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A PROFITABILTY ANALYSIS OF AN AUTOCLAVED AERATED CONCRETE PLANT IN ONTARIO CANADA By
Ing. O.J. Bloemen
SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE
AT RIJKSUNIVERSITEIT GRONINGEN GRONINGEN, THE NETHERLANDS
FEBRUARY 2010
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RIJKSUNIVERSITEIT GRONINGEN FACULTY OF ECONOMICS AND BUSINESS
TECHNOLOGY MANAGEMENT The undersigned hereby certify that they have read and recommend to the Faculty of Graduate Studies for acceptance a thesis entitled "a profitability analysis of an autoclaved aerated concrete plant in Ontario Canada” by O.J. Bloemen in partial fulfillment of the requirements for the degree of Master of Science. Dated: February 2010 Supervisor: _____________________________________ Aircrete Europe Readers: _____________________________________ dr. ir. I ten Have _____________________________________ dr. G.C. Ruël
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Index
A
AAC plant Autoclaved aerated conrete plant · 11
AE · Zie Aircrete Europe BV Aircrete Europe BV
Manufacturer of AAC pants, located in oldenzaal the Netherlands · 11 Aluminum powder
grinded aluminum up to a particle size between · 13 autoclaving
baking in a steam pressurised oven · 10
B
ball mill steel drum filled with steel ball to grind sand or other products · 12
D
Durox system System where the green cake is cut flat when it comes out of the mold · 37
F
fly ash Fly ash is one of the residues generated in the combustion of coal · 10
L
LSS Light structural steel · 35
N
North America north american continent with the countries USA, Mexico and Canada · 21
S
sand slurry mixture of dried sand and water · 12
4
T
tilting cake system Production system where the green cake is tilted when it comes out of the mold and is placed on the cutting
machine · 37 tobermorite
hydrated calcium silicate mineral · 10
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List of tables Table 1 AAC plant manufacturers ................................................................................... 17 Table 2 three different plant sizes offered by AE ............................................................. 38 Table 3 Population of nearest largest cities (agency, canada's national statistic, 2008) ....... 40 Table 4 Required FTE for operational plant ..................................................................... 41 Table 5 overview starts of new houses ........................................................................... 43 Table 6 Plant and market capacity ................................................................................. 44 Table 7: Production cost per cubic meter AAC ................................................................. 45
List of figures Figure 1different AAC products ...................................................................................... 10 Figure 2 The three chemical reaction during AAC production ............................................ 10 Figure 3 Schematic view of an AAC plant ........................................................................ 12 Figure 4 Ball mill for grinding sand ................................................................................. 12 Figure 5 Low speed mixer ............................................................................................. 13 Figure 6 cured mould in factory ..................................................................................... 13 Figure 7 Full Traverser travelling to open autoclave ......................................................... 14 Figure 8: DOV-Model .................................................................................................... 19 Figure 9 System definition ............................................................................................. 20 Figure 10 Conceptual Model .......................................................................................... 23 Figure 11 Ulrich and Eppinger their process development model ....................................... 26 Figure 13: House constructed out .................................................................................. 34 Figure 12: Typical wood framed house ........................................................................... 34 Figure 14 Polystyrene fill blocks ..................................................................................... 34 Figure 15: 3D model of suggested plant ......................................................................... 37 Figure 16 Map south west Ontario (google maps) ........................................................... 39 Figure 17 labour overview ............................................................................................. 42
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Table of contents Index ............................................................................................................................ 3
List of tables .................................................................................................................. 5
List of figures ................................................................................................................. 5
Table of contents ........................................................................................................... 6
Summary ....................................................................................................................... 8
Chapter 1. The scope of the research ......................................................................... 10
1.1 Introduction AAC ............................................................................................. 10
1.2 Aircrete Europe - Core business ........................................................................ 11
1.3 What is an AAC plant ....................................................................................... 11
1.3.1 Section 1 Preparation of raw materials........................................................ 12
1.3.2 Section 2 Casting and curing of the mould .................................................. 13
