Jürgen Rautert — The View from ‘Hei’ Above

WTH THE printing industry, and global economy, in turmoil, Heidelberg perhaps best represents a case study of an equipment manufacturer facing difficult times, tight credit markets and the challenge of how to best position itself within the industry’s digital future.
In an exclusive interview with Printing Impressions, Dr. Jürgen Rautert—member of the Management Board responsible for sales, customer- and market-focused activities, product management, services, consumables and marketing for Heidelberger Druckmaschinen AG—talks candidly about the challenges and opportunities. Below is the complete transcript of the interview.

PI: Do you see a recovery in process or do you expect that business will continue to be depressed through the end of Q4 2009? What practical signs of recovery do you see in Heidelberg’s business now?

Rautert: As a global company with a presence in more than 170 countries, we are facing local markets with different economical situations. While business was already down in the U.S., other countries continue to enjoy good business. Here is an example from Central Europe: During the last open house in Switzerland, we closed approximately U.S. $6.5 million—and this was in June 2009! The markets in Asia are also different. Following “Print China” in May 2009 we are also confident, because the business exceeded our expectations. If you ask about future development there is no global answer, but we are prepared to adjust to the situation.

PI: What potential do you see for worldwide sales over the next 12 months?

Rautert: The financial year 2009/2010, which sees us through April 2010, will remain difficult. However, in the last six months we’ve had customers approach us seeking guidance in the areas of workflow, print color management and business development, which is very encouraging. Many of our customers want to improve their business by improving their existing equipment—and they’re doing it by partnering with us. This is another clear indication that attention to quality in all areas is what counts at the end of the day.

Now it’s important to add that our strategy remains viable for the future: Of course, the sheetfed offset market is our core market, and our strength in that market over the years is a growth potential for us now. Our broad portfolio of installed equipment is a tremendous asset in today’s difficult economic environment

PI: When we finally emerge from recession, how will the market compare with 2007?

Rautert: I see a chance that our industry will be able to reach the market level of 2007, but with a different development path for industrialized markets and developing markets: The clients in industrialized environments tend to focus much more on investments to gain productivity on one hand and value-added applications on the other hand. In developing countries, we are facing a situation with more organic growth potential. In many of those countries there is still low per capita paper consumption with a high potential for growth. Our customers around the globe are on their way to further developing the industry and are being rewarded with promising business opportunities.

PI: Can you elaborate on Heidelberg’s approach to helping its customer achieve growth and gain productivity?

Rautert: We work hard to offer the best value for money in terms of machines, software and professional service to keep the equipment up and running. Certified consumables help to achieve the desired printing results. But success consists of more —our customers offer many different and creative solutions to their clients to successfully differentiate themselves from their peers.

Our mission is very clear: if we are able to support our customers in a way that they become winners, we do. Let me list the areas of excellence and some of the typical questions our customers and we have to find answers for:

1. Marketing: What do I offer at which price level to whom, using which channel? Is my business model sustainable?

2. Environment: How do I make sure to offer an idea to those clients who care?

3. Quality: Do I know what my clients think about my offered quality? Not just print quality—this is taken for granted anyway, but in terms of contact, timely delivery and many other aspects to make business easy with my enterprise.

4. Productivity: Do I know where my bottlenecks are? Is my productivity increasing at least 5 percent per year?

5. Value Add: How do I create something special that is less vulnerable in price negotiations?

6. Transparency: Do I have a transparent and realtime view into my operations to identify bottlenecks and to evaluate the corresponding costs and potential savings? Do I know the status of any job, anytime, effortlessly?

7. People: Do my people know how? Are their targets in sync with mine?

We are identified with hardware and software, our customers rely on our service availability, but we are going on: Our business development team for example offers support tailored to the needs of every single customer in the following fields: Strategy Development, Sales and Marketing, Succession Planning, Financial Management, Organizational Development, and Mergers and Acquisitions.

PI: How will Heidelberg’s recent job cutbacks affect its ability to pursue sales opportunities worldwide? How will they affect other functions besides sales?

Rautert: The majority of the job cutbacks already made and planned for the future will affect the factory and the administrative parts of the organization. We will manage our service capacity according to the needs of our clients.

We will absolutely stick to our strategy of providing print shops with substantial production and cost benefits and continue to provide the known level of service and consultancy expertise in all regions.

PI: Do you have plans to increase equipment parts sourcing and manufacturing from Europe to China? The U.S.?

Rautert: It is most important for Heidelberg to utilize all reasonable sources and some parts are better sourced in Europe, some in Asia and some in the U.S. Independently from the question of origin, it is mandatory for us to treat every single component as a Heidelberg part that has undergone a thorough inspection and has been designed, made and assembled according to Heidelberg’s quality and performance standards.

In order to do this, of course, we have to keep our eyes open to identify growth potential in different local markets. This is where China comes into the picture: Our Chinese factory near Shanghai was built to open and to serve the local market with machines such as the Stahlfolder KHC 66/78 and the Printmaster PM 52. Those products are well accepted by the Chinese customers and our throughput in the factory has increased steadily. We added PM74's and we plan further expansion.

