Focusing on. emerging markets SWIM OR SINK IN THE GLOBAL ECONOMY RUSSIANS BUYING MORE HIGH-QUALITY PAINTS

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1 no SWIM OR SINK IN THE GLOBAL ECONOMY RUSSIANS BUYING MORE HIGH-QUALITY PAINTS SOUTH AMERICAN BOOM IN WATER TREATMENT CHEMICALS Focusing on emerging markets KEMIRA STAKEHOLDERS MAGAZINE

2 editorial KEMIRA is a magazine for stakeholders, published four times a year. PUBLISHER Kemira Oyj P.O Box 330 FI Helsinki Finland tel fax EDITOR-IN-CHIEF Anna-Kaisa Säkkinen PRODUCTION Sanoma Magazines Finland Custom Publishing P.O Box 100 FI Sanoma Magazines Finland Editorial staff Anu Virnes-Karjalainen Hannu Virtanen Layout Pia Hytönen Cover Lehtikuva Translation Ekhart Georgi Qualitext PRINTED BY Forssan Kirjapaino Oy, Forssa 2007 ISSN Print run: 6,500 copies PAPER Galerie One 80 g/m 2. Coated with Kemira s CoCoat calcium sulphate pigment. KEMIRA IN BRIEF Kemira is a chemicals group made up of four business areas: Kemira Pulp&Paper, Kemira Water, Kemira Specialty and Kemira Coatings. Kemira is a global group of leading chemical businesses with a unique competitive position and a high degree of mutual synergy. Procurement & Logistics huge potential in emerging markets Kemira s current strategy is to be a global group of leading chemical businesses with a unique competitive position and a high degree of mutual synergy. Our business areas strategic cornerstones include well-defined customer segments and product and service portfolios with the potential to be classed as superior. In addition, our primary focus is on improving profitability. Procurement & Logistics is one of the most important functions to consider when trying to improve profitability and identify internal synergies. Each year, Kemira spends more than 65% of its turnover on various types of purchases such as raw materials, indirect materials, logistics, energy, and various services. Through top level Procurement & Logistics, we can maximize our economies of scale by enhancing internal synergies and improving efficiency. The KemSTAR project will be one of Procurement & Logistics biggest development activities in 2007 and THINK GLOBALLY, This project s main objective involves implementing systematic sourcing methods throughout Kemira. These in- ACT LOCALLY. clude standard processes and tools combined with an approach in which all relevant stakeholders are represented in fact finding, strategy creation, and decision making. Creating competent category teams which have cross functional and cross regional members will enable the more efficient consolidation and harmonization of Kemira s needs in order to achieve maximum economies of scale in purchasing. For several reasons, emerging markets have great potential from the point of view of Procurement & Logistics. A crucial factor determining the financial viability of sourcing a product from emerging markets is the ratio of transportation costs to the product s total cost, which should be well under 30%. Another important point is that the supply from these markets can also be used to break existing monopolies or oligopolies in supply markets in mature regions, in other words, to create competition. Naturally, we also need to reinforce our local and ever-expanding sales and manufacturing in these regions. In emerging markets in particular, success requires professional supply base management, dynamic and yet efficient logistics, and fact-based decision making. Petri Boman Executive Vice President, Procurement & Logistics In 2006, Kemira recorded revenue of around EUR 2.5 billion and had a payroll of 9,000 employees. Kemira operates in 40 countries.

3 12 RUSSIANS ARE USING more and more paint in decorating says interior architect Marina Mihailova. 22 CHEMISTRY CAN even make a rose change color.. 16 BIG JOB AHEAD in South American water management.. 15 Contents TITANIUM DIOXIDE provides protection from sunburn. 8 Managing all risks Growth in emerging markets underlines the importance of risk management. 11 Europe today Growth slows down slightly in European chemical industry. 12 High-quality paints are in Russia s rising standard of living increases demand for high-quality paints. 15 Protection for sunbathing Titanium dioxide blocks UV radiation efficiently. 16 Brazil as a bridgehead Kemira is watching the South American water treatment chemical market. 19 Swim or sink Lasse Kurkilahti s and Toivo Äijö s book calls for action in the global economy. 22 Chemistry provides opportunities Chemistry and biotechnology got together at the ChemBio trade fair. 24 Focusing on new markets Kemira reinforces its position in emerging markets. 28 Customers spur growth Customer-oriented solutions are the keys to Kemira s growth. IN THIS EDITION 4 Current topics Chemical industry and Kemira news. 30 Kemira s interim report Rapid growth of revenue. 31 Facts Did you know this about Kemira? 2/2007 Kemira 3

