Mehmet Koca, the general manager of Gübretaş, is confident enough to declare that his company jumped the competition by acquiring the Razi Petrochemical Company from the Iranian privatization authority last year. Speaking to Let’s Talk Business this week, Koca revealed to Today’s Zaman how the new strategic thinking of securing raw materials for the business played well in the venture. It recorded a 60 percent growth in the last decade and has expanded its market share from 16 percent to 28 percent today.
Mehmet Koca, an industrial engineer by trade, says he did not expect the company would have grown this big. Starting his business career at Ülker, the largest food company in Turkey, after he graduated from Istanbul Technical University in 1986, Koca took part in several business ventures, although some were unsuccessful. He listed public administration as his eighth choice of major in the centrally held university exam application in his senior year of Afyon Voyvadin high school, and he never imagined working for the government after school. “I love wheeling and dealing in business transactions,” he says, adding that “a significant portion of my daily life is consumed by corporate affairs.”
“I try to devote as much time as I can to my family and to my social life,” he claims, although he admits that the business takes up the lion’s share of his daily routine. “As a general manager, the heavy burden of running a company this size and the big responsibility placed on your shoulders do not give you much leeway in organizing your personal life,” he stresses. “You pursue your business even in your dreams,” he laments.
For the last three years, Koca has been at the helm of Gübretaş, where he started as deputy general manager in 2003. “We never anticipated that the business would have grown this much,” he says when asked if he ever imagined Gübretaş would be a major player in the fertilizer industry.
Founded in 1953 as the first chemical fertilizer company in Turkey, Gübretaş has grown to be a major name in the industry. The company was among the first 16 companies listed on the İstanbul Stock Exchange (İMKB) in 1986. The state-run company was bought in 1993 by the Turkish Agricultural Credit Cooperative (TKK), which owns 81 percent of the shares, while the rest is publicly traded. The TKK has around 3 million members, primarily small farmers and agricultural enterprises.
“We wanted to seize on the surging global demand for fertilizers,” explains Koca. Increased demand for better and more food, population growth, a decrease in the amount of arable land and development of alternative fuels like biofuels have increased the demand for fertilizers, causing a shortage of supply and thereby increasing prices. “We knew we needed to secure raw materials which would enable us to exploit the opportunities out there,” he noted. Turkey unfortunately lacks the typical raw materials used in fertilizers such as natural gas, phosphate ore, sulfur and potassium and depends completely on external supply. “That’s what pushed us to seek countries rich with the main raw materials of fertilizer,” states Koca, adding that, “Iran, Ukraine, Libya, Russia, Tunisia and Egypt were on [our] list.”
Major score: Razi takeover
At the time, to prevent further isolation of the country, Iran was trying to open up its economy by initiating major privatization projects. The Razi Petrochemical Company, the largest chemical plant in the region, was put up for grabs by the Iranian privatization authority. “We meticulously examined every aspect of the deal and then decided to submit our bid,” recalls Koca stating that Gübretaş joined the consortium that included one Iranian and three Turkish partners. Gübretaş is the leading partner in the consortium with a 50 percent share.
The deal was approved by Iranian authorities, and 96 percent of Razi’s shares, valued at $1.3 billion, were sold to the consortium for $656 million, almost half of its value. “It was the biggest industrial investment by Turkey outside of its borders to date,” stresses Koca. He believes investing in Iran was a wise move for the company, and Gübretaş is not exposed to major risks with this deal. “All the major European countries, led by France and Germany, as well as Japanese and Chinese corporations operate in Iran and have a strong presence, why shouldn’t we?” he asks. “Iran is our neighbor and Iran is very eager to attract foreign investment to the country.”
Razi, the largest fertilizer plant in the Middle East, produces semi-products like ammonia, sulfuric acid and phosphoric acid, along with fertilizers such as urea and DAP. The plant was established on a plot of land of 850,000 square meters and has its own private port that can handle three ships each with a capacity of 40,000 DWT. There are three ammonia, three sulfuric acid, one phosphoric acid, two urea and two DAP production units in the facility. The plant has a total production capacity of 3.8 million tons each year and an annual turnover of $1 billion.
