Financial Times

Hayleys:Export-oriented and farmer-oriented
Hayleys Ltd., one of Sri Lanka's most diversified conglomerates that traces its origins to a small proprietorship set up in Galle 126 years ago, has been practicing Corporate Social Responsibility long before it became the buzzword it is today.
Known for keeping a very low profile, the company received much-deserved recognition for its efforts recently by winning the Best Corporate Citizen award given by the Ceylon Chamber of Commerce.
As Rajan Yatawara, Hayleys chairman joked in a rare interview; "We didn't know what it (CSR) was until recently." And Hayleys started rehabilitating irrigation tanks long before the government started talking of it.
Despite is size and extensive reach, here and abroad, Hayleys is modest about its achievements and its executives rarely give interviews.
It must probably be the only company of its stature that does not publish pictures of directors in its annual report, which itself keeps winning awards. In this exclusive interview with The Sunday Times FT, Yatawara and deputy chairman N.G. Wickremeratne talk about the company's CSR work and the current status and future direction of its core businesses. Excerpts:

Can you describe what is it that made Hayleys win the award for best corporate citizen? What are your main CSR activities?
Presumably it's the balance between the different stakeholders that we have obtained in fulfilling our social responsibilities, rather than just one aspect like employees or society or environment or shareholders.

It stems from the fact that we're probably the most diversified in terms of location within Sri Lanka - be it factories, offices or farms. We're fairly well spread out in rural areas where we assist schools, temples, hospitals, local communities. We also feel that our main lines of business are in themselves fulfilling social responsibility in terms of creating employment in rural areas, providing employment for the technically qualified, graduates in particular. At the same time trying to satisfy shareholders. We're particularly biased towards the environment because environment purification is one of our lines of business. So it's a fair mix.

Actually, I've had mixed feelings and sometimes disagreements with some members of my board and my staff about going public with some of these, what may be called accomplishments from that standpoint, but which was a way of life to us. We've been doing this for the last 30-40 years, not necessarily financial assistance, but where employees themselves get involved and the corporate also assists. What we did was at the instigation of the chamber, which said that a compilation of our activities in this field would benefit others and therefore it would be salutary for us to publish it.

It was with some reservations and misgivings that we finally forwarded this to the chamber committee that was conducting this contest. This somewhat went against our principles but we did it.

What we hope is that in the future the selections would be made without requesting the aspirants to submit applications, that surveys will be conducted independently by the chambers as far as it is practically possible but where the concept of wining an award does not overshadow the real underlying feelings with which we engaged in fulfilling social responsibilities.

Why were you reluctant to talk about your CSR activities? Also, why is Hayleys such a media shy company?
This has been the culture that has prevailed in the company for quite a long time. Firstly, of course we were media shy because the main line of business was 'kohu' (coir) which is not very attractive to talk about. But since then we've diversified into various fields and we didn't think there was any necessity to go public unless it helped the bottom line, in the good old days, and now of course the triple bottom line, as they call it. So unless there was a tangible benefit we never sought publicity for ourselves as a corporate or as an individual heading it.

The reluctance to publicise our CSR activities is for the same cultural reasons. When we performed those activities of CSR we never thought of them as CSR. Neither did we feel we were obligated to beat competition in achieving this. In fact, the rehabilitation of the first village tank was initiated by (former chairman) Mr Sunil Mendis long before anybody was talking of tanks. And we did it with the utmost humility and lack of publicity although some of it was indeed published because the politicians did get involved. But it stems from our origins in agriculture. We're very close to the farmer because we feel the future of the country lies very much with value-added exports and increasing self-sufficiency in food whilst improving the financial plight of the majority of our population who are farmers.

Can CSR be considered a convenient fig leaf for corporate greed?
Yes, in fact that is one of the reasons why we did not want to be identified as another party joining this. This has been the 'in' thing in the last two years internationally and now locally. But we went back to basics and we looked at our main lines of business to see whether they are in sympathy with social responsibility and whether we feel, by and large, each of the lines of businesses we are in has some alignment with fulfilling our social responsibilities. E.g. we're not in killing of animals for production of food. We're not involved in hospitals, although some might argue that to be involved in hospitals is a good thing. We are not involved with undertakers. We have stayed away from activities connected with liquor, gambling. We tried as far as possible to find other avenues - and we think there are a lot - that we can busy ourselves in which will be in concert with norms of social responsibility.

Why hospitals?
Mr D.S. Jayasundera used to always tell us; 'don't make money out of people in distress, there'll always be someone else to do that - let him do it'. It's just that we didn't want to do it. It's just like publicity - if someone wants to take publicity we have no call to judge but we prefer to give a very good annual report, however good or bad the result, and let the actual performance speak for itself.

CSR has become a big issue in recent times - almost a buzzword - but there seems to be somewhat of an anomaly here. As a company chairman your job is to maximise profits for your shareholders, not do charity?
You're quite correct. That is the point I've been making to my staff when I resisted their attempts to push through this application. But there is also the other side that if we're of some assistance to the world at large in redirecting their views on CSR, then we've been of some benefit. And I don't think we have spent overly whether financially or in terms of management resources on fulfilling these social responsibilities. I concur with one of my previous chairman's statements that the business of business is business. We pay taxes for the government to look after the social responsibilities. But then having said that, when we know that there are so many wants amongst the populace we feel obliged morally, not necessarily to fulfil some credo, to get in there and help. But not at a significant cost to the bottom line.