4 news SHORT NEWS» The ecological footprint of Kemira has diminished by about 80% in under ten years. According to Kemira s Environmental Report 2006, the reduction from the previous year s value was 20% while the net sales of the Group were up by 26%. In 2006, environmental operating costs totaled EUR 35.4 million, up by 6.3% from the previous year, and environmental capital spending EUR 12.2 million, up by 65%.» The redone laboratory of Kemira s Espoo Research Center was officially inaugurated on March 8, 2007, after two years of renovation. The special day involved a gathering for personnel and a seminar for customers. The Espoo Research Center was founded in 1972, and it serves all Kemira s business units. There are over 90 employees working at the center.» Kemira participated in the 9th International Exhibition and State of the Art Conference PAP-FOR RUSSIA 2006 for Russia s forestry, pulp & paper, and converting & packaging industries. The event attracted over 350 companies and over 10,000 professionals from 15 countries.» The Helsinki University of Technology (HUT) will start teaching pulp and paper manufacturing in Uruguay in collaboration with the School of Engineering of Uruguay s University of the Republic (UDELAR). Kemira is one of the companies financing the program.» The Finnish Zero-Accident Forum awarded its highest occupational safety classification grade to Kemira s Oulu plant in 2006 for successful promotion of occupational safety. The criteria include the number and severity of occupational accidents. Expanding into China s water treatment chemical market The agreement between Kemira and the shareholders of Chongqing Lanjie Tap Water Materials Co., Ltd., has been confirmed. Kemira has acquired 80% of the shares in the Chinese company. The new name of the company will be Kemira Water Solutions (Chongqing) Co., Ltd. Chongqing Lanjie Tap Water Materials Co., Ltd., is a producer of inorganic coagulants and organic polymers for water treatment in the municipality of Chongqing, located in central China. The company s main client base is in local potable water production. The company s current annual revenue, in the range of about two million euros is expected to grow rapidly in the years to come. The company will be targeting, in addition to the growing market in the potable water industry, the industrial wastewater and municipal sewage treatment sectors. Kemira has a strong commitment to strengthening its water treatment chemical operations all over Asia, and this acquisition is a logical step in implementing the company s strategy. With its population of about 30 million, the city of Chongqing ranks among the biggest in the world. It has been nominated as an autonomous region of the People s Republic of China. Its location is ideal to further strengthen Kemira s nationwide water treatment chemical business in China. So far, Kemira has had one larger manufacturing company for similar products, Kemira (Yixing) Co., Ltd., in the province of Jiangsu of eastern China. Kemira Water is the world s leading supplier of inorganic coagulants and ranks third in water treatment polymers. It offers customized water treatment and sludge treatment solutions to municipal and private water treatment plants and industry. In 2006, the Kemira Water business area had revenue of EUR 468 million and a payroll of approximately 2,000 employees. It is present in 30 countries. 4 Kemira 2/2007

5 news ACQUISITIONS IN INDUSTRIAL PAINTS AND WATER TREATMENT CHEMICALS Kemira is pursuing its strategy of strengthening its market position in eastern European paint markets. Tikkurila, which is responsible for Kemira s paints and coatings business, has acquired 70% of the two St. Petersburg paint companies OOO Gamma and OOO Ohtinski zavod poroshkovyh krasok. The parties have agreed to not disclose any financial details. Gamma is one of the most important producers of metal industry coatings in Russia, with net sales of about EUR 8 million and a staff of 110. Ohtinski zavod poroshkovyh krasok manufactures and markets powder coatings under its own OHTEK brand. The company has net sales of about EUR 3 million, and it employs 50 people. The acquired companies will continue their operations as new companies under the names of OOO Gamma Industrial Coatings and OOO Tikkurila Powder Coatings. The entire personnel will transfer to the new companies. The present management will continue both as management and as minority shareholders of the new companies. The acquisition will considerably increase Kemira s sales and market position in the Russian metal industry coatings market. The agreement between Kemira and Dalquim Industria e Comercio Ltda, Brazil, has also been confirmed. Kemira Water Solutions Brasil Ltda has acquired the shares of two companies conducting the coagulant business of Dalquim Industria e Comercio Ltda. Dalquim is one of the leading manufacturers of aluminumbased coagulants in the south of Brazil. The annual revenue of the coagulant business is approximately EUR 12 million. The target companies are located in the south of Brazil and have two production units. The main customer base is the paper industry and municipal potable and wastewater treatment. The company will be targeting the fast expanding paper industry and potable and waste water treatment sector in the southern states of Brazil. The acquisition fits extremely well into Kemira s strategy to enhance its position and mutual synergies as a world leader in chemicals supply for both pulp & paper and water treatment customers in fastgrowing emerging markets. Kemira Water is already present with production in the Bahia region (northeast Brazil) and in the Sao Paulo state. With this acquisition, Kemira will significantly broaden its current product portfolio in Brazil and gain a strong geographical presence in the southern Brazilian market. NEW PULP AND PAPER CHEMICAL SALES COMPANY IN RUSSIA Kemira has established a new company in St. Petersburg, OOO Kemira HIM, to look after the sales and marketing of pulp and paper chemicals in Russia. The company will function as the main contact to customers in Russia. Sales and marketing connections will be transferred to Kemira HIM from the joint venture ZAO Kemira-Novo, which will continue to manufacture paper sizing chemicals in Arkhangelsk. Kemira HIM enables Kemira to significantly reinforce and rationalize its customer services in the growing Russian pulp and paper chemicals market. Kemira s main customers include several major companies such as Ilim Pulp, International Paper/Svetogorsk, the Arkhangelsk Pulp and Paper Mill, and Mondi/Syktyvkar. The company also sells chemicals to customers in other industries. Kemira HIM has offices in St. Petersburg and Moscow as well as in Arkhangelsk. At this stage, the company has 15 employees. Russia s current annual paper and board production volume is 7.5 million metric tons, its annual pulp production is 6 million tons,, and the consumption of paper and board is expected to grow at an annual rate of approx. 9%. The share of Russian trade in Kemira s pulp and paper chemicals is growing. Kemira is the world leader in supplying chemicals to the pulp and paper industry. Kemira Pulp&Paper has annual revenue of about EUR 1.1 billion and employs about 2,500 people in 34 countries.

