envisaged oil collapsing five hundred dollars about because it never happened before but we've never thought about it but now it couldn't happen today because it's not you know the the banking agreements accommodate that fact they you know it ain't gonna happen but how did you feel I'm just thinking about your your feelings was this kind of immense stress for you I'm just thinking of how you coped with that well you we reacted well you have to deal with it firstly it was it was stressful in the sense that we were aware that the banks had the options to take the keys if they wanted to to the business but what all we did really is we sort of gathered our people together in September actually almost immediately after Leland's had come out we were nervous after the August holiday because we'd seen our orders starting to come off very quickly so we were sort of we'd seen it before that billions come out but we pulled all our people together and we said we don't want it you know at the end of the day you're you're all running big businesses and we don't we don't want you creating panic amongst the troops you've just got to do all the things that you can to rein in cash everything you can so you've got to stop capital expenditure you've got to stop maintenance expenditure you've got to stop bonuses you've got to can all pay rises everything you can possibly do to save cash you've got to do and we don't when you're running around like headless chickens with a look at panic on your face you know you've got to deal with it like grown-ups and we did that we got stuck into that solidly and then we engaged in a discussion with the banks and persuaded the banks that the less thing they wanted to do was take over the keys of a business that made hydrogen cyanide because they probably very good which would which would kill the city of Cologne in a microsecond you know do you see the company having a social revitol otherwise is it very much question of NRC what is is a role in society is it very much about employment and about wealth creation or do see it having any wider role at all good question no no assessment that question before I mean I think I mean we obviously have this initiative I mean we obviously we're reasonably profitable and so you know I suppose we know we try to look after the local communities where we're present because we're dependent on the local communities to operate you know particular places like Germany where you know Germany a lot most of most of chemical facilities in Germany are in mainland Germany as opposed to coastal so you tend to be mere habitation and you know you need it's a symbiotic relationship between a local community and a chemical plant we have to operate it safely and well we need their support you know occasionally things go wrong and you need they need you know we need the sort of sympathy from time to time so we sort of help local communities and I have a bit of a you know a sympathy well I have this I don't know what you call it really but this concern about you know the the younger generation with you know you know just the health of the younger generation really related to a we're not very active and B we spend a lot of time eating and playing and our game boys and things like that so we have this sort of you know go room for fun initiative which has been extraordinarily successful we get five to ten year olds to go and run around the park and get a medal and all that sort of stuff that's been versatile in terms of leadership you know any particular advice that could be surprised that you got and you're valued and following the advice you give here I don't think so I don't know no I can't remember well I think the most important thing in leadership is for me anyway is is to have a team of people that are capable I'm motivated because it that means you can delegate and you can feel comfortable with people below you making decisions so you know managing your team well choosing your team and absolutely critical and then managing your team well is for me it's the most important thing because it enables you to enables you to delegate and then you know look at maybe doing doing some you know I probably even today you spend 60% of my time on running the company and 40% thinking about new acquisitions even today but you know with a company the size of any horse he can't you couldn't do that unless you had really really good call to pick from so I think that would be from anything and you know the other thing I've I have discovered which is quite late in life is chief executives who have a bit of a sense of humor attract better teams because you know at the end of the day you spend a lot of time working and you know you want you want to enjoy life a bit you know if it you've got some miserable sod that you're working for yeah life ain't much fun really and you spend a lot of time working so you know the characters that you choose as chief executives they you know that element of the character we quite often forget and it's a sort of it's quite important as a leadership character I mean I don't know whether Shackleton I was reading a bit about Shackleton the other day obviously you know he was really good with his men and you know that that you know journey to Elephant Island and then South Georgia and across and back again and everything else you know he kept all his men together they were all motivated there wasn't any fighting they all survived you know you know that would be my it's number one on my list really I think yeah I mean there are other things like judgment and the the other one I really like is rigor you know I mean if you look at what we have done we've we've taken some quite being what people would perceive was quite big risks when we bought BP chemicals intervenors that was called at the time in