1.3.3 Section 3 Cutting of the cake ..................................................................... 14
1.3.4 Section 4 Autoclaving ................................................................................ 14
1.3.5 Section 5 Packaging .................................................................................. 14
1.4 AAC Producers ................................................................................................ 15
1.5 Aircrete Europe direct competitors .................................................................... 16
1.5.1 Hess AAC Systems .................................................................................... 16
1.5.2 Wehrhahn GmbH ...................................................................................... 16
1.5.3 Masa-Henke ............................................................................................. 17
1.5.4 Hoetten ................................................................................................... 17
1.5.5 Changzhou Maoyuan Technology ............................................................... 17
Chapter 2. Theoretical framework .............................................................................. 18
2.1 Stakeholder analysis ........................................................................................ 18
2.2 Diagnosing the Problem ................................................................................... 19
2.3 Defining the system ......................................................................................... 20
2.4 Problem statement .......................................................................................... 21
2.5 Formulating the research Question: .................................................................. 22
2.6 Conceptual Model ............................................................................................ 23
2.6.1 Adoptability of the market ......................................................................... 23
2.6.2 Physical restriction .................................................................................... 24
2.6.3 Plant income ............................................................................................ 25
2.7 Theory ........................................................................................................... 25
2.7.1 Phase 1 “The concept development phase". ................................................ 27
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2.7.2 Phase 2 “System level design”. .................................................................. 27
2.7.3 Phase 3 is the detailed design phase. ......................................................... 27
2.7.4 Phase 4 and 5 .......................................................................................... 27
2.8 Conclusion ...................................................................................................... 28
Chapter 3. Adoptability of the market ......................................................................... 29
3.1 Building culture ............................................................................................... 29
3.2 Regulations ..................................................................................................... 29
3.2.1 Conclusion Pest analyses ........................................................................... 31
3.2.2 SWOT analysis ......................................................................................... 31
3.2.3 Conclusion SWOT ..................................................................................... 32
3.3 Substitute products ......................................................................................... 33
3.3.1 Mobile homes or prefab houses: ................................................................ 33
3.3.2 Non brick home ........................................................................................ 33
3.3.3 Brick Homes ............................................................................................. 34
3.3.4 Apartment buildings .................................................................................. 34
3.3.5 New markets ............................................................................................ 35
3.4 Conclusion Adoptability of the market ............................................................... 35
Chapter 4. Physical restrictions and plant income ......................................................... 37
4.1 Type of Plant .................................................................................................. 37
4.2 Availability and quality of raw materials ............................................................. 38
4.3 Location, climate and population ...................................................................... 39
4.4 Investment cost of a medium size plant ............................................................ 40
4.5 Operating cost of a medium size plant .............................................................. 41
4.6 Potential market size ....................................................................................... 43
4.7 Annual plant income ........................................................................................ 44
4.8 Conclusion Chapter 4 ....................................................................................... 46
Conclusion ................................................................................................................... 48
References................................................................................................................... 49
Appendix A Technical properties of raw materials ............................................................ 51
Appendix B Plant lay-out ............................................................................................... 54
