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‘We have to give priority to local production’

In this freewheeling interview with B Surendar of Climate Control Middle East, Raphael Khlat and Azzam Messaykeh, the CEO and COO, respectively, of Faisal Jassim Group, discuss their philosophy on trading, their strategic response to market circumstances and how they would like to see the day when locally manufactured equipment would find their way to far-flung markets. Excerpts…

| | Nov 30, 2016 | 3:07 pm
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Raphael Khlat and Azzam Messaykeh

What does your business growth trajectory read like at this point in the year?
Azzam Messaykeh: We have two aspects – the top line and the bottom line. From a top line perspective, we have 12% growth. And this was by giving a total solution to customers, which is the strength of our company. We focus on customers that are looking for a reliable supplier that can deliver services from the design stage, and are looking at value engineering alternatives. We work with developers and consultants to optimise the solutions and meet the specific requirements of a project all the way to execution and aftermarket support. On the bottom line, it has been good. We always look at the optimisation of our systems and processes. And we do whatever is needed to make sure our cost infrastructure is competitive, and that we remain competitive in the market. Outside the UAE, we have done a good job in laying the infrastructure in Qatar and Saudi Arabia. We did not see the business volume this year, but we believe we can capture the opportunity when it comes.

We are focusing on offering support in hydronic balancing. This is a big challenge. Even if you put it in place, there is an opportunity to rebalance the system, which could give 10- 15% energy savings

Raphael Khlat: A lot of things have helped. We went out and captured large opportunities that were available. We also worked with certain principals in a way to take them closer to the market, which helped win certain jobs. ABB worked closely with us, helping us win certain jobs. Maybe their work is slowing down, so they are going through us. We also started some agencies, so it has been like a mix – certain markets are down and some areas work for us. We are doing much better in Dubai. It’s been a good year, so far, but collection-wise it has been a different story, though not by much. We have faced some problems in a few projects. We are well financed, though, and so are fine.

Could you elaborate on collections?
Khlat: We would like to be better. For instance, the average number of days for making a collection has jumped slightly up compared to last year. I don’t know how things are going to be improving. I am not sure how things will change. The diversity in terms of products and locations that we have established has helped us in business, though.

Messaykeh: Location-wise, we focused on certain opportunities even in Iraq, and we are dealing directly with institutions with BOT-type contracts in oil fields. We are seeing some financing that is coming from outside for the government. That is where we focus, and it is paying off in Iraq. As for payment issues, they are also related to the challenges every SME has. Typically, SMEs are facing challenges with banks, and that is putting pressure on SMEs to be able to operate and finance their business. The electro-mechanical contractors are not in good shape, and they are struggling to get finance. We hope the new set of actions from the government and the central banks will support SMEs. Also, we hope the new bankruptcy law will help everyone, but we need more support for SMEs.

Solder uneditedHave you been buffeted by project pull-backs? Are you seeing margin erosion?
Khlat: I saw that happen in 2008. In 2009, we saw a lot of contracts that were awarded, where people were asked to reduce 15-20% from the value, but not now.

Messaykeh: People are looking for value engineering. If you look at developers, they are all squeezed. In a District Cooling plant project in Qatar, the developer and owner were pushing for a lower budget, and the guy was doing value engineering for them. So we are seeing more of the contracts, where when they are faced with a challenge they are teaming up with suppliers to work on solutions. So at Faisal Jassim, we focus on balancing the design of the plant without compromising on the functionality of the system, but at a lower first cost. Customers also look at other aspects, like filtration systems. So this is where we as a supplier move in to support the contractors. That’s what we have seen in terms of margin erosion; from a market perspective, everybody understands the need to be nimble. You need to grab opportunities and, at the same time, seek the support of principals or partners, because the market is demanding more support. And globally, everybody is looking at more business value, and so nimbleness and flexibility are essential virtues. If you are not nimble, the train will pass.