nineteen nine in 2005 we wrote a check for nine billion dollars for that that was quite a big risk but you know rigor is it's really I mean it it sounds like a bigger risk but we didn't think it was a big risk because we've done a huge amount of homework and I don't like doing things if we've not been really rigorous in our analysis and I don't like people winging it you know you don't know the answer say don't know the answer and go you know go and find out the answer don't wing it you know you need but you do need because it's so easy to get things wrong or miss things you know when we sold when we see it's quite interactive quite an interesting example when we sold in spec which we sold for a billion dollars in 1998 at the time we sold in spec we actually carved in spec into two pieces because the inspector had a fine and speciality chemicals component which was the bigger part and then it had a more commodity oriented chemicals business which is based in unto it they were all beat it was another BP business but it was all part of inspect and I and the the commodity end of the business was holding down the PE multiple so the PE multiple of inspect had been about 2223 and then we had a bad quarters results with this commodity business and the PE multiple dropped to seven and so we we live with that for about 18 months we tried to persuade the analyst that we'll actually this person smokes lots of cash and we invest it in all these fun but they didn't want to know really because in in their world if you can't predict the next quarters results they don't like it so we remained on the slow multiple and so we I can't remember where I was coming from there but anyway we took out where was that coming from here I'm sorry you were looking you the other thing in terms of leadership qualities yeah okay interesting story so senior moment you know but so when we when we sold inspect our I'd taken this commodity chemical business which was the forerunner of idioms so we took that out of the group that then left in spec as a pure finance speciality chemicals play and he came in immediately to buy it which was a company called Laporte it doesn't exist anymore and when they did their analysis of in spec they never understood that 40% of the profits were created by this business that I had taken because we had a manufacturing cost we had a manufacturing tax scheme which was perfectly legitimate where the business which was based in Antwerp manufactured the profit and then it sold it to the UK in the UK sold it said that we sold it and made a profit made most of the profits manufacturing business in and made a little bit of profit so that we paid predominantly UK taxes rather than Belgian taxes which were very high and they never figured that out it was all there in the annual report and they never figured out that the profits they were buying included this manufacturing arrangement from Antwerp so they thought the value of the business can you imagine that and they spent a billion they said they spent a billion dollars on something where a substantial proportion of the profits weren't there because they were in the business that I took away and they hadn't they hadn't they were not rigorous in their analysis so you can make some really dumb mistakes you know if you don't you're not rigorous that was a really dumb one it was a great one for me but it's a really dumb one for them I'm glad you've included in rigor and management of risk I've got lots more questions but I'd like if I may to open it to the floor so if I could over to you yes because anything with a community increase your chance of being caught by the venture business that would increase my chance of in court by the venture capitalists court to escape I don't understand the question do you mean yourself being the subject itself being subject to venture capital attention yeah how did you well I subsequently found out which is which is outrageous in itself actually that they headhunter that contacted me had been given my name by the deputy chairman of corps tells which he published and have done City because I was working with quartiles at ton so he'd obviously tells him head on so there's this you know bright your mang you know give him a call deputy chairman shouldn't do that good thing you did I certainly didn't seek attention it just happened was out of the blue know he mentioned a few times that most likely to fail as we all know so what did what did you do differently in your career to make them successful well you have to be able to say no we I think the more deals you look at the better you get at selecting good deals you know these two you know the there's also there's all sorts of sort of experiences you have you do you don't want to lose a good deal for a pound so if you if you you know you can identify a really good deal then you know don't quibble over the last pennies but on the contrary to that is if you overpay for a deal then you know you very seldom make up that make up that ground it's you know if you depends on the level of competition the time that you buy you know if if life's a bit depressed and there's you know there's less money around if you're in an unpopular area let an unfashionable area there's less people chasing the deals you know there's a bit of demand and supply and you know if you get people who get frothy I'm going to forget it move on be rigorous you know I mean we we know certain things we know that you know we if we buy a chemical business we know exactly what we're going to do with it you know we have a routine which we go through and that involves you know will normally look at fixed costs because that's something you can do something about you know you know you can manage fixed costs you know you know if you've got a forecast which is reliant upon