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Summary Autoclaved Aerated Concrete (AAC) is a precast structural product made with all-natural raw materials. In 1914, the Swedes discovered a mixture of cement, lime, water and sand that expands when aluminum powder is added. AAC is a lightweight material that is easy to build with, has great thermal properties, and can be easily produced from locally available materials. Aircrete Europe (AE) is a company located in the eastern part of Holland in the city of Oldenzaal. AE, founded in 2003 by Willem van Boggelen, began primarily as a consultancy firm. Later, the company began to shift focus from consultancy to the manufacture and development of all AAC plant equipment. Today, AE offers a complete AAC solution anywhere in the world. An AAC plant has 5 main sections: preparation of raw materials, casting and curing of the moulds, cutting the green cake, autoclaving and packaging. AE offers their services worldwide and has been so successfully in Europe, Asia, Japan and the Middle East. AE has 3 direct competitors in Europe and one in China so they distinguish themselves by offering complete solutions for the customer. AE will deliver the finished plant in 14 months, as well as provide custom engineering, installation and commissioning. AAC products are successfully introduced in the European, Asian, Middle East and Japanese building market. For some reason AAC never conquered the Canadian market. AE has the strong feeling that the Canadian market could have a potential for AAC. That is why we asked ourselves the question if an AAC plant can be profitable in Ontario Canada. We choose for Ontario because the Canadian climate, economy and geographic properties looked promising for a business case. AE desires to expand its business and has determined that to accomplish this, the company must expand its market scope. To sell an AAC plant, an investor must be convinced of the in the profitability of this plant that the manufacturer is the most suitable to partner with. Our research revealed that there has been no serious attempt by an investor to establish an AAC plant in Ontario. The scope of the research is narrowed down to the development of a business case for the establishment of an AAC plant in Southern Ontario. To conduct this business case we use the literature of de Leeuw and Ulrich and Eppinger to structure the development process for AAC. Our view is that AAC is an 80 year old discovery not yet introduced to Ontario The main goal of the research is to determine the profitability of a new plant in Ontario. We explore how the market could adopt to the product, with economic figures and physical restriction; we conduct research to conclude if it would be possible for an investor to invest in an AAC plant in Canada in the future. In the first phase we identify the customer needs. We discovered that Canadian houses can be grouped into four categories; mobile homes, non-brick homes, brick homes and
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Apartment buildings. For the apartment buildings and brick homes, AAC panels would be the best product. For the non-brick homes, AAC Jumbo block would be the best alternative; there is not much use of for AAC in mobile homes. For the external market analysis, a PEST analysis was done. The main conclusion of the PEST analysis is that there is not a significant difference between the European market and the Canadian market, except the attitude towards the use of energy and natural resources. Canadians are used to an abundance of the energy at a low cost. Houses are typically not very durable as the focus is mainly on the development of cheap housing. For the internal analysis of the business proposal we did a SWOT analysis. In the SWOT analysis we found strengths weaknesses opportunities and threats. In the end, user perspective, the biggest opportunity, is the shift toward more durable and sustainable buildings. For AE, the main goal is to be the first company to sells a modern, successfully operating factory in Canada. The biggest threats are the power of the lumber and concrete industries that may try to prevent AAC products from penetrating the market. The biggest challenge is to convince the construction industry to use the product and to develop some new alternatives for the Canadian market such AAC board and AAC walls for road barriers. In the implementation phase, our focus was on finding a suitable location for a new AAC plant. We discovered a location with a population of approximately 15 million people in a 300 km radius. All the suitable raw materials would be within a close distance to the plant and there is sufficient labour available. We analyzed what the total investment cost would be for a medium sized plant, and the operating cost for such a plant. In the end, we give a theoretical net gross profit from sales and the cost price of a produced cubic meter of AAC.
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Chapter 1. The scope of the research
1.1 Introduction AAC
Builders in North America can now have the opportunity to use an innovative concrete material that Scandinavians have built their homes with for decades. Autoclaved Aerated Concrete (AAC) is a precast structural product made with all-natural raw materials. In 1914, the Swedes discovered a mixture of cement, lime, water and sand that expands by adding aluminium powder. It is a lightweight material that is easy to build with, has great thermal properties; and can be easily produced from locally available materials. AAC is commonly found as masonry block units or as larger planks that can be used as wall components, or as roof or floor components (Figure 1).
Figure 1different AAC products There is a high percentage of air that comprises the volume of AAC and the materials used to make it can even be made from recycled waste AAC material. Grinded sand, grinded recycled AAC, or fly ash can be used as aggregate in the mixture. Also, the energy that is required to produce AAC is much lower than other masonry products (Domingo, 2008). AAC is produced by the moulding and hydrothermal processing of various raw materials containing mainly quartz, Portland cement and lime, with traces of aluminium powder. In the mould process, the mix slurry generates hydrogen gas from the chemical reaction between fine aluminium powder and lime.
