First, we’d like to wish everyone a very happy and healthy 2013! This is of course our first post, on the first day of the new year. Mark, Chris and I are very thankful that you read our weekly missives and we promise to keep bringing you ever more exciting fodder in the year to come.

So on with it! (assuming you’re not all too hung over to concentrate)

We’ve been following the story of a unique, privately-held fire safety and equipment provider in Mongolia for the last year or so.

Before the holidays I was given the chance to sit down with Sébastien Marneur, the CEO of Eurofeu Asia to discuss how he ended up in Mongolia, the business and his plans for the future.

What’s really special about Eurofeu Asia is that it will be the first reverse merger listed on the Mongolian Stock Exchange. Further to that, we’re told by people we trust that the accounting can be relied upon, which is not always the case when dealing with Mongolian-listed equities, or equities in most frontier markets, to be fair.

For this and a couple of other reasons we feel the company could end up being a “must own” for investors and institutions wanting exposure to Mongolia’s growth.

Read on to see why…

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Scott: Sebastian, you came to Mongolia over a decade ago and started Eurofeu Asia. What is your background in this space and what opportunities did you see in the market for fire safety equipment?

Sébastien: Well, I’m a French national, and I was formerly a policeman. I then joined the fire brigade. I worked for about ten years in the fire safety business in various countries…fire safety and security in Mexico in Indonesia, Pakistan and China.

I arrived in Mongolia in 1998; it was a country which looked like it missed everything. We had no idea at this time that many of the natural resource deposits were so huge. But, I thought that I could set up a business here at less cost, and I launched in 1999.

Scott: Eurofeu is the only fire safety equipment provider in Mongolia that is operating to international standards. What opportunities does this present and what does it mean for your competition, if you have any?

Sébastien: We still don’t have any serious competition, I would say. When I arrived here there was only one competitor, it was a State company which had been privatized in 2002.

He had a big advantage in that he knew the market very well. At that time the foreign direct investment (FDI) and the international resource guys had not arrived in Mongolia. But, as soon as they did I found my market.

Scott: Why is that?

Sébastien: Because they were expecting service and equipment like they would get elsewhere in the world. I was the only one who was able to supply that. I was the only one providing fire safety equipment. I added the service component with the equipment. We offered the equipment and the service as a package, and we are still the only ones doing that.

Scott: Is anyone trying to compete with you on the service side?

Sébastien: No, they think that service is not necessary. They sell fire safety equipment as they would sell end-user equipment.

Scott: They think they can get rich selling fire extinguishers..? They clearly don’t understand the potential to be generated through free cash flows.

Mongolia is becoming and will remain a resource economy for the next several decades. How are you positioning Eurofeu to take advantage of the explosion in the number of mines which are set to open over the next decade?

Sébastien: It’s exactly what I said previously. These people are miners. They want to concentrate on mining.

For fire safety they want a company which is taking care of the fire risk assessment, the equipment, the installation, and the inventory of the fire safety equipment, including the maintenance. They want to satisfy the international standards for the health and safety of their employees.

Fire safety for companies like Rio Tinto and others…this is not a core strength for them. They don’t want to have to deal with this. However, it’s my business and I want to care for them, and they are very satisfied with this.

Scott: When looking at international fire safety companies such as Eurofeu France, their bread and butter is not fire safety equipment, but rather maintenance contracts as you previously mentioned.

The other day we talked about a maintenance contract whereby you’ll be going to the sites and testing the equipment. Give me some color on how this side of the business functions. Can you explain how maintenance contracts are used in the fire safety industry?

Sébastien: Really this is very easy to understand. There are some rules internationally. For instance in America the fire extinguisher standard is called NFPA 10. This covers not only the equipment, how to install it and where to install it, but we also have to make sure that the  equipment works every time. It has to be always ready.

When we sell a fire extinguisher here we have to sell some kind of maintenance and testing. This is more obvious with the fire pump. The fire pump is very heavy, very expensive equipment, and by law it needs to be tested weekly…literally every week.

To get the conformity certificate from the NFPA or from CE Standard, you need to have a contract with the company which ensures that the equipment is regularly tested and maintained.

The fire equipment is not there for decoration. We make sure that it will work when there is a need. Companies have to comply with the rules, to the standard. What is prevalent here is the NFPA standards.

Scott: You don’t want fires in mines, so the fire safety law is very stringent here. Where was the Mongolian fire safety law adopted from?

Sébastien: The fire safety law came from Russia, and it was a little bit outdated. At the beginning of the year 2000 we helped Mongolia and their fire brigade to update the standard and adopt new technology to fight against risk. So, now the standards come from the French and European laws.

Scott: Okay, so the backbone is European standards?

Sébastien: Yes, it’s European standards. But still, most of the safety directors in the mines are very oriented to the NFPA. The law in Mongolia will end up being based on the CE Standard. I try to explain that to my customers. To me, it doesn’t make any difference. I can install according to NFPA or CE Standard, or even by the Mongolian standards.

Scott: So you can have an operation with fire safety standards that satisfy really any government?

