Melanie Stern is Section Editor of Families in Business magazine.
Precious metals trader Heraeus is no stranger to change, but the internal and external challenges of the next year will provide the 153-year old company with its most potent opportunity to shine
Like any exemplary entrepreneurial business, Germany's Heraeus has always traded on its talent for ingenuity. Indeed, one of the company's earliest 'claims to fame' was the discovery of two new elements Caesium and Rubidium in 1860 and 1861, respectively. Its scientists have played a part in the evolution of technologies as diverse as dentistry and space exploration, and their ingenuity remains an essential component in modern science. As would be expected in an industry that is at the edge of innovation, the Heraeus family is no stranger to change. Having survived a revolutionary reorganisation several years ago, the company is set to take on the future, with an eye towards keeping the company in family hands.
The father of invention
Headquartered in the city of Hanau near Frankfurt, Heraeus' core business is the trade and recycling of precious metals, established to eliminate supply and pricing risk. A holding company encapsulates five core business competencies – precious metals, dental materials, quartz glass, sensors and special lamps – executed via more than 100 international subsidiaries. The company is the global leader in the sensors, steel and aluminium melting service provider industries, and the largest integrated quartz melting house in the world.
It all started 153 years ago, when Wilhelm Carl Heraeus inherited his father's pharmacy. A trained chemist himself, Wilhelm Carl experimented with the uses of metals such as platinum as it became increasingly popular in the production of jewellery. Platinum was traditionally forged when white hot due to its melting point of 1770 degrees Celsius, and the process was only understood in Paris and London – so supply of the metal was unable to meet growing demand. Wilhelm Carl changed all that in 1856 when, after many failed attempts, he succeeded in melting two kilograms of platinum in an oxyhydrogen gas flame. Twenty-eight year-old Wilhelm formed WC Heraeus around the pharmacy and became a supplier of platinum to goldsmiths, jewellery manufacturers, dental laboratories and industrial clients across the world.
In 1898, Wilhelm Carl's sons, Wilhelm and Heinrich, inherited a diverse business producing products such as scientific apparatus, plates, false teeth anchorings and bulb filaments from its work with platinum. The brothers steered Heraeus through evolution into a large-sized family company producing some 1,000kg of melted and processed platinum a year. Having moved to bigger premises just outside Hanau and increasing its workforce to 40 staff, the company stepped up production to commercial quantities, before becoming a supplier to the growing electrochemical and plastic industries.
Heraeus saw a second wave of growth after World War II, having survived a large scale drafting of its employees into the military and production using precious metals shrinking to almost nothing. A period of growth was fuelled by significant research investments made by the third generation of Heraeus leadership, Dr Wilhelm Heinrich Heraeus and his cousin Dr Reinhard Heraeus who took over in the 1930s. While Wilhelm Heinrich took care of technological development, Reinhard oversaw business development and wasted no time opening new offices across France, Italy, America, Britain and Japan.
In 1970, Wilhelm Heinrich and Reinhard hired their first non-family chairman, Dr Helmut Gruber, to take over so that they could move to positions on the supervisory board. At the same time Dr Juergen Heraeus, Reinhard's son, joined the management board, and in 1983 succeeded Dr Gruber as chairman and fourth generation family member to lead the business.
The future looks bright
In 1985, just two years after assuming leadership of the company as Chairman, Juergen revolutionised it by reorganising its entire structure, setting up the holding company to house the subsidiaries within the five competency areas. It was a bold move, but it allowed each subsidiary to act independently and facilitated an orderly hierarchy, management and accountability structure. "Besides full responsibility of the divisions and legal entities, we had an interesting tax benefit at this time," explains Juergen. "At the same time about 120 shareholders had to agree in the presence of the public. I sent our treasurer to South America and South Africa to explain the deal to our shareholders living there; I talked with many 'family heads'. If there had been just one shareholder that didn't agree, we could not have gone ahead with the deal."
But this didn't happen. "Within six months we made the closing," reveals Juergen. "I'm sure not everybody understood what really was going on. But in 1984-85 we had discussed the reorganisation of the company involving hundreds of product lines. We started with the divisions and then put the holding on top."
The result was a streamlined and efficient organisation – and this was no accident. Juergen had worked hard to turn the company into an attractive and well-organised acquisition target, though Juergen rejects the notion that the family would ever sell up: "Our next generation members say they want to celebrate the businesses' 200-year anniversary."
This reorganisation was a big undertaking for Juergen, especially with 100 years of history upon him. But he shouldered it well and has weathered some recent difficulties with the same spirit.
The company has seen some bad losses in 2002 due to the stagnation of the semiconductor market, weak global markets and reduced pricing in the metals trading business, and Juergen concedes that this may lead to redundancies in the coming months. Indeed, a family company – no matter how well managed – is a company like any other when it comes to business survival. "We are long-term thinking so, of course, we don't like it when profit goes down, but it is a way of life and we don't get nervous. If cuts are needed, we have to do it," Juergen confesses.