6 news SUPPORT FOR ST. PETERSBURG S WATER TREATMENT WATER TREATMENT CHEMICALS BUSINESS EXPANDS IN SOUTHERN EUROPE On March 23, Kemira Water received a grant of about EUR 578,480 from the Finnish Ministry of the Environment to enable more efficient phosphorus removal at the waste water treatment plants in St. Petersburg. Kemira s partner in the project is the St. Petersburg Water Works. As a result of this project, the phosphorus load entering the Gulf of Finland will be reduced by tons annually, which corresponds to 5 8% of the annual total phosphorus load entering the Gulf of Finland. In 2006, the St. Petersburg Water Works and Kemira signed an agreement extending to 2015 with the objective of developing and producing new chemicals in St. Petersburg that are to be used in producing drinking water and in cleaning waste water. Kemira has the production plant ZAO Kemira Eko in St. Petersburg, which produces 80,000 tons of liquid aluminum sulfate per year. This plant also supplies the iron-based chemicals used for cleaning wastewater. Kemira Water has agreed to acquire Arkema s coagulant business for water treatment, whose revenue totaled about EUR 19 million in The acquisition includes three production units located in France and Spain, and it will enable Kemira to improve its market position for coagulants in these countries. The acquisition is subject to information and consultation of Arkema s personnel representatives and subject to the approval of the relevant antitrust authorities. Kemira Water Kemira s water treatment chemical business is the world s leading supplier of inorganic coagulants and ranks third in water treatment polymers. We offer customized water treatment and sludge treatment solutions to municipal and private water treatment plants and industries. In 2006, Kemira Water had revenue of EUR 468 million and a payroll of about 2,000 people. It is present in 30 countries. MORE NEWS IN BRIEF» The engineer Alberto Volca from Bolzano, Italy, has developed a method of making paper, cardboard, and glue from apple stems. He got the idea while thinking about the large pulp content of leftovers from the production of apple juice and jelly. South Tyrol is a big producer of apples, and the province s parliament already uses notebooks, envelopes, and paper bags consisting of paper made from apples. The Italian method will soon also be used extensively in China. (Helsingin Sanomat April 17, 2007)» It is no longer enough for items to be well designed. Increasingly, they need to have an extra twist. One of the newer forms of added value is responsiveness. An example is paint that changes color according to temperature. When you lean against a wall covered with it, the heat from your body will alter its hue where you touch. Or the whole appearance of your room changes as the sunshine hits your black wall and turns it white. (Financial Times, February 16, 2007)» Chemicals and not just craftsmanship give a Stradivarius violin its pristine sound, say researchers led by Joseph Nagyvary, professor at Texas A&M University. The wood used to make violins in the late 17th and early 18th centuries was treated with harsh chemicals to kill wood worms, as well as with varnishes and fillers, he says. The researchers are still trying to determine which chemicals were used, but so far they believe these were oxidizing agents. (Chemical Week, January 24, 2007)

7 news KEMIRA AND WWF INSPIRE BALTIC SEA PROTECTION Kemira is supporting WWF Finland s Baltic Sea protection work. Kemira is participating in Baltic Sea protection by promising to double the funds collected by Helsinki Festival goers who buy their tickets as Baltic Sea Tickets. As in previous years, festival goers can voluntarily pay 2 euros extra for their tickets, and this amount is passed on to WWF for the protection of the Baltic Sea and its endangered species. This year, Kemira will donate the same amount as collected from the public. This year, the Helsinki Festival will last from August 17 to September 2. This multi-arts festival takes place each ANSSI SOILA RE-ELECTED CHAIRMAN OF KEMIRA S BOARD OF DIRECTORS Kemira Oyj s annual general meeting of April 16, 2007, confirmed a per-share dividend of EUR 0.48 for the financial year It re-elected the board of directors, its chairman, Anssi Soila M.Sc. (Eng.), and its vice chairman, Eija Malmivirta M.Sc. (Eng.). It also re-elected the supervisory board and its chairman, Aulis Ranta-Muotio. KEMIRA SELLS INDUSTRIAL SERVICE COMPANY ONEPOINT OY TO KOKKOLAN VOIMA Kemira has sold the entire share capital of the industrial service company OnePoint Oy to Kokkolan Voima in accordance with a letter of intent signed between the companies in December At the same time, Kokkolan year around this time, and its program includes music, theater, dance, art, films, and city happenings by international and national top artists. See for more information about the festival. Voima is engaged in a business transfer of the maintenance operations of One- Point Oy to Maintpartner Oy. Operating in the city of Kokkola s industrial zone for large-scale industry, OnePoint Oy is a leading service and infrastructure company that offers and develops services related to infra structure and production. The company employs about 130 people and has revenue amounting to about EUR 22 million. Kokkola s industrial zone for large - scale industry and its approximately 20 companies constitute the biggest concentration of inorganic chemistry firms in Scandinavia. Kemira has a sulfuric acid factory there. In line with its strategy, Kemira is focusing on the development of its four business areas. Industrial services are not part of Kemira s core business. STOCK MARKET Share trading is increasing Trading in Kemira shares has increased since the beginning of the year. Until the middle of May, an average of about 430,000 shares were traded daily, which is 28% more than during last year s corresponding period. The proportion of traded shares to the total number of shares was 30%. The period s highest share price was 19.20, the lowest was 15.98, and the average was Kemira s market value at the beginning of May was about 2 billion euros. Non-Finnish ownership rose to 24.0% by the end of April, compared to 17.6% a year earlier. Finnish institutions owned 16.3% and households 8.0% of Kemira shares. Kemira held 3.1% and the Finnish state 48.6% of the company s shares. For more information about Kemira s stocks and owners, please check The writer is Andreas Langhoff, Kemira s investor relations manager Kemira s website at under Investors -> Share HEX/KEMIRA SHARE PRICE KEMIRA OMX Helsinki CAP FTSE EUROFIRST 300 CHEMICALS FINANCIAL INFORMATION IN at 9.00: 6-month quarterly report at 9.00: 9-month quarterly report VOLUME 2/2007 Kemira 7

8 Good risk management enables running a business at a higher risk level in a controlled manner, says Jaana Dromberg. 8 Kemira 2/2007