Sébastien: If it satisfies the CE Standard only, it possibly will not satisfy the NFPA standard. The difference is slight, but it matters. Even a slight difference is relevant. So, we choose the NFPA, or we make it CE Standard.

For instance, there must be one fire extinguisher every 15 square meters in the American law; in some other laws it is every 16 square meters. So, just one square meter will make the difference if an expert comes here to inspect. So, we choose which to go with per installation.

It makes no difference in reality, but it makes a difference in terms of certification. I hope this is clear.

Scott: Clear enough. Fire inspectors are precise it seems (laughs).

Sébastien: Yeah, they are precise. But we are able to qualify installations as CE standard or NFPA standard, and no other company in Mongolia can do that, which is my point. There is a lot of red tape involved. We are the only ones that can qualify installations to be certified.

But I cannot certify installations that I do myself. You understand that there is a conflict of interest, right? So, there is an independent company who certifies NFPA and CE standard. But, when we install for a client they always get certification.

Scott: In Mongolia fire safety equipment is ever-present, but usually low-grade Chinese stuff. Clearly, Mongolia has a long way to go until the market is saturated with quality products like those that you offer. How is Eurofeu positioning to take advantage of the trend towards technically superior and reliable equipment?

Sébastien: The sourcing is important. We are sourcing the best product in terms of detection and new technology for protection. We already took advantage of the push. My competitors, of which there are five or six, they cannot believe that people will buy a fire extinguisher four times the price of a sub-standard Chinese-made model.

They can’t believe it is possible for people to be so “stupid.” They consider the fire extinguisher as an element of decoration in the corridor. They don’t consider the fact that people are judging the product not only by its price, but also by the service it will give!
Many people just compare the price. They don’t compare quality, service, or so on. For example, there are companies that continue to buy pens that work only one time. This is because the pen is the cheapest on the market. It costs two or three hundred tugriks. I told them to buy Bic pens, which work for a year! You usually lose a Bic pen before it runs out (laughs).

But they cannot understand why you’d spend 1,000 tugrik on a pen when there are others that cost so much less. I tried to explain it to them. I said look, if I buy a Bic I will buy one pen in a year. If I buy this &%$*ing pen from China, I will buy 100! In the end it will cost me 30,000 tugrik.

This behaviour, price insensitivity, is something that people cannot believe because, up until 2003 or 2004, this was a country with absolutely no money. The government had no money; the people had no money.

So, they were attracted only by the price. This behaviour remains unconsciously. As a result my  competitors focus on the price, not on the quality and the service the product provides. A cheap pen that breaks won’t kill you, but a cheap fire extinguisher that malfunctions can have dire consequences!

Scott: That’s really incredible, but I can see it after having spent several months on the ground in Mongolia myself.

Sébastien: It is incredible. Look, one Chinese standard fire extinguisher will extinguish a fixed volume of fire. A CE Standard fire extinguisher, for the same quantity of powder and the same size, will extinguish 10 or 12 times more. So, there is the efficiency.

Scott: I have to imagine the foreign-owned enterprises get this?

Sébastien: Sure, the foreign companies understand this because the people are very well-educated in fire safety. They are usually American or European fire safety supervisors.

We create fire ratings for the fire extinguishers. What they look at is the composition of the product. It’s ammonium phosphate and bicarbonate sodium. What is the volume of fire that it can extinguish? They are looking at the apparatus safety.

Chinese sub-standard fire extinguishers contain a chemical substance that is forbidden almost everywhere in the world. If it’s over-pressurized it can and will explode. Therefore you risk injuring or killing people in the immediate area of the explosion.

The CE Standard fire extinguisher contains a safety valve that avoids over-pressurizing. So, these fire extinguishers are very safe and cannot explode, unlike the Chinese models.

But, you know what, it is difficult to explain that to people who are just looking for the best price. They just want something which “looks” like a fire extinguisher. This behaviour will change.

Scott: Going back to maintenance, give me a rough revenue breakdown of your business and how you expect that to change in the coming years.

Sébastien: You know, when I started the business, the “French 50” was not even a concept. It was the last thing people were thinking about when they planned the budget to build a building. Gradually, the equipment became important for the required insurance.
Now, I will say that the equipment is 95% of our income, and 5% is related to the service that we provide. That is fire inspection, maintenance and testing. We have placed a lot of equipment in Mongolia.

What I think is that even if a customer doesn’t sign a maintenance contract upon installation, one day they will understand the importance of it and add it on. This will take a little bit longer to explain to customers…that the fire extinguisher is of no use if it is not maintained.

My target is to get 50% of our income through the equipment and 50% from service. This is how the international companies’ revenues are structured. The profit is in the service because there is no inventory. This is where there is absolutely no competition in Mongolia.

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We’ll continue with more from Sebastien on Thursday!

*In full disclosure, as of the date of this post, none of the principals or employees of Capex Ltd. owned shares in Eurofeu Asia. However, Mark, Chris and those involved in CPAN WILL be buying shares in Eurofeu Asia, pre-IPO.

– Scott

“If the Almighty were to rebuild the world and asked me for advice, I would have English Channels round every country. And the atmosphere would be such that anything which attempted to fly would be set on fire.” – Winston Churchill