Can Eagle sustain its impressive growth?
Haycarb, the subsidiary of the Hayleys conglomerate that has carved a niche for itself in the arcane world of activated carbon, is a company that is almost obsessed with recycling and pollution control.
Its core product, activated carbon, comes from coconut shells that most people would discard without a second thought. Waste heat is re-cycled to generate steam requirements and electricity. Even the sewage is treated and used to water the gardens at its production sites.
The company's vision statement puts it succinctly: "Tomorrow's product from yesterday's waste, today."
It makes an astonishing variety of activated carbon for a range of specialised applications. Activated coconut shell carbon is used in the gold mining industry to recover gold from ore, as well as in air and water purification areas such as gas masks, protective military suits, cigarette filters, odour removal and tap water filters.
Haycarb operates in the realm of molecules. The operative parts of its products - the pores in coconut shell-based activated carbon that absorb pollutants - cannot be seen even when magnified several times under the microscope. One gramme of activated carbon is said to have a surface area - the surfaces of the holes or pores that absorb pollutants - of 1,200 square metres.
Haycarb makes activated carbon granules and powders from waste coconut shell and activated carbon pellets from waste charcoal dust. Basic charcoal characteristics are particle size and porosity - the size and number of holes in a grain of carbon. It operates on the same principle as that of a sieve - polluted liquid or air is sent through a screen of activated carbon that absorbs toxic matter.
Breaking into the market which was dominated by a handful of players in the industrialised countries proved difficult in the early stages and it took a lot of hard work, trial and error and sheer perseverance before the activation process and the marketing were fine tuned. Today, Haycarb is well known in the gold mining industry. It has an activated carbon plant in Thailand and fully-owned marketing subsidiaries in the United Kingdom, Australia, Japan as well as distributors in Canada, South Korea, South Africa, Taiwan, Hong Kong, Chile, Kuwait and Ethiopia.
"We always look for ways to save money," says Haycarb managing director, Rajan Yatawara who has been in charge of the company since its inception as a charcoal export operation in 1973 and is now deputy chairman of the Hayleys parent company.
Coconut shell-based activated carbon accounts for less than a quarter of the world market for activated carbon, which is estimated to be about a billion dollars a year. Of the annual global production of 620,000 tonnes of activated carbon, the bulk comes from coal, peat, wood and agricultural wastes. Coconut shell charcoal accounts for only 100,000 tonnes.
The Haycarb group makes about 10,000 tonnes a year at its two plants in Madampe and Badalgama, located in the heart of the coconut triangle to ensure ready access to the raw material. This is more than 60 percent of the coconut shell-based activated carbon exports from the island. The capacity of the plants is 14,500 tonnes. All the activated carbon made at the two plants is sent to a central transit warehouse in Wewalduwa where it is containerised for shipment. Haycarb makes another 4,000 tonnes at its Carbokarn subsidiary in Thailand.
The charcoal is treated in giant, brick lined cylindrical kilns that rotate slowly. It takes 12 hours to burn - steam passed through the coconut shell charcoal at very high temperatures, at around 1,000 degrees centigrade on average, activates tiny pores in the charcoal. "This is the most important part of the process of converting charcoal into activated carbon," Haycarb director Ananda Hettiarachchy explained.
Much of the machinery is enclosed to reduce noise and filters designed by the company's own engineers is used to minimise dust emissions. Still, fine particles of soot hang in the air. Workers with blackened faces and overalls are a common sight. However, the soot is not a health hazard - a study of workers done in 1989 found no evidence of respiratory problems.
Haycarb is very proud of its in-house engineering talent. Yatawara says the company employs 30 engineers qualified in chemical and mechanical engineering. "Most of the equipment used in our plants is designed and assembled by our own engineers," says Yatawara. This saves costs. The company also buys second hand equipment such as boilers. It imports mainly sophisticated instruments and equipment used for testing that cannot be made locally.
Right now, company engineers are busy designing a re-activation plant to be set up in its Thai subsidiary. This new kiln will clean used activated carbon - liberate the poison that has been absorbed without causing more pollution - so that it can be used again.
The engineers are also doing the designing for the planned charcoaling plant coming up at its Badalgama site, close to the Ma Oya. The investment in the automated plant is huge - almost a billion rupees. Its aim is to ensure future stability in the supply of raw material. The site has been cleared and the first of five charcoaling lines is being built. The plant will minimise pollution associated with making charcoal the traditional way - in open pits.
A new company called Recogen, headed by a team of young professionals who are expected to grow with the project, has been set up. Haycarb has recently been forced to import charcoal because of a shortage of raw material caused by the prolonged drought that reduced the coconut crop. The firm expects a 25 percent drop in the coconut crop. This means the supply of charcoal could fall by as much as half.