9 Managing all risks According to a recent study, Kemira s open manner of reporting risks connected with its business activities is one of the best among Finnish public companies. Growth in emerging markets further emphasizes the importance of well-planned and proactive risk management, says Jaana Dromberg, vice president of Kemira s risk management. BY MATTI REMES PHOTOS BY SANNA LIIMATAINEN Chemical companies are pioneers in minimizing risks in production plants, but enterprise risk management systems that cover all business activities are fairly new even in large corporations. But companies should take the matter seriously. According to international analyses, companies that manage risks are generally more successful than companies that don t, Jaana Dromberg explains and continues: Taking risks is an essential part of business. Well organized enterprise risk management enables running the business at a higher risk level in a controlled manner. RISK ASSESSMENT INCREASES UNDERSTANDING Kemira began systematic comprehensive assessment of the entire Group s risks in But Dromberg stresses that risk management had played an important role at Kemira already before that. For example, the Group Treasury is and has been responsible for protecting the company against adverse changes in financial markets. And production plants are proactive in their safety work to prevent all accidents and incidents. Enterprise risk management also means that risk assessment is extended beyond operational activities to strategic planning. So the way of thinking is the same as before, but the perspective is now broader. Dromberg admits that the implementation of this system based on selfassessment will take time since other development projects are simultaneously under way at Kemira. The leaders of the business areas have however quickly realized that risk assessment helps to understand one s own business and the surrounding world better. The analysis should be as practical as possible and not too scientific. PAYING ATTENTION TO UNEXPECTED THINGS On the other hand, Dromberg feels that it is also important to gain a broader perspective. Companies should also consider risks for which they did not prepare themselves in the past. Perhaps we don t need to include a new biblical Flood or nuclear war in the risk assessment, but there are many things in today s quickly changing world that have not necessarily been taken into account. So how can a company assess the probability of risks connected with, for example, the availability of skilled labor or the company s reputation? That s this job s big challenge. It s extremely difficult to evaluate the effect of such things on business and to express it in euros. The job of the head of risk management also includes drawing attention to unpleasant things. Sometimes the job consists of being a Cassandra and includes asking» 2/2007 Kemira 9

10 GROWTH IN EMERGING MARKETS EMPHASIZES RISK MANAGEMENT S IMPORTANCE. IN THESE COUNTRIES, WE NEED TO BE PREPARED FOR THINGS THAT WE DO NOT NEED TO WORRY ABOUT IN FINLAND. foolish questions. But it serves as an important counterbalance to the optimistic business area directors, who must indeed have both feet firmly in the air, Dromberg laughs. She says she has learned much about Kemira s activities in the four years she has been in her current job. The position of head of risk management is a lookout. But I can t claim to know everything about the company s risks. My job is to provide a risk management framework and a uniform methodology that enables a regular analysis of the Group s activities. This is especially crucial when major changes occur in a business environment. NEW MARKETS, NEW RISKS According to Dromberg, Kemira s growth in emerging markets further emphasizes the importance of enterprise risk management. In the new countries, it is necessary to be prepared for things that one does not need to worry about in Finland. Political risks are a good example. The business environment can change dramatically due to a coup or an armed conflict. Good planning, knowledge of local markets, and being proactive are however keys to success in Asia, Latin America, and also Russia. Dromberg believes that the Finnish companies that have entered the global market have learned to be wary of possible pitfalls in business acquisitions, for example. Buyers nowadays make sure that they are not unknowingly acquiring a company with old sins such as environmental pollution or illegal contracts. New investments also have to pay close attention to local legislation, administrative culture, and other local conditions. For example, a risk analysis of Kemira s chemical factory that is being built near Botnia s pulp mill in Uruguay was already carried out in the planning stage. This was used to draw up a more detailed plan for minimizing risks. So far, the risk analysis has been correct. Kemira s investment project is progressing nearly according to schedule, even though there have been demonstrations against the pulp mill on the other side of the border in Argentina. PRAISE FOR KEMIRA S REPORTING Enterprise risk management has become common in Finnish public companies ever since the Helsinki Stock Exchange, the Finnish Central Chamber of Commerce, and the Finnish Union of Industries and Employers published corporate governance recommendations four years ago. These include regular reporting by companies on how they organize risk management, in addition to internal control and auditing. Since the beginning, our goal has been more ambitious than these corporate governance recommendations. In this, Kemira has been one of the pioneers of Finnish public companies. Dromberg s view is supported by the auditing company KPMG s recent study, which evaluates the reporting of public companies during the last three years. Kemira s results belonged to the best, along with those of Nordea and OMX. Good reporting is transparent and comprehensive. It s important for investors to receive detailed information especially about the strategic risks of business activities, for their management is extremely important for the company s future, explains KPMG s accountant Reino Tikkanen. According to KPMG s study, many Finnish public companies still have a lot of room for improvement in reporting according to the corporate governance recommendations. Tikkanen admits that it is not always easy to provide a detailed account of risks. Reporting is quite a balance act. On the one hand, the message has to have content, but on the other hand, it can t reveal business secrets. Tikkanen however encourages companies to improve their reporting. It increases confidence in that the company is properly managed. 10 Kemira 2/2007