margins you've got no idea really I mean you can forecast the margin but you really have got no control over margins and you know for us we can you know we'd probably know what we can do with fixed costs we probably know you know maybe we can improve the technology a little bit maybe we probably know that we may have some raw material angles because in our business if you know we've got sales of fifty five billion were probably buying forty five billion of raw materials so if we save a bit on raw materials it has a big impact a few few thoughts yes well that was that first thing we did which is back in 1992 whereas it was called BP fine chemicals and they had to for silver to manufacturing facilities one was down in near the New Forest on Southampton water and the other one was in car Shelton in South London and they were closing the Carlton facility in South London but when we bought it it hadn't really done their math what they were doing their closing notes they were moving the vast majority of the production down to what sounds ghost but they hadn't really done their maths on the reduction in fixed costs because you lose all the fixed costs here I was saying because you then going to operate on one facility rather than 213 there's lots of fixed costs you know you know manufacturing facility and they hadn't they didn't fully tweak that so you know our estimates of what it would how much profit it would make were considerably higher than theirs but they didn't know that I mean it was sort of pretty rudimentary stuff in those days to be obviously it was a small business of BP so they weren't really focused on it but they didn't they didn't tweak that really and we did so I was pretty sure that we were we were going to make a bundle on that one which we did because we went you know we went from 37 264 in she's always money if you could comment on life as a prime that's best as public company in the UK today you know see you floated a business back in the day and now in your sister please Frank in the UK what's what how would you call on the changing nature of being a private company versus being a public company look the funds themselves privately well at life's much I mean life's much more enjoyable in a private company than a public company because you've got too many people telling you what to do as a public company and too many rules and regulations really I mean you know at the end of the day if you if you're an owner of a private company you're you know you focused on and they're doing the same thing so it which is you know enhancing value and increasing profitability and all that sort of stuff so but I mean it haven't indeed something that's obviously you know that scrutiny has obviously got it's got worse in a public company so you finish it you know I run a public company for four or five years you finish up with two sets of people who can be irritating one of your non-executive directors who typically know absolutely nothing about the business that you're in but nevertheless want to give you lots of advice I remember one of what we had a chap called Sir Charles Tim berry on the board he'd been chairman of whip breads I think asking me about Formica top skate said I've got fun like a worktop it in the kitchen I mean why don't you make Formica but anyway I just remember that I don't know why but you get all sorts of the you know useful sort of help like that and then the second bunch of people you have to do whether the analyst they were all in short trousers you know it was some of you may become at least so but you know you have to deal with analysts so you know the unlisted the agender of an analyst is obviously very different to the companies sort of more interested in making a name for himself and quite often turning over stock you know nonetheless quite often you know if you think about how there driven in their organization there quite often driven to turn over stop so they quite like sale or buys recommendations rather than always neutral and said they have a slightly you know they have a slightly different gender but there's a in chemicals chemicals you know it's not a it produces a lot of cash over a period of time but the chemical cycle is a quarterly size log twelve monthly cycles so you know he's you know there are two in in a business where you've got lots and lots of competition then you you absolutely supplied your supply demand driven so you know you get a downturn which obviously affects the demand side or you get people putting piles of capacity in the middle east or something like that then you can go through a cycle and it's very very quick because pricing is is very sentiment driven chemicals so you know if the buyers can see lots of new capacitor coming on so they immediately stop buying you know and they'll run down the stops a bit and then everybody you know panics and the prices crash really quickly and as a consequence it you know it's difficult to predict your quarterly results in the commodity end of our business with any great accuracy the only thing that we worry about is that at the bottom of a cycle and you know we you know all our businesses go through cycles but at the bottom recital we're in reasonably good shape we can meet all our financial obligations but other than that we don't worry about the side we don't try and predict what profit we're going to make next quarter or the quarter after that we just make sure that our assets of the first or second quartile assets as opposed to third or fourth quarter at it which means you always know they're going to be healthy at the bottom of the cycle and I don't have to worry about excuse my french all this from the analyst really because you know it's not really relevant what my next quarter what's relevant is you know a chemical cycle might be