In the age of digitalization, only the agile and adaptable will hold their own in the international competitive arena. This also applies to steel distribution. Klöckner & Co is a pioneer of change. This maxim is reflected in our “Klöckner & Co 2022” strategy: Three main strategic pillars are supported by our transformation to a digital corporate culture characterized by greater openness and flexibility as well as customer centricity. We have systematically implemented this broadened strategy since we presented it in 2017.
1. Digitalization and platforms: Digital transformation of our business is the cornerstone of our strategy. We are pioneers here, blazing the trail for customers and partners. Part of our “Klöckner & Co 2022” strategy involves driving the disruption in steel and metal trading via an industrial platform. We will benefit from the clear line we have taken here in incorporating the opportunities and potential inherent in online marketplaces in our business.
2. Higher value-added business: Focusing on business with higher margins remains a key thrust of our “Klöckner & Co 2022” strategy. We expect digitalization to give this pillar of our business an additional boost as well.
3. Efficiency improvement: Launched in 2017, our One Europe program has already noticeably increased efficiency. We are making progress in the USA as well, having initiated One US with the aim of generating another substantial boost to efficiency.
Our new, extended “Klöckner & Co 2022” strategy is backed up by a broad range of flanking activities as well as a self-prescribed cultural transformation for the entire workforce and our Group divisions.
The supply and value chain in the steel industry is inefficient and lacks transparency. There is no effective information and data interchange between market players with regard to available inventory and lead times. This results in delivery delays, incorrect shipments and surplus inventory. The quotation process is also highly time-intensive. Not least, only 30% of quotations lead to an order.
Klöckner & Co’s digitalization strategy aims to eliminate supply and value chain inefficiencies in the steel and adjacent industries.
All projects and initiatives relating to Klöckner & Co’s digitalization and digital networking are being driven forward by kloeckner.i, our Group Center of Competence for Digitalization, from the heart of the German start-up scene in Berlin. Approximately 90 employees now work at kloeckner.i in the fields of product innovation, software development, online marketing and business analytics. kloeckner.i is far enough removed from our traditional business for it to act more independently in the rapid development of digital tools and portals than would be possible from within Klöckner & Co. However, kloeckner.i is connected closely enough with Klöckner & Co for it to harness the Company’s comprehensive expertise in steel distribution and leverage our relationships with customers and suppliers in developing solutions.
We make use of methods such as design thinking, agile product development and the lean start-up approach to design digital solutions for our customers and partners in the shortest possible time. First, we go directly to the customer’s premises and evaluate on site how we can create added value. Once we have made our evalu-ation, we develop simple prototypes. The initial prototypes are specifically designed to cover solely the most important functions. Together with our customers, we then determine by means of a continuous testing and refinement process whether the tool meets the requirements set. This ensures from the very outset that all customer needs are met and only prototypes that have already been validated with customers are devel-oped into solutions. Compared with the conventional approach typical of a large corporation, the new working methods have made us significantly faster. As a result, we have progressively raised the share of sales made through digital channels from 9% in the first quarter of 2016 to 25% in the fourth quarter of 2018. At the same time, we have digitally connected with wholesalers and major steel producers on the procurement side.
Based on the high level of demand generated by the successful digitalization of Klöckner & Co, kloeckner.i will also offer consulting services to other companies starting from 2019. To this end, kloeckner.i has entered into a partnership with Axel Springer hy to jointly offer customers the benefit of their experience in the successful digitalization of traditional groups.
Our digital tools, including online shops, contract portals and order overview tools, have already been integrated into the Kloeckner Connect service portal at many of our country organizations. The portal gives both customers and partners a central access point for all tools and data, which they can use much more efficiently than before.
We have also expanded the range of our offering by opening up our – initially proprietary – online shop to partners offering complementary products. At the end of the year, 29 third-party vendors were already marketing their products through the Klöckner marketplace. This lets Klöckner & Co customers access a significantly wider range of steel, metal and complementary products without us having to invest in additions to our product portfolio.
Alongside the digitalization of processes throughout the Group, intelligent use of the data generated is also gaining in importance. We have been working with Arago, one of the leading providers of artificial intelligence (AI), in this key area for a number of years. AI has already helped us to automate parts of our IT infrastructure through permanent learning processes and continuous self-improvement. Going forward, having access to improved data assessments incorporating a wide variety of factors will make it possible to predict demand for steel and price trends with much greater accuracy. At the same time, more in-depth analysis of customer behavior will open up additional growth potential.
In February 2018, we went live with the first version of our open industry platform, XOM Materials, in Europe. By the end of the year, we had already brought on board ten dealers and 160 customers and generated orders of more than €5 million. In contrast to the Klöckner marketplaces, XOM Materials is a digital trading platform for steel, metal and other industrial products that is also open to competitors. Growth of XOM Materials is to be funded by outside investors, which will also ensure its independence from Klöckner & Co. The first financing round with external investors will be completed in 2019. At the end of the year, around 40 employees worked for XOM Materials at three locations. The US market launch of the platform is being prepared.
Platforms such as XOM Materials break up linear supply and value chains by allowing differently positioned market players to connect with each other directly. Looking ahead, steel and metal products will therefore be increasingly traded through various digital channels: online shops operated by individual distributors, marketplaces, industry-specific vertical platforms, and cross-sectoral horizontal platforms.
Online shops are only of limited use to customers due to the restricted product portfolio. Although Klöckner also started in this way some years ago, it has already moved on a step.