11 Europe today GROWTH SLOWS DOWN IN EUROPEAN CHEMICAL INDUSTRY The boom in the European chemical industry seems to be over for now. The European Chemical Industry Council CEFIC finds that companies nevertheless remain confident about the sector's future trends. According to CEFIC, 2006 was a good year for the European chemical industry. The brisk growth that began in 2005 continued until the middle of last year. Since then, production growth has slowed down. The change is however not significant, as shown by the newest business trend report published by CEFIC in March. Eurostat estimates that production in the chemical industry in the EU increased by 3.6% in 2006, compared to only 1.1% in the previous year. Production growth has been supported by both strong demand in the domestic markets and successful export to areas outside the EU. In its report, CEFIC predicts a slight dip in demand for this year. This will also lead to slower production growth in many chemical industry subsectors. CEFIC's prediction is based on January production figures. Despite the slight slowdown in growth, production remains at a high level. The lower growth rate however increases uncertainty about future developments, as CEF- IC points out in its Chemicals Trends Report. Good news for the chemical industry is that producer prices are predicted to continue rising. At the end of last year, prices dropped slightly, but they again started rising in January in many subsectors. Chemical producers received an average of 4.4% more for their products in January 2007 than in January Producer prices for petrochemicals rose the most, by 8.7%. The prices of other chemicals and plastic products also rose in January. Prices for pharmaceuticals however dropped compared to the beginning of last year. According to CEFIC's economic barometer, the chemical industry's confidence has EU 25 Asia North America Rest of Europe Latin America Oceania Africa 5.8% 6.0% 1.6% 3.0% 0.5% 1.0% 0.7% 1.0% somewhat decreased. CEFIC however estimates that no major changes have taken place in the industry's outlook on future developments and that expectations are still clearly above the long-term trend. Chemical industry managers are however worried about the competitiveness of the European chemical industry, as CEFIC points out. Maintaining its competitiveness compared to the chemical industry in other economic regions is important because exports represent a significant share of the European companies' turnover. CEFIC reports that the EU's external trade surplus grew in many subsectors of the chemical industry last year and increased most in trade with the USA. Exports to the other side of the Atlantic continued at high levels even though the exchange rate of the euro to the US dollar remained high. 20.1% 23.0% 14.5% 17.0% According to CEFIC, the deterioration of the USA's economic outlook and the imbalances in the US economy, which have already continued for a long time, have not dampened the positive expectations of the European chemical industry. This positive outlook is influenced both by the industry's fairly strong confidence in continued European economic growth and by the strong economic growth continuing in Asia. Several economic prognoses predict a slight slowdown for EU countries compared to the figures for Growth is however expected to continue relatively steadily until at least 2008, which can be seen in the companies' expectations. BY MATTI REMES EXPORTS AND IMPORTS OF CHEMICALS, % 56.8% Share in world imports Share in world exports The EU is clearly the world s largest exporter and importer of chemical products. The percentages include trade between the different countries within the regions. Source: Cefic, VCI, Global Insight ja Eurostat 2/2007 Kemira 11

12 High-quality paints gaining more favor with RUSSIANS As the standard of living rises, Russians are investing more in the quality of their homes. Sales of high-quality decorative paints are increasing each year. BY JORMA LEPPÄNEN PHOTOS BY JUHANA ISOHANNI, TIKKURILA AND KRASKI TEKS The use of paint indoors has begun to replace the traditional use of wallpaper. 12 Kemira 2/2007

13 Russia continues to provide an enormous market potential to paint producers. The per capita consumption of decorative paints is about 5 liters annually. In Nordic countries, it s four times as much, says Mauno Nurm, the sales director in charge of the Tikkurila brand in Russia. The product range of the Kemira Coatings business in the area also includes the brands Finncolor and Teks. Studies have shown that the consumption of water-borne paints is annually growing by about 20 percent in Russia. The demand for solventborne paints is annually growing by about six percent. There are still great income differences in Russia, but the middle class is growing at a good speed. According to Nurm, the result of this is that the demand for medium-priced paints is growing sharply. Consumers that in the past preferred the lowest price category are increasingly often choosing mediumpriced paints of better quality. By buying the St. Petersburg-based company Kraski Teks last year, Kemira Coatings reinforced its position as Russia s leading paint company. Teks is clearly the market leader in the lower and medium-priced categories in Russia. Finncolor, on the other hand, has a strong position in the middle segment. Tikkurila is the most popular high-priced brand. Together, we already control about one fourth of the Russian market for decorative paints, Nurm summarizes. TEKS KNOWS ITS CUSTOMERS Because the trend in the Russian paint market has been that customers switch to better and more expensive products, Teks has launched its new brand Elite, which has a higher price and quality than its traditional products. Our new product has been well received. It competes in the same segment with Finncolor products, but this is not a bad thing from the point of view of the entire Group s paint business. In this way, we prevent other competitors from entering the market, explains Teks s managing director, Igor Lichkaty. Teks has a strong foothold in more than 100 Russian towns and cities, and its share of the Russian decorative paints market is 16 percent. The company intends to boost this significantly. Our goal is a market share of percent throughout Russia. At present, it s smaller in some regions and larger in others. In St. Petersburg, for example, we in fact have a 60 percent market share. According to Lichkaty, the strong growth of Teks, which was founded in 1994, is based on customer orientation and strong marketing expertise. We know the local conditions and quickly respond to the changing needs of our customers. Customers receive from us everything they need from water- and solvent-borne paints to wood stains. We are convinced that we have the best price-quality relationship in all our product groups, Lichkaty says and continues: As more and more of the paint retail business in Russia ends up in the hands of large foreign and Russian chain stores, we has to ensure that the Group preserves its capacity to negotiate. In order to be able to set our prices ourselves, we arrange competitive bidding between dealers and retailers and try to prevent competition between the chain stores. GOOD CUSTOMER SERVICE In order to improve customer service, Teks is continually training dealers and retailers. The company has also sent its own sales assistants, its promoters, to the largest retail outlets throughout Russia. In expanding markets, competition increases all the time. In addition to offering customers good products, companies need to provide better and better service, comprehensive solutions. A good tinting system provides a very significant competitive edge. By means of our skilled sales assistants, we have increased our sales by up to 40 percent in some building materials supermarkets, Lichkaty says. Recently, Teks s competitors have also sent their promoters into stores. Lichkaty remarks that it is normal that competitors imitate the market leader s methods. They copy both our products and our methods, and we have to always stay a few steps ahead of them. We collect market information in many different ways. Success in a competitive market requires differentiation in a way that provides our customers with a unique benefit and added value. Lichkaty notes that Teks s strong presence throughout Russia also benefits both Tikkurila and Finncolor. We have a very good idea of what our customers in different areas want and prefer. We listen to both contractors and ordinary consumers, and we let the whole Group know what we hear.» 2/2007 Kemira 13