three years or it might be seven years as long as I know that over that period of time I'm going to earn a good return on the capital I got invested I'm very comfortable with that the American market tends to be more sophisticated so it's it's a it's more tenable to be a chemical company with commodities in America than it is in your they're not sophisticated in Europe so if you look into doubt you no doubt raise on quite a high multiple delwood and then you look at BASF in Europe and BASF doesn't although BASF is just as high quality businesses down in requiring he try to change existing systems which he the system's already in place systems being like safety system space rather well refineries are different to chemicals in the sense well in the simple sense that hmm everything's got an extra north on the end in refining so I don't like refer him very much because you know the swings they work in capital and things like that you know I remember one quarter the swinging working capital in in a two month period in refining was 750 million euros three quarters of a billion euros in two months is you know typical swing for a chemical company but but I mean I think in terms of changing systems and all those types of things in refire refining is a you know you sort of got hydrocarbons in at one end it's high temperatures high pressure and you've got reactors and things like I mean you come out with a series of products so you know that the requirements of running a refinery are very similar to those of running a chemical unit but a refinery cost you five billion and a chemical plant cost 500 million sort of thing but the approaches in terms of safety and systems and all that sort of a similar I mean they where we always start when we acquire a new asset is safety it's always number one you know I mean for the obvious reason but also safety is highly highly correlated with operational efficiencies so you tend to find that if you've got a plant that's very safe because it's run very rigorously then it also operates at very high rates operating efficiency rates reliability is very high in other words and you know if there's one primary variable in our business which we want to get right is to have high reliability because we're a business that runs very large machines and if your machine operates at 98% efficiency in other words reliability of 98% and your first or second quarter you will always make lots of money typically over the cycle but if you operate at 88% then you went because the cutoff point is actually quite a high it's quite a high level so we invest a huge amount of our personal time and energy making sure that our assets run really really well and run really safely which is why any other safety stances it's some of the best in the world habits or routines I mean the one that I like is keeping fit because I think you know otherwise you get you you know you'll go you know I'd go slowly mad I think about you know if I spent the whole of my life of working which would be very easy to do what I have to say and I think it's a healthy balance but I'm not sure if that's quite where your question was but if you ask me what one of my primary routines is that's one of my primary routines so I'd like to mix they you know we work when we work we work quite intensively and you need a break from that from time to time otherwise you know gonna fall you know and you finish up going out for dinners and lunches and things like that so you need to keep a sensible sense of balance if you can and also there's quite a lot of I mean in fearing there's quite a lot of stress and you're involved in risk and all that sort of stuff so you know you don't want that to win that's the sort of connection to dance question with maybe the other side the way that you've structured your company is that it taken anyway the decisions stay private and you mentioned you know he's spent to 40 percent of your day and he more time thinking about acquisitions whereas Co doubt I spend 20 percent of his time fighting off activist investors course under this office is spitting off yeah well I mean it's a bit of that but we it wouldn't do anything you know I don't we don't need to go I don't need to go public to make more money so you know I you know I don't sell any us because it nobody else pays dividends and all that sort of stuff and it it doesn't you know why would we why would we go public you know we don't doesn't improve you know a lot of people go public either because they want to cash out or because they say that it's then easier to finance transactions subsequently but if you look we're we're any us has always played we've always played in the public debt markets and you know I mean people say you are public you're a private company not a public company they say that in a sense we don't have any public equity but we do have lots and lots of public debt and we prefer and I think it's far more intelligent using public debt than using public equity because once you've once you've sold your equity you don't get it back it's a one-way you notice that that's that's a one-way ticket whereas with public debt you can refight whenever you wish so if the interest rates go down industry fie and you replace it with those and the capacity today in the public debt market is enormous and you know arguably is as large as it is in the private in the public equity business so you know the world is awash with cash at the moment and we use you know there different mechanisms accuse but we tend to use these you know the other term loans or fixed rate bonds and then we'll just refi them on a on a rolling sequencer every year now we you know there's a refi of a piece of finance so you know we have a quilt of financing in any us and and we have different financing for different businesses so