After the moulding process, the resulting green body is hardened by autoclaving under steam pressure, with the formation of tobermorite as the main binding phase. These processes result in lightweight products with low bulk density and special desert properties, such as lower thermal conductivity, lower shrinkage and higher heat resistance. In recent times, there has been a worldwide increase in the production and usage of autoclaved
CaO + H2O → Ca(OH)2 + 65.2 kJ/mol (energy created by chemical reaction of lime) 2 Al + 3Ca(OH)2 + 6H2O → 3CaOAl2O3∙6H2O +3H2↑ (reaction hydrogen) 6 SIO2 + 5 Ca(OH)2 →5 CaO∙6SiO2∙5H20 (crystal formation of lime silicate)
Figure 2 The three chemical reaction during AAC production
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aerated concrete in both hot and cold countries (Mostafa, 2005). Still, in some parts of the world, AAC has not yet been fully accepted and used as a building material.
1.2 Aircrete Europe - Core business
Aircrete Europe B.V. (AE) is located in Oldenzaal, the Netherlands and is manufacturer of AAC plants. Aircrete was founded in December 2003 by Willem van Boggelen, and together with an old colleague they began a firm which offered consultancy services for the AAC industry. Over a period of six years the firm grew to include almost 20 employees and shifted focus from consulting services to machine and equipment production for AAC plants. Today, along with plant production, AE offers technical consultancy, plant engineering and plant optimization services. The purchase of an Aircrete Europe BV (AE) plant can therefore include a full service from construction to production. Aircrete Europe BV can investigate whether there is sufficient and adequate raw materials readily available, estimate the output of a plant, provide on-site supervision of the mechanical work, commission the plant and educate the people who are actually going to operate the plant. In summary, AE is the developer and builder of all the equipment which is needed to build and operate an AAC plant. Any investor who wants to produce AAC products can partner with AE to develop a complete AAC solution.
1.3 What is an AAC plant
Regardless of the size or output type, AAC plants always have the same basic sections: Section 1, the preparation of raw materials; Section 2, the curing and casting of the moulds; Section 3, cutting of the cured cake; Section 4, the autoclaving process; and section 5, the packaging. In Figure 3, a schematic view of an AAC plant is illustrated. Typically, the output capacity, the type of output material, and the level of automation all determine the plant’s cost and configurations. Every market demands its own plant configuration and this makes every plant a customised project. AE offers complete production lines for panels, blocks and reinforced products. For these products AE offers the following lines:
• Durox Block Line • Durox Versa Line • Stema Line • New Eco-Block Line
The basic ingredients of an AAC plant are: Portland cement, Gypsum, Limestone, high silica sand, aluminium and water. The required properties and quantities of these ingredients are described in appendix A.
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1.3.1 Section 1 Preparation of raw materials Before mixing the four main ingredients (sand, Portland cement, lime and aluminum powder), the sand must be ground otherwise it is useless in the slurry mixture. For the production of AAC, sand is ground in a ball mill (see Figure 4). A ball mill is a large drum filled with steel balls. The wall of the drum is cladded with special plates that also have paddles to transport the ball upwards. The whole drum rotates on a low rpm. During rotation, the steel balls are moved up in the drum and when they reach the top, they fall down and crush the sand. In the past this process sometimes occurred in a dry environment. In a dry process, the sand has to be dried before it can enter the system. Because of energy costs and quality problems, most systems today run it wet. This is accomplished by filling the ball mill halfway with water. When the sand is fine enough, it flows out of the ball mill and is pumped as a sand slurry mixture into large storage tanks with agitators which prevent the sand from settle on the bottom of the tank.
Figure 4 Ball mill for grinding sand
Figure 3 Schematic view of an AAC plant
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1.3.2 Section 2 Casting and curing of the mould In the mixing tower, cement, lime, sand, water and return slurry is dosed into the mixer. Cement and lime are stored in bulk silos on top of the mixer; an auger will dose these materials into the mixer. Sand and return slurry are stored in slurry tanks which are pumped into the mixer see Figure 5. All ingredients are dosed by weighing the material. The mixer will hold enough slurry to fill a mould. When all ingredients are ready and the mould is under the mixer and ready for casting, the aluminum powder will be added into the mix. Aluminum powder is brought in and comes in drums of 60 kg each. [Owing to its fine consistency, aluminum powder is highly reactive, and as such a high risk, or hazardous material in the process. The powder must be handled with care because should it catch fire, it is almost impossible to extinguish. The only possibility would be to remove the oxygen in the reaction by covering the burning aluminum with sand. If the powder gets into the air as a dust cloud, it becomes an explosion hazard.] The aluminum powder is mixed with water in a special machine located in a well ventilated, explosion proof room. For every casting, a batch with aluminum is made. When the aluminum batch is ready it is pumped into the mixer and mixed with the almost ready slurry. The mixer is ventilated on the outside of the building to remove the hydrogen gas that is emitted by the reacting aluminum. Figure 6 shows a filled mould standing on a roller track. This is an AE standard mould which can fold open on four sides. The mould travels automatically through the factory on roller tracks. The mixed slurry from the mixer is dumped into the mould. To prevent sticking on the sides of the mould the mould is oiled before it is filled with slurry. When the mould is filled with slurry it travels to the curing area. In the curing area the slurry rises into a cake as you can see in the picture. With the right mixture and right conditions the cake that comes out of the mould after 4 hours of rising has a size of 6000mm x 1500mm and 625mm high. This means that every cake contains 5-5/8m2 of green AAC material.