The new Recogen plant, which will employ about 40 people, will produce 26,000 tonnes of charcoal a year. At full capacity it will consume 100 lorries of coconut shells a day. It takes 3.3 tonnes of coconut shell to make one tonne of charcoal. Altogether, 350 tonnes of coconut shell would be needed to make 80 tonnes of charcoal a day. It will also generate eight megawatts of electricity, seven of which can be sold to the national grid, with one megawatt being enough to power the plant.
At the Badalgama plant, production manager Palitha Weerawardena, explains how charcoal is pulverised in a grinding mill into a very fine powder - as fine as talcum powder - to get pelleted carbon used in solvent recovery. "We don't make standard grades," he explained. "We make customised grades for specialised applications such as solvent recovery."
The Madampe plant is the company's biggest. It now has 12 kilns, employs 200 people and consumes 100 tonnes of charcoal a day. It normally maintains three months' buffer stock of 9,000 tonnes - but now manages only a month's supply because of the shortage of charcoal.
The company's focus on recycling is very much in evidence. About half the plant's electricity needs is met from recycled steam, saving the company about Rs. 12-15 million a year. "We try to recover energy without wasting it," says Hettiarachchy. "The process is economical and ensures no damage to the environment - there's no release of pollution."
Haycarb also pays a lot of attention to research and development. "Every carbon order is made to order," says Yatawara. "So we do R&D every day." The company is forced to do its own R&D because research in the manufacture and use of activated carbon for commercial applications is not readily available, being closely held by the small number of other manufacturers in the business.
Most of the research is done at the company's laboratory located in a small building adjoining its headquarters at Deans Road in Colombo. Here, engineers design different types of activated carbon to meet special requirements. New products are first tested in a scaled down version of a kiln before being made in bulk. Here also, used carbon is analysed, products of rivals tested against Haycarb's own to see how they can be improved, and the activation process fine tuned to suit the specialised needs of individual customers.
Yatawara recalls how a complaint by a customer of ferrous particles being found in the activated carbon set off a series of tests right through the manufacturing chain to find out how coconut shell got contaminated with iron particles. This led to new equipment being designed to separate ferrous particles from the charcoal.
"Any little complaint or new inquiry from a client sets off an R&D chain reaction," said Yatawara. "The research will be either to get a breakthrough with a new client, solve a quality problem or change the activation process." Yatawara says the time and effort spent on R&D is "well worth it because we get the business and a good price - the best way to differentiate ourselves."
The company is now trying to move higher up the value chain and is using impregnation technology for specialised applications like military gas masks. Returns are higher in specialised applications although the markets are small and more difficult to enter. The usual value of activated carbon is around $900 per tonne. Pellets are two or three times the value of granular activated carbon but the market is smaller.
During the 1990 Gulf war, Haycarb made a windfall by winning a big order to supply powdered coconut shell activated carbon for protective suits used by the American military. This happened when the regular activated carbon supplier was unable to cope with the demand following fears that Iraq might attack US forces with chemical weapons.
However, getting further orders proved difficult. The lucrative market for military applications such as gas masks in the United States, Europe and Japan is heavily protected, with specifications of end-users designed to suit their own producers. A key reason for the protection is strategic - these countries naturally prefer to keep the source of raw material for military applications under their control to ensure continuity of supply during war. For instance, one French company imports coconut shell charcoal from Sri Lanka to make activated carbon for gas masks for the French military.
With sales of gas masks going up after the September 11 terror attacks in the US and fears of chemical warfare attacks by terrorists, there is more potential for the sale of activated carbon. "We see an increase in demand for activated carbon for use in air filtration systems," Yatawara said. Looking back at how the company has progressed from its humble origins, Yatawara says he is amazed by its achievements: "When we started I did not dream it could get this sophisticated or so big and international."
By Tennyson Rodrigo
Pursuits of good governance, ethical values and value-creation have been the hallmark of Eagle Insurance Company's corporate commitment. Its Annual Report to December 2001 was in the hands of shareholders by March 1,2002. This commentary serves to capture some highlights of Eagle's performance amidst a unique set of challenges.
Value of life
The economic downturn in the past years culminated in a sub-zero growth rate in 2001. The negative impact of the external environment on actual performances and annualised forecasts of many listed companies have been distinctly evident. Against that backdrop Eagle has posted an outstanding performance.