we have the main in you're screwed which has probably got I think net about six billion euros of debt in it in about six or seven different tranches of term loan and and bonds but then we've got companies like star Aleutian which is ten billion euro no not term eight billion your own company such a big company that's its own debt in Dvinsk of its own debt and the nice thing is you get to keep the equity which means you can you know you can you make the decisions you do and I mean it is I think one of the extraordinary things about any office is that we've gone from from North in 1998 to 55 there's a whole bunch of things were looking at doing at the moment which would take that up again and we've retained well most of people that we most of the new people in any of our acquired obviously they come in via the acquisitions that we make and they tend to be too many of them because you know we're more streamlined so it's a combination of two things very we we obviously want to select the best guys and secondly you've got to select people who are comfortable in our environment which is a very different environment to a BP or a shell or a dowel or a BASF where you know you you're sort of in this cotton wool world you've got lots of support from head office and dad earlier in any of us you know you're you know you're on your own a bit you get the support from you know head office you've got I mean you you will interact with in your capital which is myself and my two colleagues on a monthly basis because there'll be a board meeting so you know I meet with the board of every company on a monthly basis and we talk about strategy and what they want to do and where they're taking the business you know so but other than that they're managed you know they're almost managing their own business you know they've got lots of independence and some people some people are comfortable with that some people are less comfortable with that you know in a BP you never be in that situation of irrespective of how senior you are I think it we I mean financially obviously you can motivate people and you know I think that's that's a good money is a good motivation I don't I don't haven't you know some people get all you know sort of funny about well you know people are not motivated by money I mean people are motivated by money and I think that's very I am you know I quite like the idea I don't need any more money but I'm still motivated by by making money but I think it it's I mean it it never loses anybody nobody ever leaves in yours you know which is unusual so it's obviously an environment people enjoy so they're quite supportive environment because you know it's not you know you've seen a lot of companies you get into competition between individuals in big corporations we don't we don't like politics and we don't you know you've got your own business to run you've got your own team to run you know get on and do it don't start politicking with other parts of the organization and you know some people in you know they like that environment I'm just saying it's a very healthy environment of you're even vaguely entrepreneurial you know and you want to do your own thing and show what you can do you know it's not quite stimulating obviously in green 13 of these concoction I just want to ask you is there anything things I look back when you can say that maybe we've done something they're meant to last disruption and then follow and also like ask is there anything any advice you give to other thinkers that you tell them you would disenfranchise the noise the other second one's quite difficult I think I think in terms of would we have done I think bear in mind we had two types at arrangement and the first one was a disaster it was extremely expensive and when they no progress at all I don't know I honestly don't think we would have done anything different and I think you were at a point where you know the business was losing lots of money they're very mind with Grangemouth I mean for those who don't really understand that business that well the games - basically user is a petrochemical it's a petrochemical complex but at the heart of the petrochemical complex is a cracker which converts and Orsi gases into ethylene and then we make derivatives from from ethylene so it's all based on that cracker the cracker requires Northey gas and the North Sea gas was dwindling to the point where we couldn't run the cracker high rates and the only solution I mean you know if you if you're not gonna feed stocks then then ultimately you have to close it it was losing quite a lot of money and the only solution we had to the problem which was quite innovative was to bring these gasses over from the United States shale gas is over from the United States and landed so in other words all the costs of bringing all that those gases across because you have to refrigerate you know you know you have to turn them into a liquid - ninety degrees centigrade a day and bring them all the way across the ocean it still landed half the price of North Sea gas so you can get the volumes over and it would be considerably less expensive but it required an investment in Grangemouth of 300 million pounds which is quite a bet on a facility for 30 years which we've just been a nightmare of Union I mean we on an annual basis we'd be threatened with a strike four or five times a year so every time you sat down to talk about anything with the unions like say we want to talk about pensions you want to talk about pay rises we're going to go on strike that was always the mindset of the the unions so we were not going to invest 300 million in a facility which had been losing lots of money with that sort of relationship with pensions which were costing 60% of salary and the average operator was earning 60,000 pounds a year