Figure 5 Low speed mixer
Figure 6 cured mould in factory
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1.3.3 Section 3 Cutting of the cake When the cake has risen and is stiff enough, the material can then be cut. A special Tilt or Grab crane, which allows transport of the partly hardened block, is used to place the green cake on the cutting line. The cutting area is the crucial stage of an AAC production system. There are essentially two systems used to produce AAC: the Tilt Cake and Flat Cake system. Additionally, a Combi system can be used that combines certain elements of the other two systems. It is important to make the right system choice in order to produce finished products appropriate to specific market needs. With special pre-stressed wires, and special knives the semi-plastic block is cut longitudinally, horizontally, and cross-wise. Also, profiling and handgrips can be machined at this stage for easier handling and transportation.
1.3.4 Section 4 Autoclaving When the cake is cut to the right size, the green products go into the autoclave. In the autoclave, the products are baked for 12 hours under a steam pressure of 12 bars and a temperature of 200oC. During autoclaving the chemical reaction described in 1.1 will create the tobermorite and will give the product its final strength
1.3.5 Section 5 Packaging When the products come out of the autoclave they have to be de-stacked and separated from each other. This is done automatically with the de-stacking crane. After the products are separated and de-stacked, they have to be tied up and wrapped in plastic. Usually it is at the preference of the customer if these handlings are done automatically or manually.
Figure 7 Full Traverser travelling to open autoclave
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1.4 AAC Producers
Aircrete Europe is a manufacturer of AAC plants and not a producer of AAC products. This is important to keep in mind because the dividing line can sometimes be a bit vague. In Europe, the biggest producers of AAC are mainly Xella, H+H and Tarmac. H+H is a customer of AE and buys its machinery from AE. Xella has historically developed and built a lot of its own machinery. There are also private investors or big construction companies who purchase plants from manufacturers such as AE or its competitors. AE competitors are discussed in 1.5. In the Middle East and South America AAC projects are usually funded by their governments. The total number of plants in operation around the world is estimated at 400 to 450. Around 100 of these plants are located in the Balkans and produce low quality products. These plants are very low tech with most of the operation done manually. The most sophisticated plants can be found in Europe where Xella, H+H dominate the market. Xella has about 7,600 employees in more than 30 countries including China and the USA. In fiscal 2008, XELLA generated sales of € 1.3 billion. Approximately 995 million of this revenue is generated by AAC products. 70% of the Xella group’s total external sales were achieved outside Germany. Eastern Europe, where the company has significantly expanded its operations since 2007, accounted for 32% of the total, Western Europe (including Germany) for 66%, and China and America for 2% (Xella-group, 2009). The H+H Group generated in 2008 revenues of DKK 1,439 million (193 million euro) and had an average of 1,282 employees. The pre-tax profit in 2008 was DKK 1.4 million. H+H group focuses solely on the manufacturing of AAC products and operates in the following market (H+H, 2009): UK, Germany, Denmark, Belgium and the Netherlands, Poland, Czech Republic, Russia, Ukraine, the Baltic States and Slovakia, Finland, Sweden and Norway The AAC market struggled in the last years as the construction industry in general was affected by an economic downturn that enhanced the competition between manufacturers of different building materials. Currently in Western Europe, the AAC market is showing signs of growth and is generally considered a block market. The Eastern and southern parts of Europe are primarily block markets that are showing signs of significant growth with millions of m3 consumed annually. The Russian and Polish marked show the strongest growth; however these markets remain dominated by blocks produced to their own standards and levels of quality. In the Middle East, AAC is well known and accepted as a first class building material and the market share in that region continues to grow. The use of AAC in Asia is remarkably innovative and the Asian markets are growing rapidly within the AAC industry. Specifically, Japan is one of the Asian countries where AAC has emerged as a high quality, flexible building material. The application and building systems for AAC in Japan differ greatly from those in Western Europe, especially the use of AAC systems for seismic building technology. Thin reinforced panels used as cladding for high rise construction are earthquake resistant. North America remains a developing market as AAC products have a very limited market share in the building industry. For several reasons, the marketing of AAC as an alternative building material and the achievement of technological improvements is slow to
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succeed. In the US the standard hollow concrete block is the biggest competitor of AAC. In Canada the biggest competitor is a wood framed building (Boggelen, 2005).