The net revenues of Rs. 2.7 billion represent an increase of 21% while the post-tax profit has increased to Rs. 197 million. Life business has been the performance driver. Segmented results reveal that Eagle's life fund is a massive Rs. 4.7 billion - largest among private-sector insurers. Whilst surplus from the life fund was Rs. 145 million (up 34%), operating profit from life business was a handsome Rs. 204 million - a growth of 43 percent and a share of 88 percent.
The contribution to profits from the fund management subsidiary has been rather disappointing. With a fund base of Rs 9.9 billion - the biggest among private insurers - results from asset management should have been a conspicuous driver of profits. Eagle's fund managers should clear the decks to showcase a dazzling contribution to the consolidated results next year.
Debenture dividends
The recommended 60% dividend for 2001 is the highest ever - disregarding the 80% in 1999 enabled by a policy change in accounting treatment. Since 1999, Eagle issued redeemable debentures to satisfy dividend payments. The underlying rationale stemmed from the non-recoverability of accumulated Advance Company Taxes that can only be availed of for setting off taxes. Since Eagle qualifies for 'tax losses' it avoids paying taxes. This enables Eagle to pay above-market interest on the debentures as well as postpone payment of the principal. This is astute thinking.
A single entity owns 87.2 percent of Eagle. This severely restricts liquidity and free-float of its shares. By listing the debentures, the company hoped to gain market visibility through active debenture trading. It was also aimed at injecting liquidity to the debenture holders. As trading in debt instruments remains incipient in the Colombo stock market, the anticipated visibility for Eagle through debenture trading has hardly been a resounding success.
The interest rate for the debentures has dropped to 15.35% from 23% in 2000. From about the 4Q 2001 the interest rates began to nose-dive; contrary to expectations of money-market players, the Central Bank succeeded in holding the rates low well into 1Q 2002. Low interest rates are good for the economy as well as for the equity market particularly at this critical juncture in the politico-economic landscape. This time around it appears Eagle has played safe by not pitching the debenture interest too high. Disappointed shareholders could take comfort from the higher dividend rate of 60%.
Corporate governance
Some years ago the buzzword of good corporate governance was UK's Cadbury Commission Report. Eagle and some other leading corporates have since fulfilled at least the requirement that the Chairpersons and the Audit Committees should not comprise persons from the executive.
Singapore's Code of Corporate Governance requires at least one-third of a listed company's board to be non-executive and the roles of Chairman and the CEO to be separated. This code becomes effective from 2003.
An issue here is the interpretation of the term 'non-executive'. If it implies 'independent', then it can be argued, a director must not be on the board just to serve the interests of a major shareholder. It is a moot point as to whether such interests can be deemed independent.
The fact that the Singapore Institute of Directors trains persons to be independent directors suggests that it wants to create a body of qualified and experienced persons who can fill a perceived shortage in the category of independent directors. If on the other hand 'non-executive' simply means 'dissociated from direct executive management', it's not too difficult to have even more than a third of the directors by having representation from related companies.
Exemplary change management
At incorporation, Eagle's major shareholders were the Ceylon Tobacco Company (CTC) and the Capital Development and Investment Company (CDIC).
Following a global restructuring, CTC's shares were sold to a joint venture held by Zurich Insurance of Switzerland and CDIC. This joint venture owns 87.2% of the company. Thus from 1999, Eagle's controlling ownership and management were radically transformed.
And with it emerged a formidable challenge for the management. Corporate culture, business processes and systems have been re-aligned to harmonise with Zurich's global structures and philosophies. The company has been re-branded, re-named and re-imaged successfully - there could even be a change in the Auditors to fall in line with Zurich's global policies.
All this had entailed a sweeping change-management and consolidation process between 1999 and 2001. It is remarkable that alongside these compelling imperatives Eagle has achieved such excellent results. This is ample testimony to the dynamism and inspirational leadership of Eagle's management.
Sustainability of growth
The insurance market has become fiercely competitive. Some competitors of Eagle having strong global partners as well are themselves showing growth and profits in the life segment.
Since in the short term, disposable incomes are unlikely to be expanding, all insurers are targeting the same diminishing piece of the life cake.
In this context can Eagle sustain its impressive growth and for how long? This is the critical challenge in the next phase of Eagle's journey. Any good management must be able to shift gears as new challenges emerge and navigate unchartered territory. Will the 'Team with Wings' fly to the war-ravaged, poverty-stricken North and the East and offer products that have any meaning for those who have been living in isolation, deprivation and constant fear of life itself? It's hard to imagine that for them life insurance is an affordable priority or something they can even comprehend. A window of opportunity for everybody, however, could emerge in the capital-intensive sectors of construction, transport and infrastructure. Can the Team with Wings redesign and re-engineer products and processes to achieve growth and profits on a non-life platform?