From a technological point, Razi needs an overhaul of some of its oldest parts. But Gübretaş is not in a rush. “We want to spread the restructuring and revamping of plants over time,” Koca says: “The proceeds we earn from Razi will go into this process slowly. Our first target was to secure raw materials, and we did that.” Gübretaş kept Razi’s management and labor force intact and appointed five members to the board of directors. “We are selling Razi’s products to markets stretching from North Africa to the Indian sub-continent,” he notes, adding, “Our production costs are substantially lower there as we acquire natural gas at a very competitive price.”Gübretaş’s Razi plant currently pays one of the lowest prices for natural gas in the Gulf region.
Largest distributor in industry
In Turkey, on the other hand, the securing of a major deal in 2002 with the TKK, the major shareholder of Gübretaş, placed the company in an advantageous position over its rivals. Gübretaş became the sole provider for all fertilizer needs for the over 1,900 TKK dealers throughout the country. With an additional 750 dealers of their own, Gübretaş enjoys the largest network of dealers and distribution channels in Turkey. The strong network and market dominance explains why the company saw a 6 percent contraction in sales volume in the first quarter of 2008 in a market that shrank 12 percent.
Turkey consumes 5 million tons of fertilizer every year, lower than the EU average of 7.2 million tons. “That leaves a lot of room for growth,” Koca argues. Domestic production is about 3 million tons, leaving imports to make up the shortfall. A severe drought in Turkey last year led to a fall in consumption of 4.1 percent. “Despite the fall in demand, we were able to increase our profit by 6 percent in 2007, on a turnover of $610 million.”
When Razi’s impact on revenues and profit comes into play, in the first consolidated balance sheet Gübretaş has achieved remarkable growth, which has exceeded analysts’ expectations. The company’s strong second-quarter performance resulted in a 52 percent increase in revenue before taxes, up sharply from last year’s 6 percent. Razi alone achieved 82 percent growth in earnings before taxes and a net income of $146 million. The deal proved very beneficial for Gübretaş as profit from the second quarter alone covered 18 percent of the acquisition cost.
Since the industry heavily relies on the import of raw materials, Koca says exchange rates and foreign market conditions are very important for the company. The recent sharp rise in the value of the dollar against the Turkish lira may prove to be a major challenge for Turkish farmers this season. As such, the expansion into the Iranian market for Gübretaş means reducing risks associated with exchange rate volatility and diversifying resources and markets.
Koca explained that they have made investments to make sure the growth of the company is commensurate with the strength and flexibility of the company’s logistics and infrastructure. Gübretaş has established storage facilities in İzmir, Samsun and Diyarbakır to better serve clients in different parts of the country. “Our trucks can deliver orders anywhere within 24 hours,” says Koca.
As many expected, Gübretaş also decided to enter the pesticide business by acquiring Kimyagerler, a pesticide business located in Manisa, for $2.5 million in 2007. “We have the largest network and distribution channel to target farmers,” Koca said, “We wanted to serve our customers better by offering pesticide products to keep their products safe from disease.” In other words, Gübretaş wanted to keep its client portfolio intact by reducing the risk of produce perishing in the field. Pesticide use in Turkish agriculture is far less than the average global use. “And yet, some Turkish produce still faces problems and is banned from export because they include pesticide residue above the acceptable level,” Koca underlines. He believes this was mostly caused by improper use of pesticide in the farming industry. “We wanted to educate and inform farmers on how best to use pesticides,” he added.