Someone like Uber can use a disruptive approach commercially. Yes, it can be done in the HVAC industry, but it needs a stronger integration platform for key stakeholders

What other strategic measures have you taken to grow in the current market scenario? Are you focusing on greater client and consultant engagement? And are you focusing on aftermarket services and spare parts as revenue streams?
Messaykeh: We had a strategic meeting, recently, and one of the outcomes was the decision to interact with the customer not just at the later negotiation stage but rather from the start, during the design and engineering stages. As for aftermarket services, we have a division that focuses on aftermarket services, spare parts and retrofit aspects. We are looking to see how we can differentiate ourselves from other suppliers. We aim to be consultants for equipment, to ensure they are operating at the best possible efficiency. This is one direction. In the case of valves, where we represent IMI, we are focusing on offering support in hydronic balancing. This is a big challenge. Even if you put it in place, there is an opportunity to rebalance the system, which could give 10-15% energy savings. So we are building the expertise to support the customer. Another company that we represent is Xylem. They are coming up with systems that are smarter and more integrated with building efficiency. If you look at it, pumps consume 10% of global electricity. Existing systems can be more efficient by 40-50%. We realise that participating in the energy efficiency drive means we need the right products. Every single equipment is an opportunity to save energy.

Khlat: We are looking to add value, and it starts from the level of the relationship with the contractor and the developer’s experience with a product. We want to be in a position where contractors and developers are more willing to work with Faisal Jassim. For the contractors, the most important aspects of the engagement relate to how we are following up on submittals and how we are helping on testing and commissioning. They want to feel secure in terms of the availability of spare parts and extended warranty.

We have also been conducting a lot of seminars, presentations and technical discussions. These have been very good, but we need to strengthen the activity further.

Besides greater client engagement, we want to create new businesses. We would like to find out what else is not being served to the market and what are the products that can help.

Of late, the talk is of disruptive technologies with a view to improving building performance, ease of installation, more precise monitoring for energy efficiency and so forth. Are you thinking along these lines when you say you want to introduce more products?
Khlat: Every manufacturer has a certain R&D initiative. Xylem, for instance, are into sensors, because they want to give more data and enable the end user to monitor and prevent problems. And if you talk to air conditioning equipment manufacturers, they are able to produce solar-driven units. If the price and time are right, we can have PV absorption chillers working on solar, whether you take generated cooling to 1 tonne of refrigeration (TR), 2 TR or 3 TR. The price of the technology has come down.

They have banks and companies that are certified to provide energy solutions, and based on their commitment they will finance

Broadly speaking, anything to do with reducing the load on the electricity grid will help. When you talk of disruptive… we have to understand that this is an industry that has been slow in its approach. It does not believe in totally throwing everything else out the window. So in that sense, the disruptive approach might not happen. We will, instead, see more development in controls for monitoring for better energy efficiency. We are likely to see more home automation. The only disruptive things that can happen are how we are going to serve the contractors in terms of better integration and of ensuring we give materials on time. We want honesty and a correct partnership relationship with contractors. We know they are going through a lot. There is a lot of drama that is happening today with projects subjected to a number of variations. If the contractor is going in one direction and is then forced to go in another direction, it affects his business. So we want to see better planning from the developer, because the contractor would be most happy to get the job done with minimum variation.

Messaykeh: What contractors are looking for is peace of mind. As a supplier, if you can make their life easy by getting their order on time and by making them understand where the delivery is in the supply chain, you would be doing a great service. Also, as a supplier, we would like to support them and help supervise the installation of equipment. This is the type of connectivity we are talking about. Someone like Uber can use a disruptive approach commercially. Yes, it can be done in the HVAC industry, but it needs a stronger integration platform for key stakeholders, the channels, principals and contractors. Uber is a platform for people to put their e-services online and for people to take the service without worrying of cash in their pocket.

What drivers for growth have you identified? For instance, do you see promise in building-retrofit initiatives?
Messaykeh: Firstly, we need infrastructure and legislation in place as enablers for the building-retrofit business. The second important aspect is banking. As an owner of an asset, when I look at retrofit and replacement, I will be looking at an ROI of 1-2 years. But when we start talking of 5-6 years, there is no enabler for them, unless there is a bank that supports the drive and agrees to be the financial vehicle to enable the business. This has happened in the United States, where they have been able to enable the ESCOs. They have banks and companies that are certified to provide energy solutions, and based on their commitment they will finance. I believe this is very critical, otherwise we will be talking of low-hanging fruit, like switching off the chiller during night-time, but no one talks of replacing the chiller, which has an ROI of 5-6 years, but which is essential.

There are those who are suggesting that manufacturers and suppliers consider leasing expensive equipment to lower the capex for building owners and, thus, encourage and enable them to go ahead with the retrofit exercise. What is your take on this?
Khlat: If an outsider helps the building owner he will take a loan. It does not make sense that the contractor comes to the rescue of the vision. If we look at it from a macro point of view, we have to consider generating strong brands for contractors out of Dubai. We have to succeed very strongly in our territory. The Municipality has undertaken standardisation efforts, but we have not yet come to the level to say, “This is the Dubai Standard”. We are not grooming our own brands internally; we depend on the United States and Europe for technological solutions.