Some companies here have been reporting quite phenomenal profits in recent years. Do you think this is morally fair especially when the country is going through difficult times?
To be frank, it depends from whom one is making those profit margins. If you are referring to some of the quoted companies and they are making high profits from tourists or from servicing the shipping industry or from infrastructure development projects where it would have cost more to the government if they went overseas, then I think one cannot begrudge them their profits. But largely also some of these high levels of profits have been derived from privatisation - because most privatisation has entailed entities which have had monopolies being now handed over to companies. So for a considerable time they have the benefit of that monopoly. That does not necessarily mean that the Sri Lankan consumer has had to pay for it, although it could also be that.

Then of course we have not referred to the banking sector. I'm not qualified to express an opinion on why banks are making so much of money. But since there is competition amongst the banks, hopefully, one would imagine that it's on fair play grounds that they are making such profits. They could have a downturn if businesses go under or if the economy starts slowing.

Our group has not been the beneficiary of some of these landslide profits because our growth has been organic and largely export oriented. So we face competition from neighbouring countries or even competition from consuming countries. We have limited raw material resources in Sri Lanka which is why we're now, in gloves and carbon, and fibre also, going outside with our technology, which is all what we possess once the raw material is exhausted. But those are areas in which it is difficult to make windfall profits. It's slow and steady growth. Of course, to try and reduce our dependence on this we have expanded in the shipping and transport sectors where the gestation period from the point of investment till profits are derived is probably shorter.

We have very profitable shipping agencies through joint ventures with foreign shipping lines. I believe we have the largest container depot which does repairs and service and storage of containers. We've also recently built a state-of-the-art warehouse under the name of Logiwiz which is part and parcel of a supply chain management to producers here and in the region. More recently, we bought two ships, the first in collaboration with our partners in India, Orient Express Lines (OEL), bought under the name of Hayleyslines. We bought our second ship at the end of last month. The intention is to broad base our involvement in shipping to ship owning and ship servicing. Our maritime arm will be involved in air, sea and land transport globally, but concentrating on the region - the Middle East, Pakistan, India, Sri Lanka, Bangladesh and perhaps Singapore.

Shipping is a notoriously cyclical industry. There are bound to be downturns. Are you prepared to ride out the downturns as well?
Well, we have been doing that all our lives - not just only in shipping. Coconuts also have downturns and upturns. So has rubber. So, yes, we're prepared to ride that out. I think if we get in at the right time and earn enough at the onset then we'll have a little more courage to invest more and suffer a downturn as well. All knowledgeable circles point to a strong freighting market at least till the middle of 2006.

Could you describe how Hayleys intends moving in its other core areas, particularly activated carbon and rubber?
The overseas market for activated carbon is growing very rapidly particularly with demand from China and its increased use in water purification. We have a fair share of the market and we're in some form of alliance with Calgon Corporation. That would give us some strength on the marketing side. On the supply side, because of the volatility of the supply situation in Sri Lanka we're making our own charcoal now - we buy the coconuts to make charcoal and produce electricity which gives us a margin with which we can fight competition. The first phase of this project is now commissioned without the power - the power will come on before the end of the year. And then we hope in the course of next year to set up four more plants which should make us self-sufficient locally.

We already have a plant in Thailand where we just expanded into a fifth kiln making the capacity 5,000 tonnes. We also have a reactivation plant there that's running profitably. We also want to have two plants in Indonesia. (See page 1 story)

Dipped Products Ltd., Hayleys rubber or hand protection division, has about 3-5 percent of the $1-1.5 billion global market. The much larger market is the medical market - that's where we're moving into with our new factory in Thailand so in the future we could grow our present business of non-medical gloves, which is consumer and retail gloves, and develop in the medical sector. The expansions that are possible at DPL are quite significant. The market is very large and we're a recognised player certainly in the non-medical sector and we hope to become that in the medical sector as well.

The alliance with the Italian marketing subsidiary, ICO Guanti SpA, is working out very well. The company provides us with a very good insight into the way markets operate in Europe. Knowledge of how distributors work with retailers, connections that are necessary, the market access that you need to develop. We won't make that our model - we don't intend to buy all our distributors right round the world. But it nevertheless, apart from providing decent profits into the DPL bottom line, gives us at least a foothold in the EU.

Are you thinking of other upstream moves as well?
Yes, we're developing collaboration with the Haycarb marketing arm in the US in setting up a marketing unit for medical gloves. The US is the single largest buyer of medical gloves, buying nearly 70 percent of medical gloves produced in the world so we need to be close to that market.

How are you coping with raw material shortages?
Going to Thailand is one move. Sri Lanka produces about 100,000 tonnes of rubber. Thailand producers about 2.3 million tonnes. Southern Thailand where we are located produces about 1-1.5 million tonnes. In Thailand we would grow our medical business. The plant's capacity can be increased by three-fold.

How is the alliance with Mabroc Teas doing?
Mabroc is doing well. There is a dialogue between the marketing company and the plantations about teas that are suitable for the market. Earlier, we used to speak to brokers who used to sell the tea to a number of different buyers. Slowly, we're making more and more teas which Mabroc can market. And they are low key, like Hayleys. But they've got a very strong brand name in Russia and some of the CIS states apart from the mature markets like the UK and Japan. They tell me there are a large amount of billboards of Mabroc in Iraq. So they are waiting for these problems to end.

Some conglomerates like John Keells are getting out of plantations. What is Hayleys future outlook on plantations?
The very reason why John Keells previous partner bought out the plantations is because they were in rubber manufacture. So for that reason it's not logical for us to give up our plantations because half our plantations are rubber. As for the other half in tea, especially the alliance with Mabroc, it can only be a positive in the overall management. However, the chances of tea making any big dent in overall profitability unless wages are brought completely out of line, is remote.

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