1.5 Aircrete Europe bv direct competitors
Aircrete Europe is a manufacturer of AAC plants and is not the only company in this market. Direct competition comes mainly from Western-European companies. Aircrete Europe’s most significant competitors include Hess AAC systems, Wehrhahn GmbH and Masa-Henke. These are further described in the following subsections. Apart from the three main competitors mentioned above, there are other small competitors operating in the market. Their focus however lies with small, low capacity AAC plants for the creation of low cost products and therefore are not considered a direct threat to Aircrete Europe. In the last 3 years Aircrete Europe has built two factories, one in Khakovka (Ukraine) and the other in Wittenborn, Germany. The Wittenborn factory is owned by H+H and has a Durox production line. Wittenborn can produce blocks and reinforced panels. The factory in Kakovka began production in June 2009 and produces high quality blocks on a Durox production line. The factory is owned by a private investor who produces for the local market. When the factory opened it had the largest production capacity of any AAC factory in the world. Aircrete Europe wants to expand its capacity and wants to double or triple its sales in the next five years. Instead of one, the company is aiming to sell two factories per year. Looking at the direct competitors of Aircrete Europe we see that Aircrete Europe is one of the smaller players in their business. Table 1 shows a list of competitors that also deliver AAC machinery, as well as the total number of factories sold by these competitors in the last 2 years.
1.5.1 Hess AAC Systems The Hess group is a German company that has a long history in the traditional concrete business. Their activities within the AAC business started in 2006 when they took over Stork Bouwtechniek, a division of Stork specialized in AAC systems that was divested by Stork due to disappointing sales in that year. Hess AAC Systems has, as far as is known at the moment, no in-house production facilities and has around 30 employees working in their office in Enschede, The Netherlands.
1.5.2 Wehrhahn GmbH Wehrhahn Industrieanlagen GmbH is a German company that builds machines and systems for the building materials industry. They became active in the AAC business in the early 1990's and were the first party that independently sold AAC equipment on the market. They have since then sold many plants worldwide and claim to have the most experience in the business.
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1.5.3 Masa-Henke Masa-Henke Maschinenfabrik GmbH is a German machine factory that has only recently focused on the production and sales of AAC systems. Before they became part of the Masa Group (a Group with long time experience in traditional concrete), the Henke machine factory's core business was the creation of presses for the creation of concrete blocks. It was only after the takeover by Masa AG and its subsequent takeover of the Dorstener Maschinenfabrik, specialized in sand-lime brick presses and AAC equipment, that AAC systems were shifted to Masa-Henke and became one of their core businesses. Masa-Henke has, unlike Aircrete Europe, Wehrhahn and Hess AAC, extensive in-house production facilities and employs around 250 people in their office and machine shop in Porta Westfalica. Name of manufacturer Total factories sold in the last two Year
Changzhou Maoyuan Technology 36 Werhahn 11 Masa Henke 5 Hoetten 2 Aircrete Europe BV 2 Hess AAC systems 4 Table 1 AAC plant manufacturers
1.5.4 Hoetten Hoetten is a German manufacturing company which is specialised in the production of machinery for the building material market. They sell about the same number of factories as AE Europe but they focus specifically on the supply of machinery and do not have the knowhow for the commissioning phase. Hoetten has its own production facility for the fabrication of parts and assembly of machinery.