So Dubai can set up standards, instead of importing equipment. Once we achieve that level of strength, we can see brands going out of Dubai

The technology is available today and is not very difficult to achieve. We are not talking of controls-related solutions, which are sophisticated. So Dubai can set up standards, instead of importing equipment. Once we achieve that level of strength, we can see brands going out of Dubai. The big question is, ‘What is stopping us from going to European countries?’ Yes, there is protectionism there, but fundamentally, we don’t have standards that match theirs. So we need to make massive investments in setting up testing facilities. If I have to test an FCU, I have to go outside.

We have to give priority to local production. Perhaps Dubai Municipality can start using locally manufactured products in their own facilities. Going back to what I earlier said, we want to be able to say, ‘This is a Dubai Standard.’ Dubai has a strong brand presence, globally speaking. There is this certain perception about Dubai having a high quality, so maybe we can ride on this perception and produce strong brands here. I don’t understand why this is not being seen as a big opportunity. I don’t know why this is not a priority yet.

At a micro level, we have to do a lot more in terms of educating the industry to make better use of the available technology. As an industry, we are the last at adopting technology and utilising in the construction field. It took us a while to improve the quality of drafting by using BIM. We need more specs on those and better visibility. We are late adopters of all technologies, so as a supplier, I am hoping to improve service and the relationship structure.

Messaykeh: Just to touch on the issue of making strong brands in Dubai, as a company, our Flowtech Air Distribution division is going beyond UAE, into Africa. We have worked really hard to align ourselves with ASHRAE 70. Our fire dampers are UL-certified. We are always looking at opportunities to go beyond this, but this is a journey and mindset to make Dubai a platform for success for export, rather than depending only on the local market.

Certified stamp editedTypically, what is the percentage of the revenue that is diverted for R&D by UAE companies?
Khlat: The funds allocated for R&D are less than one per cent of the revenue, if you are talking of the construction field. We are slow adopters of technology, and face the absence of testing facilities. Let’s say, I have come up with an idea. But where am I going to test it? In Europe? We need R&D labs here, and the universities here can help in that direction. We need to be able to test equipment and show results. We are sending to Europe and the United States, which does not make sense to me. There are a lot of things we can do. As Azzam said on Flowtech, we are coming up with our own designs and have done a lot of work in optimising the systems. As a company, we would want to enter into a cooperation agreement with some European entity and co-brand the products. These would be locally produced equipment but technically at the level of European standards. At Faisal Jassim, every division has a project that they can develop into a brand, be it related to solar, pumps or AHUs. We aim to develop our own brands that will stand up with their own specs and calibres and, eventually, become entities on their own. This is our motivation and impetus.

I will not accept the consultant, if he is not deeply aware of the standards. As a community, consultants need to see how the selection has been done

As a trader, how much are you affected by the rampant practice of misrepresentation of certification?
Khlat: If you take any certification, there is need for good education. People talk of UL, like a sticker, saying, “I am UL”. There is a lack of education. The shortcoming is from two directions. First, from the generator of those standards to make their message clear. I would want Eurovent to talk of the importance of Eurovent certification and its meaning. Second, the consultant has a big responsibility when he specifies something. It is up to him to explore the depths. We have seen in hospital projects that the specs are totally contradictory to the DWG standard, which is prescribed to ensure hygiene in healthcare facilities. I will not accept the consultant, if he is not deeply aware of the standards. As a community, consultants need to see how the selection has been done, because they are all available online. They cannot check only model numbers. This can be easily discovered at the time of submittal.

Messaykeh: There is a lot of copy and paste of American standards, which are not all applicable here. For instance, 60Hz is not applicable here. So knowledge and education should reach a level, where they understand before putting in the specs. This is why it is important to certify engineers that work in consultancy firms. In other countries, consultants attend regular seminars, where they get certified. That is missing here, probably. And that is why you see specs from the 1990s.

Khlat: The consultant and contractor should take responsibility. Perhaps the government could define their individual responsibilities. There is a lack of knowledge on where the responsibilities end, hence we have a question like, ‘Am I supposed to do only the drawing and tenders or deliver certain kw/sq metre and certain performances that need to be measured?’ We need better clarity there.

(The writer is the Editor of Climate Control Middle East.)

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