Likewise, our manufacturing plant for the QM 46 in Sidney, OH, is also well on track. Staff training in Germany for the U.S. workers has been accomplished and we expect the first American-built machine to ship in August. The entire serial production should be ramped up at the end of this year.

What is paramount for us is that every customer receive the quality he expects from Heidelberg, and this goes for all our plants, whether in Germany, China or the United States.

PI: Can you comment on the assistance (loan) Heidelberg recently received from the German government.

Rautert: My short answer is that the financing for Heidelberg is warranted—even in this critical phase of the financial crisis. This will secure the future, the innovative strength and technology leadership of Heidelberg as a force in the printing industry.

Now let’s take a look at the details: The German government initiated a 120 billion euro support program to assist companies through the economic downturn based on the financial crisis. Any company can participate in this program if certain prerequisite criteria are met. The government loan and state guarantee is only granted to companies that can show that their business strategy is compelling and, consequently, their ongoing business is sustainable. To ensure that the criteria are met the government assigned public accountants—like PwC —to take a close look at each enrollee's request.

Let me be very clear: We have not received a gift of any kind; rather, we have received a loan that has to be repaid. The government did not provide any grant, subsidy or injection of capital.

PI: How do you assess Heidelberg’s vulnerability as a takeover target, based on asset value vs. market capitalization?

Rautert: Our assets are obviously a multiple of our market capitalization right now. I think this is easy to understand when you just take a look to the value of our assets—like the production sites. We talk to all kinds of investors, including institutional shareholders, private equity firms, sometimes even hedge funds. As our business model is long-term oriented, our preferred structure in the shareholder base is to get those on board who also have a long-term investment horizon. Specific shareholder details are not published beyond the main shareholders of Allianz (12 percent) and RWE (8 percent). Whenever we have new shareholders above 3 percent, we will inform the (capital) market accordingly.

PI: Speaking of Financial Services, how is Heidelberg addressing the inability of its customers to obtain financing, due to the tight credit market?

Rautert: Heidelberg Financial Services has established a network of worldwide financing partners for its customers. These financing sources have been extensively involved in financing services for the print media industry and appreciate the special value of an investment in Heidelberg machines. Our highly qualified Financial Services team connects the customer with the appropriate financing partner and offers personal onsite consultancy for all financing questions. Especially in difficult times, the close cooperation with financial institutions has proven to be of great value for our customers.

PI: How does Heidelberg expect to improve its market share for service contracts on older equipment, and what is the profit potential of this additional business?

Rautert: We target to expand our offerings in the areas of Service, Parts and Consumables. In different countries we already achieve a market share of up to 75 percent in Service—measured on the base of our installed machines—and in other markets there is obviously growth potential. Due to the fact that the majority of new machines are already equipped with our industry-leading Systemservice 36 plus contract, we focus on equipment that is six years and older.

Recently we conducted a dedicated market research project for our Service business in order to better understand customer needs. The results showed that while service contracts are very important, our Service offering provides much more. For example, we also assist our clients to “optimize their productivity”; “train the operators”; and “optimize the material flow,” just to name a few. This can significantly help increase productivity in even a customer’s existing equipment.

I’d like to remind your readers that our global service parts network enables us to supply our customers directly in a matter of hours. Our dense service and sales network spans the entire globe. We employ about 7,000 service and sales staff worldwide and have an active presence in 170 different countries, generating around 85 percent of sales through our own sales operations. This means that we are able to provide our customers in both industrialized nations and emerging markets with optimum support.

PI: How does Heidelberg plan to grow its market share for print media consumables? What is the profit potential of this additional business?

Rautert: Our current market share is small, and we are very close to our customers. We also have a very effective logistics system for spare parts in place. We will use these prerequisites and some new elements to offer qualified consumables, backed by expert support, to drive that business.

Around PRINT 05, our entire consumables offering by Heidelberg USA was focused mainly on prepress. Now the offering has been significantly expanded to include a comprehensive portfolio of prepress, press and postpress consumables including plates, chemicals, inks, coatings and banderoles, to name a few. Our consumables portfolio has been well accepted by our customers and I’m happy with the current rate of adoption.

PI: Heidelberg is devoted to business development and business services. What is the company’s commitment to expand its business consulting area in terms of training, and what is the profit potential of this additional business?

Rautert: To be successful in today’s print media industry, printers not only need the right equipment, but also must react quickly and smartly, continuously improving their operations, while adapting business practices to customers’ ever changing needs. Heidelberg’s worldwide consulting team is made up of about 30 employees dedicated to helping our customers by creating customized, sustainable solutions for everyday business problems. For example, Heidelberg Business Consulting helps customers optimize their production practices and incorporate lean manufacturing techniques. Our consulting team also assists customers with their sales and marketing activities, in some cases we've even helped customers to develop an effective business strategy.

Heidelberg USA has its own consultancy department dedicated to consulting printing companies on equipment efficiency and printing process optimization, benchmarking comparisons, investment planning decisions and numerous other specialized projects. The team is currently offering a new product to improve the knowledge of printers: a competency analysis and subsequent training programs for print operators.