I mean we just we were not going to do that so what we said was that we would invest the 300 million pounds to bring the gases over which would save Grangemouth but only on the basis that we could address the costs of running this facility which were just off off the scale expensive which meant that the employees would have to move from a DB to a DC pension which is a very good 15% DC pension which was the standard in the UK and they'd have to said accept a pay cut for three years and we said you know if you want us to write a check for intermittent the government we're going to offer a loan guarantee as well then you you have to do your bit and we call that the recovery plan or something like that and the union said no to all of that we said well that's fine that means we're not gonna spend 300 million which means we have to close it down because it's lost two or three hundred million this year and eventually we had a mass vote on the matter and the union's told all the employee to vote no so all the employees voted no and you know we subsequently asked cuz my son worked there for a couple of years you know why why'd you know because he got to know one of the why did you vote no when you knew that if you voted no that was it was going to get shut down and he said well you know that it's so it's all about bullying and intimidation getting you cocky you know that sort of 1960s sort of mentality people were frightened really I suppose anyway they voted no so we said we were going to close it down we should fine we would just close it down and then the unions came sort of rushing back said well we didn't really mean it and then obviously we were sort of most of salvaged salvaged things but you know I've always we there's lots of union representation on lots of Inuyasha's sites and in in the main we don't have an issue with that because the you can't have a conversation with a thousand people when you're talking about pay rise how you want to debate pensions or something like that you have to have a body that represents the people but I always remember when we first bought BP chemicals which was our huge transaction back in nineteen in 2005 and I went to meet the union leader of the Cologne sight which is the second largest chemical site injects a massive about the size of the City of London BSF we've got the biggest one in Ludwigshafen and we've got the second largest one in Germany and I went to meet this guy so we just had a get to know you sort of coffee this guy called singing a big bear like character and he was it was a very nice man head of the union and after we'd been chatting for 10 or 15 minutes he said because this was after three months we'd probably owned the business for three months he said Jim I said I don't like a bonus game I said well it's quite a generous bonus game singing and not only is it generous but we pay all the operators as well as it's not just a management it's all the operators he said I would rather you spent the money on the planet and that will ensure jobs for you know the workers children and their children and then that that's the mentality in Germany that's and that is the true role of a union is you know long-term prosperity for the facility and jobs and sensible pay rises but not so but in the UK it's just you know I want a bigger pay rise I want more pensions I want this and I want the fight because I don't like employee I don't like the employer and it's that so it's not the same everywhere in the UK but I'm afraid with the United OHS it certainly wasn't arrangement I think the thing with Grangemouth was because Grangemouth was the tap to the North Sea because the forties pipe comes on to Granger on site so have you shut growing up down and forties down shut 40s down he shot central North Sea down not only that it's the only refinery in Scotland so nobody gets any heating oil petrol diesel hospitals shut that well that sort of said so the union's had you know huge amount of power for 30 years and BP who'd been the previous owner had always count out to the union's request so nobody had ever said no to the Union but we got to a point where you know we're not going to lose 300 million a year you know just because we've got some stroppy unions you know now if you look at it now it's oh it's a really happy site people are delighted the tanks going up all the import priscilla tees are going in and you know grains mouths got a really good future but we weren't going to get there without there was no way you could sit down have a sensible conversation it was just never gonna I mean we all tried I mean I I tried to dispose to sit down have a sensible conversation but they they just want the fun so in the end we got one no yes focus on the last no waiting we focus upon the past and what it's done started looking at the future of extractive each the common up to 30 years and one is you mentioned earlier I'm changing capacities around the world because Europe is dropping down in the last six years but it's you know one point four billion bottles today there's a capacity you have similar phenomenon in Australia Japan increases in the Middle East yep what's your take and how that will affect any else and then your ability to sit because of competitiveness like you or about the other point would be a shale gas and also a roll of gas the liquids as well in that space okay well it's sort of quite a big question but even if I go back to when I was first beginning in chemicals we didn't really have a that the Middle East wasn't a big deal and China didn't exist there's a threatened chemical so the two primary you know if you look at chemicals worldwide it's the same size as automotive you know I think if you you know trillion dollars or something like they say it's it's one of the world's big industries chemicals