Attracting "The Best And Brightest" Will Challenge Gas Businesses

This is an exciting time in the markets for industrial gas distribution. As the leader in the market, what you see in the future? Do you project further growth in 2007?
Yakich: The great thing about our industry is that it's always an exciting time because we touch so many different industries and so many types of customers with our products and services. All those different types of customers mean a lot of opportunities and all the diverse industries we serve help to make us more recession-proof. I think 2007 looks pretty positive. Industrial gas distribution in North America is still very tightly linked to the strength of U.S. manufacturing. And from all the evidence I have seen, the U.S. dollar is still relatively weak and U.S. manufactured goods are in demand all over the world. Whatever softness in consumer demand that we may see here at home next year will likely be replaced by exports so 2007 looks to be another good year for us, similar to 2006. Beyond that, it's anyone's guess.

Do you expect the industry will continue to eliminate international borders and consolidate globally?
Yakich: Although there has been some global consolidation at the large industrial gas company level, we're probably not going to see any further consolidation at that level in North America. There will be opportunity for consolidation within certain U.S. geographies among distributors. But our business has always been a local business, and that won't change. The most successful competitors will continue to be those companies large enough to offer a wide range of products and services but with the ability to act like a small company in terms of customer service and being easy to do business with.

Much of the excitement in the market has been driven by consolidations, but let's look at technologies. What technological developments do you see on the horizon that will affect industrial gas distribution?
Yakich: From a metal fabrication perspective, which is the biggest segment of our market, we will continue to help our customers reduce their manufacturing costs by driving automation and innovation. There are tremendous opportunities to bring new technologies to metfab customers in how they use our products, and in how they combine our products with their processes to become more competitive. Environmental pressures will bring more opportunity for the use of industrial gases to improve processes and remove environmental hazards, as well as from an environmental measurement standpoint in the specialty gas area for calibration gases and EPA protocols. Technology, especially through more automation, will also help to compensate for the growing shortage of welders, as outlined in a recent Wall Street Journal article. Lastly, there has been a significant shift in demographics because people are living longer. Healthcare products and services aimed at making life more livable for an aging population brings with it further opportunity for growth and profit. From an internal productivity standpoint, Praxair uses distribution automation software to more efficiently route trucks, to track deliveries and to better anticipate customer demand so we can get more efficient and provide superior customer service. RFID (Radio Frequency Identification) technology may also have an impact going forward to improve our supply chain efficiencies in the area of cylinder control and management, and to improve customer service.

What impact will the Internet have? Do you see "clicks and mortar" replacing "bricks and mortar?" in our business?
The Internet has already made a great impact in terms of how we present our products to customers, how we market our products and how many of our customers interact with us electronically. The Praxair intranet is available 24 hours a day to help our employees be more efficient and effective. It has made us more "employee friendly" by providing easy access to the information our people need to do their jobs more effectively. Our Praxair Express web site makes it easier for customers with established accounts to purchase both gases and hardgoods online, with online tracking from order through receipt and invoice. The Internet is a tremendous resource and will provide us with further opportunities to become more productive and customer friendly. But, in my opinion, the Internet is not going to destroy our business model, just compliment it.

Will there be changes to distribution because of the high cost of petroleum and transportation? What effect will the continued high cost of energy have on this business? How is Praxair dealing with that?
There's no question the high cost of fuel and its affect on transportation costs have changed the way we go to market. We have greater incentive to become more productive in how we anticipate our customers' delivery requirements and how we meet these needs while driving fewer miles. At the same time, we have to become more proficient in choosing the types of equipment we use in our entire supply chain, searching for more fuel-efficient vehicles while reducing the number of vehicles in our fleet. We continue to explore using lighter weight, composite material-based cylinders to lighten our payload per vehicle.

Another way technology plays a role is in making on-site gas generation more attractive than it has been in the past in the production of nitrogen, oxygen and other products. As smaller on-site generation systems become more economical, they become more attractive to a broader range of customers who value an uninterrupted supply of product.

And let's not forget the potential affect energy costs have on customers and the impact that's having on their processes. Again, we come back to the question: What can we do to help our customers become more efficient by reducing their down time, perhaps reducing the number of shifts they run with the same amount of output, etc? Macroeconomic problems always spawn opportunity.

How do you see the consolidation of the industrial gases market changing the ways that customers buy gases? Do you expect increases in liquid or air separation unit gas production? Will there be increases in bulk buying? What is the potential for technologies and the high cost of fuel to diminish the uses of cylinders in gas distribution?
I believe the customer will always have a choice of suppliers from whom they can buy products and services, regardless of consolidation. New distributors of our products and services appear frequently. But I also believe superior customer service will always win out in the long term. Of course there will be liquid capacity increases over time and these will be driven by underlying economic growth. I know Praxair is very disciplined in evaluating new capital expenditures in new capacity. The dramatic increases in fuel costs and the resulting incentive to install small on-site gas generation systems also frees up liquid capacity, removing some of the pressure to build new, large air separation plants.

There have not been any refineries built in the United States for more than 20 years. Is that having an impact on your company's ability to supply industrial gases to U.S. markets?
While it is true that no new refineries are being built, existing plants are being expanded and de-bottle-necked and we're currently looking at the biggest refinery expansion activity in the history of our country. There will be large increases in refinery capacity over the next several years. A tight oil supply and increased demand means that over time, things will come back into balance. For large industrial gas companies like Praxair this is also a tremendous opportunity because of the amount of hydrogen that will be consumed by these refinery expansions. Construction of these plants brings metfab opportunities while their on-going operation will spur more specialty gas demand. So I see opportunities, not problems, with the current situation.

What do you see as the greatest opportunities in gas distribution markets in the coming 12 to 18 months? What are the greatest challenges the industry faces?
We are challenged to find more ways to help customers perform their manufacturing processes faster, better, safer and at lower total cost. The issues that are driving customers in this direction are the shortage of skilled trades labor, the tremendous global demand for manufactured goods, the threat of global competition, and the need to get the most out of their manufacturing capacity. That is where the opportunity lies.

A very big challenge for our industry over the next five to 10 years will be attracting the best and brightest people to work for us in this very competitive environment. Changing demographics point to the fact that there will be fewer people available to join the work force. Job candidates today also have many choices on where to work. Our industry needs to present a vibrant, challenging and exciting work environment so that we can attract more than our fair share of the available talent pool.

Wayne J. Yakich is a vice president of Praxair Inc. and president of Praxair Distribution Inc. Yakich formerly was vice president for business operations for Praxair Distribution, and assumed his current positions in 2000. Praxair Distribution distributes industrial, medical, and other gases to more than 600 Praxair locations in the US and Canada, and delivers industrial gases and hardware to welders; respiratory gases and healthcare equipment to hospitals and homecare patients; and specialty gases and equipment to electronics, pharmaceutical, food and beverage, and chemical companies. It uses a line of stores and depots, cylinder-filling plants, homecare service locations, and distribution centers to serve its customers needs. Bruce Vernyi, editor-in-chief of Gases & Welding Distributor, provided interview questions to Yakich via email.