14 The colors of homes and their surroundings have strong psychological impact. In renovating, people are increasingly asking experts for help in planning, says Marina Mihailova. The rising standard of living and the revival in construction are continually increasing demand for paint in Russia. Due to our knowledge of local building styles, materials, and color trends, we will definitely be successful in the future too, Lichkaty summarizes. CONSUMERS APPRECIATE EXPERTISE Efim Glazer, managing director of the Finncolor customer Monicolor, believes his St. Petersburg company s know-how will enable success despite the increasingly tough competition in paint retailing. We are a specialist in a tight niche between the foreign and domestic chain stores. Our only means of responding to the competition is to continually improve our service. We offer solutions to architects, contractors, and consumers that provide the color shades they want and durable painted surfaces. Everything is based on good knowledge of materials and trends. Glazer has in-depth experience in the field, for he taught subjects related to construction and painting in a university before becoming a business man. The field is developing all the time, and consumer wishes are changing too. A simple example is how people have begun to use paint in their dachas. It s a Russian tradition to renovate the place by May Day. In the past, the exterior walls and fences had to be repainted every year because the paint started to peel during the winter. Nowadays, consumers are choosing better paint that lasts longer. It should also be mentioned that painting the interiors of houses was previously popular only in the countryside. Nowadays, many people in cities also paint their apartments, either directly on a concrete surface or on wallpaper. Professional help is also needed in choosing colors and shades. In the past, consumers had a dozen choices, but now there are more than 2,000, Glazer recounts. HARMONY OF HUES IN ST. PETERSBURG Called Venice of the North, St. Petersburg has precisely defined its official colors and shades. The basis for this was created already at the beginning of the 20th century by the artist Mikhail Matiushin, who was active as a painter, conductor, and violinist. He wanted architects to take into consideration that each historic period has its own world of colors and shades. This means that the age and style of a building should influence the color used for the façade. On the other hand, it is important that the colors of adjacent buildings harmonize. St. Petersburg s historic quarter was thoroughly renovated in time for the celebration of the city s 300th anniversary four years ago. The respected interior architect Marina Mihailova is convinced that this has also had a strong effect on many people s interior decorating decisions. When the city went to great expense to renovate the building In Russia, Kemira Coatings Teks has launched its new brand Elite, which has a higher price and quality than its traditional products. façades, people s eyes opened up to the beauty of colors. The use of paint in apartments has also increased. Very often, people also want their apartments to be painted in shades suitable for a certain epoch. In recent years, lighter shades have become more popular than darker ones. Mihailova points out that people s origin and cultural background influence their color preferences. For example, Armenians that have moved to St. Petersburg want strong hues, including gold and silver, in their homes. People who have lived here all their lives prefer lighter pastel shades. The color choices people make reveal their temperament. Mihailova is convinced that the colors used in homes and their surroundings have a strong psychological impact on people. I hope and believe that the children growing up in St. Petersburg s historic quarter, for example, will learn to appreciate its harmonious solutions and that these will help them make better decisions both as officials and as citizens. It is not insignificant in what kind of surroundings we live. 14 Kemira 2/2007

15 Blocking harmful UV radiation with titanium dioxide The sun tempts us to enjoy its light and warmth although we know that its ultraviolet radiation is harmful to the skin. But we don t need to worry because sunscreens, used correctly, can protect the skin up to a certain degree. BY MAARIT SEELING PHOTO BY KEMIRA The best way to protect the skin against sunlight s harmful ultraviolet radiation is of course to stay out of the sun. The second best way is to cover the most sensitive skin areas with clothing and a brimmed hat. Especially after the long winter months in many countries, many however feel that avoiding sunshine is simply too much to ask. Sometimes it is not even possible. Luckily, effective sunscreens are available that, used correctly, protect the skin against harmful UV radiation. UV radiation is a risk factor for skin cancer. In addition, excessive sun worship ages and wrinkles the skin. The skin also has a long memory. In other words, as we begin to age, it begins to show how much sun it was exposed to during our lifetime. People are nowadays more and more aware of the dangers of the sun s harmful UV radiation. This can be seen, for example, in the continuous growth of sunscreen sales. And this is a worldwide trend, points out Olli-Pekka Antinluoma, segment manager of Kemira Specialty s Cosmetics segment. Kemira produces pigmentary and ultrafine titanium dioxide used, for example, in cosmetic products and applications. Titanium dioxide has already been used for a long time in pigments in the cosmetic industry to increase the depth of colors. But ultrafine titanium dioxide is of newer vintage. It is a so-called physical blocker and specifically the component used in modern sunscreens. Due to the UV protection it provides, ultrafine titanium dioxide is also used in makeup and skin creams and in lipsticks. Sunscreen components are divided into chemical and physical blockers. Kemira s ultrafine UV-TITAN titanium dioxide provides physical sun protection. We produce Kemira UV-TITAN worldwide for the needs of the cosmetic industry. It lets almost all visible light through but efficiently reduces the effect of the sun s UV radiation by reflecting this away from the skin. Chemical blockers, on the other hand, prevent radiation s harmful effects by absorbing it, Antinluoma explains. He counts among titanium dioxide s strengths that, compared to correspondingly used components, it keeps well in sunscreen. It is also not absorbed by the skin and does not cause allergic reactions. This means it can also be used in sunscreens for people with sensitive skins and children. The sun protection factor (SPF) indicates a sunscreen s ability to prevent sunburn caused by UVB radiation. Modern sunscreens protect fairly well against UVB radiation, but their protection is usually not as good against UVA radiation, which wrinkles the skin and causes cancer. When buying sunscreen, it s important to choose one that protects against both kinds of radiation, Antinluoma stresses. Sunscreen should be applied liberally before going out, and reapplied 15 to 30 minutes after the sun exposure begins. Further reapplication is also necessary after activities such as swimming, drying with a towel, and sweating. In Finland, an SPF of 10 is usually enough unless a person is especially prone to sunburn. Only sunscreens based on physical blockers should be used for children. Used correctly, sunscreens can prevent sunburn, but even they cannot protect endlessly against UV radiation. The longer one is in the sun, the greater a dosage of UV radiation one receives, regardless of whether one gets a sunburn or not. So moderation in all things applies to sunbathing too. 2/2007 Kemira 15