Marketplaces offer products and services beyond the Company’s own portfolio. The Klöckner marketplaces allow our customers to purchase products from complementary third-party vendors as well as specialized products and services from our own portfolio.
Vertical platforms offer a wide range of sector-specific and complementary products and services. The focus here is on price-sensitive customers. XOM Materials aggregates the ranges of different market players and thus offers a broad product portfolio with a high level of transparency on price and availability.
Horizontal platforms offer a large number of standard products – ultimately for all sectors – but no customer-specific or add-on services. Here, the focus is on customers who tend to buy small quantities relatively infrequently.
Klöckner & Co is fundamentally well positioned to make use of all online channels, with a focus on our mar-ketplaces and XOM Materials. We are thus poised to take on a leading position in all online sales channels for steel and metal products going forward. We have set ourselves ambitious goals for the ongoing implementa-tion of our digitalization strategy: By 2022, we want to see 60% of all Group sales generated via digital channels.
To support our digitalization strategy, we also invest in attractive start-ups that are able to offer added value for the further development of Klöckner & Co. We connect up with external start-ups via our kloeckner.v ven-ture capital company.
Our digitalization strategy also goes hand in hand with a cultural shift within our Company. We want our employees to understand our digitalization strategy and to contribute to reaching our Company’s ambitious goals. At the same time, we need to become even faster and more agile given the ever more dynamic changes occurring in our sector. By increasingly applying the innovative working methods employed in the start-up scene, we are encouraging in-depth dialogue between kloeckner.i, our digitalization subsidiary, and employees from other divisions in the various country organizations.
Online training is provided by Klöckner & Co Digital Academy to get our workforce in shape for the digital age. This lends employees support in developing and implementing new ideas, which they can discuss with their colleagues across national and divisional boundaries in a non-hierarchical way using innovative channels of communication, such as Yammer, the Group’s internal social network. We have thus broken down the existing vertical communication silos in favor of an unfiltered, increasingly horizontal form of dialogue.
In the FOCUS employer awards, which are held in cooperation with kununu, Europe’s biggest employer rating platform, we ranked 9th in the “Leadership Culture” category among more than 1,400 participating companies in Germany in 2018. We also achieved an outstanding ranking in the Work Climate category, coming in at 38th place.
Many of our customers are highly vertically integrated and still use conventional methods to carry out tasks we can already perform more efficiently by consolidating orders. A good example of this is our investment in 3D lasers, which we can use to combine several customer tasks such as drilling, sawing and slotting at an attractive price and with significant gains in precision. In the UK, for instance, we have built what is now the country’s second-largest 3D laser center near Dudley. At home in Germany, we have already taken three 3D lasers into operation, thus very successfully occupying a market niche.
The investment in 3D printers at kloeckner.i and our German country organization Klöckner & Co Deutschland GmbH has moved us into the growth market of additive manufacturing. We have also further expanded in the demanding shipyard business. Our German country organization, in particular, has considerable exper-tise in supply chain organization for the shipbuilding industry.
As set out in our strategic targets, we will also be expanding our higher-margin business with higher value-added products. At our Bönen location in North Rhine-Westphalia, Germany, for instance, a service center to process aluminum flat products for the European automotive and manufacturing industries became fully operational in the reporting period. The service center has a total processing capacity of 80,000 tons of aluminum per year.
Our US country organization, Kloeckner Metals Corporation, invested in three special facilities for coating sheets and sections in the reporting period. The process used improves both the functionality as well as the surface of the products and is of particular interest for architectural and gastronomy applications. We have thus not only secured access to this technology, but also to the exclusive distribution rights for the United States and Brazil with our Chinese operation partner.
Our continuous efficiency improvement program VC² has been successfully launched and is accelerating implementation of our “Klöckner & Co 2022” strategy. The program brings together the existing “One Europe” and “One US” optimization programs and complements them with a series of other initiatives.
Over the last few years, we have restructured the European distribution business at the country level, down-sized capacity and pooled operations. Under our “One Europe” program, we have standardized the processes of our country organizations in Austria, Belgium, France, Germany, the Netherlands and the United Kingdom. In this way, we aim to not only generate cost savings and synergies more readily – especially in purchasing, logistics and pricing – but also to enable even faster, more efficient implementation of the “Klöckner & Co 2022” strategy. “One Europe” is projected to contribute around €30 million per year to EBITDA from the end of 2019 onward, with a total of €26 million already generated in 2017 and 2018.
Thanks to several acquisitions, our location network across the USA covers the key regions between the East and West Coast. As part of our “One US” efficiency program, the three product groups resulting from various acquisitions in the USA have been combined into one unit and the regional focus has been brought out more strongly with a new structure in order to promote cooperation and provide customers with a central point of contact. At the same time, the more efficient organization should lead to cost savings as well as even more rapid implementation of the digitalization strategy and expansion of higher value-added business. From the end of 2020, this program is slated to deliver an annual EBITDA contribution totaling USD 15 million. USD 8 million was generated in the reporting period.
The Swiss country organization Debrunner Koenig (DKG) was another key focus of VC² in the reporting peri-od. As part of the program, DKG’s activities were bundled together in three supraregional divisions. This has made the Swiss organization more centralized and streamlined its structures. VC² is complemented by a series of other initiatives around business model innovation, operational excellence and profitable growth.
In total, we plan to improve our ROCE to 10% in 2022, which corresponds to an EBITDA margin of more than 4.5% on the current basis.