Juergen now faces some tough decisions in 2003 and beyond, though his entrepreneurial style of management won't see him battening down the hatches in difficult times. While redundancies may be in the pipeline, he is confident that the geographical and market diversity of the company will see it through. "The good thing about us is that we have many legs – like a caterpillar – and we have no questions from analysts or pressure to concentrate on one part of the business, which is one of the more stupid strategies of the past years. Those who have done that are now in trouble," Juergen believes. "We have a plan to cover us for the next 5-7 years – ten is a long way off – and we have enough strengths and ideas for internal growth." Juergen plans to use the current global slowdown by making a swathe of acquisitions to strengthen existing business. Many of the companies he has earmarked are privately or family owned themselves, so he knows that he will have to monitor them and calculate the right time to move in. "We have to wait until the owner gets older, or gets in trouble – we have to watch and wait," he admits.
The chairman also plans to take Heraeus' hold in Asia to the next level in the coming months, having established several successful subsidiaries across Japan, Korea and China 35 years ago. "We want to push into South-East Asia because that's where the drums of business are beating," Juergen says. "If the political area stays the same, we will have to exert more effort into these countries; for example, they don't have enough dentists in Asia, but if you look at the number of people there and the subsequent number of teeth, the market is calling us."
The chairman also acknowledges the unique business challenges his executives face as a metals company in Asia and is determined to apply integrity to solve them. "We need to change the corruption culture (in Asia). We need them to know there is no spending of 'black' money in Heraeus," Juergen warns. How will this be executed? "By talking to people. We want to see every cent that goes through the business. We don't want to hear that we cannot get a certain customer because we do not do business that way."
Indeed, integrity forms the backbone of the company and family philosophy, and this is especially key in the metals markets. "Honesty is the highest value we have as a family, especially dealing with our own and other people's personnel. When a customer sends us their materials, they put their trust in us; some customers have accounts here for millions of euros' worth in metals," Juergen explains. "Money laundering is always close in the metals industry, as is stolen metal. If you are offered any kind of metal at a discount, you know it is from a dark channel. There is no way we can allow this into our business and we send this message right down to our last man."
The leadership of tomorrow
But corporate matters aren't the only things on Juergen's mind. The future leader of Heraeus will need to be chosen. Juergen knows that the days of an automatic family leadership succession are gone, as 21st century business pressures can only be met by the best person for the job – who may or may not be a member of the family. "In my time it was easier for a family member to progress, because I was the only one to pick as the new boss. A family member got more respect then. These days people would ask why it should be me that gets elected just because I am a family member. The level of expectation for performance of a family member is much higher than a non-family member; the decision to bring a family member in needs to be done carefully these days, to ensure that the person is capable. If they have outside work experience it is easier to explain the choice of that person."
He also considers that the business environment is more of a challenge for tomorrow's leaders than yesterday's, with an ever widening discrepancy between yield and effort extended. "Everyone knows it is much more difficult to run a business now than it was thirty years ago, and many successors now are just not good enough to do it," he reveals. "When I started out, if a manager was very good he got promoted; if he was just good the company made a profit; and if he was not good, the company might make a small profit or even no profit. Today, if he is not good, the company will go deep into the red; if he is just good the company will make some or no profit; only if he is excellent will they will make a good profit."
With this in mind, Juergen's plan to educate the 'next generation' involves a quarterly meeting at his home with them as a separate group, when each business unit manager presents their businesses' progress, projections and balance sheets. The group – 25 of the 150 shareholders, aged between 18 and 30 – is encouraged to ask questions and analyse the information in order to learn to understand it. "We hope this has the effect of keeping the next generation interested and maybe they will run for a seat on the supervisory or management boards. We hope the bright ones in this group will show up," Juergen says. "In the long run, I think if we want to remain family owned we have to make sure we empower the family to one day take these management positions. They have to develop; the really good ones will not need too much help."
The reflections of time
Heraeus has benefited from an entrepreneurial philosophy, exploiting growth markets, taking risks and investing in relevant business acquisitions even in times of hardship. This precious mettle has served them well for the past 153 years, but what about the future of the company?
Reflecting on this past year, Juergen comes back once again to his key aim for the future: to keep the company in family hands no matter what the hardship. "There are two ways the economic situation can pan out in the next two years. Either we can go the way of institutional investors and run the business like they would, with excessive benefits for our MD's, or we have a chance for a family business and the long-term strategy where values have their place – where you try to treat your people well and keep them, using this to get more energy from the company," he concedes. With values currently the talk of the corporate world, the plan is certainly sound.