16 Brazil boosts upswing in water treatment chemicals Brazil is Kemira's bridgehead in South America's growing water treatment chemical market. Business acquisitions are also paving the way for Kemira's access to neighboring countries. BY MATTI REMES PHOTOS BY AMAZON-IMAGES / ALAMY Kemira has operated in Latin America since 1996, but we have only recently begun to concentrate on real growth. The continent provides many opportunities including organic growth as well as business acquisitions, says Fred Schuurman, who heads Kemira Water s Latin American operations. Schuurman s office is located in Brazil s largest city, São Paulo. He is convinced that the water treatment chemical market will grow, besides in Brazil, especially in Mexico. Brazil and Mexico are the Latin American countries with the largest populations. Excellent growth figures in coagulants and polymers are to be expected in these countries in coming years, but the markets in other countries are also expanding. BIG IMPROVEMENTS IN WATER MANAGEMENT Schuurman s favorable prognosis is based on the considerable transformation that the water purification and wastewater treatment markets have gone through during the last two decades in all of Latin America. Inefficient and bureaucratic national water utilities have been closed down. They have been replaced by regional and municipal water companies whose operations are based on business principles. Private companies are also becoming more common. Political pressure on politicians has played an important role in improving drinking water quality and wastewater treatment. People throughout Latin America are increasingly better informed, and complaints about the quality of services have been effective. As in other developing economies, there is still room for a lot of improvement in sanitation services in Latin America. The World Health Organization and UNICEF estimate that about 50 million people nearly one tenth of the population of Latin America still suffer from lack of clean drinking water. And 125 million people do not have a proper sanitary system. The most problems are in poor rural villages and in the slums of large cities. National budget problems are delaying the improvement of services in many of the region s countries. SUITABLE SOLUTIONS FROM KEMIRA Schuurman is convinced that the solutions provided by Kemira Water are well suited to the conditions in Latin America and other developing economies. Kemira is the world s leading supplier of inorganic coagulants, and the company s water purification and sludge treatment solutions are suitable for both municipal and private wastewater treatment plants. Growth has begun not only in the drinking water sector but also in wastewater treatment. More and more Latin American cities and countries have noticed that chemical treatment of treating wastewater is cost-effective. Biological treatment of waste water requires more financial investments, which developing economies do not necessarily have. Schuurman adds that chemical wastewater treatment systems have been adopted in Brazil for example in Rio de Janeiro. And the Pinheiros River, which is badly polluted by industrial and residential waste, is being cleaned in São Paulo by means of a floating purification unit. 16 Kemira 2/2007

17 INCREASED STRENGTH THROUGH BUSINESS ACQUISITIONS Kemira s position in the Latin American market has been reinforced through two recent business acquisitions. In January, Kemira agreed to purchase two companies owned by the Brazilian company Dalquim Industria e Comercio Ltda. The agreement concerns three production plants located in southern Brazil. Dalquim is one of the leading producers of aluminum-based inorganic coagulants in southern Brazil. The deal expands our product range and opens up a market in which we were not previously present. Southern Brazil is an important water treatment chemical market. According to Schuurman, production close to the customers is an important competitive advantage. Kemira sells most of its coagulants in liquid form. Sensibly organized and well-functioning logistics are crucial to successful competition. One has to remember that Brazil is as large as all of Europe. The purchase of the US water treatment chemical company Cytec last» 2/2007 Kemira 17

18 Kemira s most important customers in Latin America are municipal water utilities, and they have a big job ahead in improving water management. an agreement concerning the development of ethanol production techniques. The goal is to increase the production of biofuel in other Latin American countries too. year also improved Kemira s foothold in Latin America. Due to the deal, Kemira gained access to the markets of Argentina, Colombia, Venezuela, and Chile. We now have a good sales organization in these countries. New business acquisitions are possible in Latin America according to Schuurman. The most interesting countries in this respect are again Brazil and Mexico. NEW CUSTOMERS IN KEMIRA S SIGHTS Kemira s most important customers in Latin America are the municipal water utilities and include, for example, the São Paulo region s water management company Sabesp. Schuurman believes that Kemira s operations will expand beyond the sale of water treatment chemicals to more comprehensive solutions than in the past. Growth will also come from customers in new lines of business, for example industry. The wood processing industry is a growing customer group, whose business is expanding in Brazil, Uruguay, Argentina, and Chile. By far the greatest investments are being made in Brazil, where 10 billion US dollars are expected to be invested in paper and pulp production by Schuurman feels it would be good for Kemira to be bold in looking for customers in new lines of business. He mentions Brazil s rapidly growing sugar industry, which will in the future have to think about taking care of wastewater and other environmental concerns. Large investments are now being made in Brazil to increase the production capacity of ethanol from sugarcane. The industry received an additional boost from President George Bush s official visit to Brazil in March. During the trip, the USA and Brazil signed BUREAUCRACY CAUSES THE MOST PROBLEMS Kemira s competitors in Latin America are mostly local companies. In the coagulant market, for example, there are many family companies. In polymers, the competitors also include large international producers like Ciba and SNF. There is no easy market anywhere in the world. Schuurman recounts how foreign companies encounter problems in Latin America that are familiar in other developing economies too. The biggest problems are usually connected with bureaucracy. Getting permits and other paperwork demand a lot of time. Participation in public competitive bidding is also a time-consuming process. The economic outlook for many of the region s countries is now very bright. But history has shown that the economic situation can change quickly. Planning business activities is more difficult here than in Europe. Plans are often delayed here by something unexpected. In Latin America, trade is based on long-term business relationships in which it is important to get to know the business partner personally. Despite the cultural differences, Schuurman feels that European companies nevertheless adapt to the local conditions relatively easily. Compared to Asia, for example, Latin America s business culture is very similar to that of Europe. 18 Kemira 2/2007