Commanding a 13 percent production share in the sector, Gübretaş today has a 685,000 ton production capacity. “Our products are seasonal, and we augment our capacity in spring and fall,” Koca notes. He adds that, “Because of this seasonal demand, factories do not operate at their full capacity.” Although the production capacity of the fertilizer industry in Turkey decreased 5 percent last year because of a fall in demand, Gübretaş was able to increase its capacity by 10 percent last year to 75 percent. The Razi plant, on the other hand, operates at 51 percent capacity due to its ailing infrastructure.
Creating soil map of Turkey
Gübretaş is also attempting to create a map of Turkey showing soil productivity, by analyzing soil samples in its own labs in an effort to determine what type of fertilizer is best suited to which soil region. “Once the project is completed, we will be able to say exactly what kind of fertilizer our farmers need,” stresses Koca. “Our engineers have collected over 2,500 soil samples so far and marked them with GPS coordinates,” he says. The Turkish government also encourages farmers to test their soils by giving monetary incentives. “However the last survey Gübretaş conducted among farmers revealed only 4 percent have their soil samples analyzed before purchasing fertilizers,” Koca complains.
According to Koca, the most pressing problem for Turkish agriculture is the lack of education. “It results in widespread improper use of fertilizers in the farming industry,” Koca says, “Sometimes farmers do not follow the guidelines and directions provided with the fertilizer.” For this reason, Gübretaş has started an educational campaign to inform farmers and better educate them on the use of fertilizer in cooperation with the Ministry of Agriculture and the TKK. The lack of agricultural economies of scale are another major challenge for Turkey, as land is repeatedly divided every time it is inherited. If only a small amount of land is used to farm, the margins of cost automatically increase. “This hurts small farmers and leaves them at the mercy of brokers and merchants,” underlines Koca.
“Turkish farmers pay less than what other farmers in the world pay for fertilizers,” says Koca, stressing that production and labor costs are lower compared to world averages. This is reflected in Gübretaş’s prices. While the price of fertilizer rose globally by 29 percent in 2007, Gübretaş’s products rose 26 percent. The surging prices in the first quarter of 2008 resulted in a 64 percent increase in world prices for fertilizers, while Gübretaş put prices up only by 49 percent. Koca expects prices will decrease as the speculative moves in the commodity markets substantially decrease after the global financial crisis. He warns, however, the price may not go down much if Turkey experiences exchange rate fluctuations.
“We are totally aware of sensitivity towards the environment and food safety concerns,” Koca responds when asked how the company measures up with respect to environmental standards. Talking about the risk of using fertilizers as an explosive material, Koca says the company takes all precautions and adds, “The government requires us now to report all activity from production to the point of sale.”
“Gübretaş pays special attention to social responsibility,” says Koca, who is a believer in giving back to the community. The company has recently launched a major reforestation project to increase forest coverage in Turkey. Company employees have contributed their free time to planting trees in Konya. Gübretaş also supports university students from low income families and extends scholarships and financial aid to students enrolled in agricultural colleges. The company has also paid for a book campaign among high school students in Karaman and has distributed free reference books recommended by the Ministry of Education.
Now that Gübretaş has made its largest investment so far, Koca is endeavoring to bring the company up to speed by having its R&D labs certified to international standards and increasing the share of R&D spending in the overall budget. The company has diversified its product line by expanding the number of products in its portfolio. “We carry over 85 different products in our sales line,” says Koca.
He says they are willing to invest in a third country after Razi, but they want to make sure the dust has settled and the uncertainty has cleared from the markets. Asked whether the company is open to purchase offers or joint ventures, Koca responds, “Why not?” Although he adds a caveat: “It may be difficult to form a partnership with over 3 million shareholders under the ownership of the TKK.”
With Mehmet Koca at the helm, Gübretaş has outperformed its rivals in Turkey. Toros Ağrı, a subsidiary of Tekfen Holding, and Bağfaş, a regional distributor of fertilizers, shrank 12 percent and 10 percent, respectively, in the second quarter of this year, while Gübretaş contracted only 1.4 percent. Gübretaş’s sales also fell slightly 0.8 percent as opposed to a 13 percent overall drop for the sector.