because you know chemicals finish up in in everything that we use and then can wear and drive and all that sort of stuff so in the early days you had America and you had Europe and they were both sort of on relatively equal footings if you look at where we are today you've got four regions of the world you've got you know the middle eighth the Middle East came on stream because they found lots of gas and obviously oil but lots of gas which is quite a good feedstock for chemicals and they became unbeatable in terms of their economics in commodity chemicals but and they put immense amounts of investment in the Middle East in particularly in Saudi Arabia but elsewhere in QA tomorrow but no and we were all frightened to death in Europe that that was going to swamp our markets and kill us all because they had unbeatable economics but what in reality happened it was the Middle East soaked up all that product so it all went west from sorry East from there no and that's been fine then what happened was China started to you know join the modern world and you know they had thirteen trillion dollars in current account you know which was the Contra two Americas thirteen trillion dollars of deficit so they had a massive amount of money and they decided that they wish to build their own base industries including chemicals so the Chinese started to pile in with the immense amounts of capacity and up until now that sort have been fine because it's just Kate that plus the Middle East capacity is sort of catered for the huge growth we've seen in China and then in 2010 America discovered shale gas and it literally is the last five or six years and and shale gas has had a huge impact in the United States so the announced capacity additions in the United States on the back of shale gas economics for chemicals is a hundred and forty billion dollars today it's immense if you then look at Europe today all you see in Europe foreclosures so if you look at the UK in the last ten years probably 20 closures of chemical plants no new ones and it's the same sort of across Europe because we don't we don't we don't have much to fight back with you know we've got expensive energy which is your primary because you're you know you look at the cost structure of chemicals energies apart from raw materials energy as they is the most expensive then you know you get all the social labor costs and inflexible labor that you have in in Europe so I mean it's a changing world we live in and the after a sort of cater for all that if you look if you go about five years ago within us two-thirds of our assets were in Europe and one-third in America and two-thirds of our profits were in Europe and one-third was in America you look at it today it's exactly the same ratio of assets but it's the flip side on profits - so it's about profits from America one-third from yarn which is why I'm always banging on rather tediously about you know manufacturing is important in Europe and the UK and energy is important in the UK and Europe you know because we just don't you know we don't have competitive energy over here you know America's Got shale gas and the Middle East obstacle cheap raw materials and China has just got lots and lots of cash at the moment but even with the collapse in oil prices gas prices in America are still half they are what they are in the UK I mean you can't commit about if I'm if I'm going to even say ten ships but also you know if you look we invest not quite a billion dollars a year of capital capital but approaching a billion dollars here we send it all to you know we we're going to invest in America we're not going to invest in the UK or Europe are we on it's just not competitive at the moment $50 is slightly changing things but and cents I think is that this is a really remarkable story and you know what Jim has done from a base which I think many might have felt is impossible how would you take manufacturing in this kind of way and make such an outstanding success of it around the world I think is a fantastic story and I mean you've seen also that Jim is a very very down-to-earth person very you know very focused on what are you doing and I think is you know it's it's you know as a role model as it were for somebody I think it's again it's a very very remarkable story but also Jim in the sense I asked you the question about the social role but I mean I could argue to it is not just what you've achieved yourself in terms of building this company but also the fact that there are now more chemical plants and more manufacturing plants and that would have been if you would not start with somebody I you know you've sent the fact a lot of more closures would've taken place in terms of your contribution to what you've done you know in maintaining manufacturing quite a lot of countries and ensuring I mean the Grangemouth example is a very good example the deal was you know we'll invest if you if you agree and you are investing I've seen the results of putting a lot of money into Grangemouth you know which will result survive as a bobble entity and that in turn I believe you know increases the prosperity of the country and the country to operate so I've answered your question for you let's go you know whether you have a social thank you you may not have one but I think you've got one and on all these grounds therefore Jim has been awarded the Alumni achievement award to be unsurprised to here and so can I just off take this opportunity Jim to you be here I'm proud that Jim is palabras proud thank you very much for coming thank you very much coming today ya know you

Channel: London Business School

Views: 48,050

Keywords: London Business School (College/University), lbs, jim ratcliffe, lbs alumni

Id: wIDelX3Po4w

Length: 71min 12sec (4272 seconds)

Published: Fri Sep 18 2015