19 Global redistribution in full swing We shouldn t close our eyes to reality, says Kemira s CEO, Lasse Kurkilahti. According to Kurkilahti, no branch of business is protected from the effects of globalization, and it is only a question of time when the next industry has to humble itself. Kemira has taken the changing reality seriously, and the company s goal is to be the world leader in the lines of business it has chosen. We ve sold off business in which we didn t consider it possible to be number one worldwide. We have created new solutions for our customers, and we have increased the efficiency of our operations, Kurkilahti recounts. Kemira is the world s biggest supplier of pulp, paper, and water treatment chemicals. It has 140 offices in 40 different countries. Kemira is aware that basic industry is being constructed in Asia at great speed and that this industry benefits from low labor costs, newest technology, and the scale advantages of large production CHANGES IN THE PLAYING FIELD AFFECT KEMIRA TOO. More and more companies are announcing plans to transfer their production to Asia to save labor costs. The footwear and textile industries have already left Finland, and now is the electronic industry's turn. Kemira has responded to the globalization challenge by clarifying its strategy and improving its corporate culture. BY OUTI AIRAKSINEN PHOTO BY JARI TIKKA plants. And although capital-intensive industry is not rushing to take advantage of low labor costs by moving to Asia, the changing playing field has had concrete effects on Kemira s operations too. There are still business sectors in which the country of origin of a product matters. In cultural exportation, for example, strong regional cultural traits are an advantage. But in most businesses, the country of origin of a product is insignificant, says Professor Toivo Äijö. Äijö and Kurkilahti spent the last one and a half years writing a book about the effects of globalization on companies (Ui tai uppoa. Suomalaisyritykset globaali talouden hyökyaallossa. (in Finnish), WSOYpro, 2007). The result is a strategy development model that enables responding well to new challenges. HUNTING FOR OPPORTUNITIES The basic rule of global business activity is that all companies try to go where business conditions are best, including those related to ownership, production, labor, and product development. Production is transferred to where it is least expensive, and R&D moves to» 2/2007 Kemira 19

20 where the best expertise is. Labor also moves - especially the employees with the best language and other skills. Kurkilahti and Äijö want to shake up and wake up: Globalization is part of everyday life and advancing with increasing speed. Because this development is an inevitable fact, closing one s eyes to it is not a real alternative. And the faster this is accepted by Finns, the better are Finland s possibilities of succeeding. Finnish society, politicians, and companies should immediately begin discussing how work performed in Finland is and can continue to be times more valuable than work performed in Asia. If Finnish person-hours can no longer be that expensive, our standard of living will decline in direct proportion, Äijö says. So how can Finland manage? Since it has no competitive advantage in terms of labor costs, market size, or tax levels, solutions must be sought elsewhere, Äijö points out. It s clear that globalization provides lots of opportunities, but these first have to be found, Kurkilahti adds. CUTTING COSTS IS NOT ENOUGH Finnish industry s traditional reaction to problems has been to reduce expenditure. This is however not enough, Kurkilahti and Äijö explain. Instead of concentrating on costs alone, companies have to monitor the ratio of investments to profits. Otherwise, they will be faced with slow but sure decline. It s crucial to determine the company s expertise and how it can be best be made use of and renewed, Kurkilahti stresses. The Good to Great program currently under way at Kemira strives to CEO Lasse Kurkilahti (right) and Professor Toivo Äijö have written a book about globalization s effects on companies improve quality and processes in addition to costeffectiveness. Compared to Japan and other Asian countries, for example, Finland s forte is its strong specialization in very narrow fields such as forest industry and some subsectors of the metal industry. These are so small from a global perspective that Asians are neither interested nor capable of concentrating efforts on them, Kurkilahti says. He considers it very possible that product development will also stay in Finland, and this will possibly provide many jobs in the future. Kemira s outlook is relatively bright because a lot of the expertise it needs can be found in Finland. Finland is the world s leading pulp and paper industry country, which makes it possible to be the world s leader in the chemical industry too, Kurkilahti points out. THE BETTER A COMPANY KNOWS ITS BUSINESS ENVIRONMENT, THE BETTER IT CAN ADAPT. OPENNESS IS CRUCIAL A company has to be open both outwards and internally. Employees and management have to jointly deliberate on what to do and have to collect experience and ideas about the entire organization, Kurkilahti explains. When information is not withheld and employees get to participate in decision making, the company can look for alternatives at every level and can improve its operations. A common conception of the future also means that employees accept unpleasant decisions too if there are no other alternatives. The more information an organization has, the better it can adapt. There should be discussions at work about whether the business unit and its employees are doing well and what can be done to make that happen. When facts are acknowledged as ear- 20 Kemira 2/2007