PI: What is the status of Heidelberg’s Linoprint/LinoProtect inkjet technology?

Rautert: Linoprotect is an exciting new project in the area of brand protection. It launched in 2008. We are currently in discussion with several well-known brands and ad agencies to develop a global go-to-market implementation.

We launched Linoprint in 2008 as a one-color solution to be installed in existing or new packaging lines. Right now we are further expanding the product range to meet requirements like variable imprints, flexible batch sizes and short term-promotions. We plan to launch the first four-color printing systems in mid-2009 for the European market.

The Linoprint system offers modular systems under the name “DriveLine,” which will function as a standalone solution that can be employed independent of existing packaging lines, e.g. for web printing with various substrates. DriveLine systems can print on labels, films and board with a high degree of variability and quality. The maximum resolution of 720 dpi makes it possible to print web widths of up to 340mm. The maximum print speed is 60 meters per minute. First customer installations of a pilot series of DriveLine printing systems for four-color printing were taken into operation already.

PI: What role will Anicolor technology play in Heidelberg’s strategy and future success?

Rautert: In the U.S. as well as in Germany and the U.K., we’ve seen strong adoption of our Anicolor press with printers who need to do a lot of low-run, quick-turn, four-color jobs. I have yet to meet a single printer who regrets investing in this new inking technology. It is a very important tool in producing high quality, short-run printing.

We’ve been hosting a series of Anicolor open houses and road shows in the U.S., and printers are excited about the Anicolor technology. They’re impressed with the low cost per job, makeready speed and the color quality.

A migration into bigger formats is certainly possible and will be evaluated.

PI: Heidelberg unveiled its very large-format (VLF) presses at Drupa 2008. Has the pace of installations worldwide met your expectations?

Rautert: Yes, our expectations have been met. Since its introduction at Drupa 2008, Heidelberg has established itself in the VLF marketplace and sold 20 VLF presses worldwide, one of them here in the U.S. at Proteus Packaging. We are glad to see that many customers, some of them who had little contact with us so far, are curious to see and test print the XL 145 or XL 162. Our assembly hall in Germany is well filled and we are confident to become a supplier of choice in that segment.

PI: What lean (and green) manufacturing and productivity improvements has your company made to its own operations? How does Heidelberg involve its customers in these efforts?

Rautert: In the Heidelberg Group we reduced the total energy consumption per metric ton of output from 7,8 MWh/a in the year 2004 to 4,7 MWh/a in the year 2007. This was achieved by implementing several measures designed to optimize the energy efficiency of the production sites, for example, by means of heat recovery, more efficient lighting systems and leaner manufacturing processes. Emissions and water consumption dropped and our waste recycling rate reached 93.8 percent in 2007.

In life cycle assessments we analyzed that the environmental impact in the use phase of a printing press is much higher than during the manufacturing. Therefore, we strive to improve not only the productivity of our presses, but also to continuously improve the energy efficiency, and reduce the consumption of resources and emissions. Only if we think economically and print ecologically will press manufacturing continue as a highly valued and dynamic industry,

As for our customers, we use different opportunities to address and stimulate environmental activities. You might know that we recently awarded the HEI ECO Printing Award. The worldwide feedback was encouraging. The two top prices, by the way, were won by a North American printer who scored first for the most sustainable operation and a Japanese printer who was decorated for the most innovative idea.

We also offer the the most comprehensive color management and measurement portfolio in the industry. The potential is huge, if you figure 200 sheets of paper per makeready saved by using Heidelberg Inpress Control. Do the math, if this technology is adopted by many printers: Within a few years we talk about millions of tons of paper.

PI: Where will the lion’s share of Heidelberg’s revenue come from in five years’ time? What will your product/service mix look like?

Rautert: As noted earlier, we have been particularly successful in expanding our consumables, parts and services businesses. Despite the current state of the machinery market, we have achieved growth in both these areas and increased our share of the total order volume. We see half of our potential revenue coming from the promotional print market, a quarter from packaging print market and a quarter from service and consumables.

PI: What is Heidelberg’s position on the perceived “threat” from digital printing technologies, especially high-speed, industrial inkj-et?

Rautert: I don’t know who sees digital print as a threat. Quite to the contrary, we continue to see digital print as an interesting supplement enabling our customers to explore new business opportunities. Talking to (offset) clients—especially here in North America —I have seen a lot of innovative digital print solutions that complete the offering of the print shop and that enable cross-selling of offset printing to digital clients and vice versa.

Heidelberg is supporting those efforts by integrating digital printing devices into the Prinect workflow philosophy. Certainly we see growth potential in the field of digital printing in the future and we are evaluating all options for Heidelberg to support our customers in implementing viable business models.

PI: Does Heidelberg envision getting back into the digital market in some way, e.g., as a reseller of OEM or original branded services?

Rautert: It is not an option for Heidelberg to develop and manufacture a digital printing machine. The market is covered by a variety of producers already and different printing technologies battle to win through the digital market. However, as I said earlier, Heidelberg will consider all options, and expanding the Heidelberg offering as an OEM partner in single countries is an interesting thought, but obviously nobody would talk about issues like this before they are implemented. Thanks for understanding. PI