1.5.5 Changzhou Maoyuan Technology Changzhou Maoyuan Technology is a Chinese owned company which so far only operates in the Asian market. Although they attempt to sell their products worldwide, their technology is far behind that offered by European manufacturers. The Chinese mainly build small, manually operated plants which delivers a poor quality AAC block. They do not have automatic cutting lines which can produce reinforced panels with high accuracy. Because Changzhou Maoyuan Technology only operates in the Chinese market uses inferior technology to that used by the European manufactures mentioned above, AE does not view it as a direct competitor, but it is worth it to keep them in mind because they can gain power and knowledge in the future and become a threat.
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Chapter 2. Theoretical framework Aircrete Europe BV wants to expand its business and believes that the North American market has great potential for AAC products. The company has asked me as a student of Technology Management at the Rijksuniversiteit Groningen to conduct an attainability research for AAC in North America. As described in chapter 1, we have already discovered that AAC is not a new product to North America, and that Aircrete Europe has been active in the USA having provided some consultancy services there in the past. In this period, Aircrete Europe discovered that most of the existing AAC plants in the USA were very small and low tech. Companies such as these, tend to produce low quality products that do not have the right tolerances and consistency normally is expected from a proper AAC product. Aircrete also discovered that there was big competition from locally produced building materials, mainly concrete, ceramic bricks and lumber. These industries have great power and would give newcomers such AAC a lot of resistance to enter the market. Nevertheless, Aircrete Europe believes, because of new technologies and rising energy prices, it will be possible to find investors who want to build a plant in this market.
2.1 Stakeholder analysis
Within this research, the following stakeholders can be identified:
- Aircrete Europe - (Potential) investors - AAC end users (contractors, builders) - Rijksuniversiteit Groningen (RuG)
Aircrete Europe is a machine supplier for the AAC industry. In a market where environmental issues are hot topics, the company senses a need for sustainable building materials. AAC has excellent environmentally friendly properties, and is used in many countries worldwide for this reason. Nevertheless it has never conquered the US and Canadian markets. Aircrete Europe’s interest is to enter the Northern American market and sell as many AAC plants as possible. In order to sell a plant, it is important to know what the market needs and wants. This research will provide information about the Canadian market and will provide advice to Aircrete Europe about market potentials and possibilities for the establishment of an AAC plant in Canada. The value for the investor lies in the fact that Aircrete Europe can offer a complete plant to produce all varieties of AAC with an attractive return on investment if the market accepts the product. Large contractors need to be aware of the potential of AAC. They need to be aware of the benefits of the product and be willing to use it in their Construction activities. This research adds value to them by providing in-depth information about AAC’s potential, use and benefits. The University of Groningen is also an important stakeholder because this thesis will contribute to the knowledge base of the Technology Management department
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2.2 Diagnosing the Problem
This research will be based on the DOV-model (Figure 8: DOV-Model) of (De Leeuw, 2002) which stands for Diagnosis (Diagnose), Design (Ontwerp) and Change (Verandering). This model is a generally accepted research methodological framework. It starts with the perception of a problem situation which is then analyzed and results in a problem statement. The next step is to design a solution for this problem situation. Finally, the solution must be implemented in order to change the system. Change refers to changing the system which will then result in an improved situation.
DesignDiagnosis Change
Problem Situation Problem Solution
Improved Situation
Figure 8: DOV-Model
The first phase within this research is the problem diagnosis. This starts with a description of the business context of Aircrete Europe. In chapter 1.2 we described the core business of Aircrete Europe. Over the next five years Aircrete Europe wants to expand and triple its sales and production. Aircrete aims to sell three factories a year. The company’s core business is to sell Autoclaved Aerated Concrete plants, which is a typical niche market. Aircrete also aims to develop machinery for other fresh concrete products but, for the moment, their expertise is in the AAC business. Within the AAC niche, Aircrete Europe wants to provide the best products, the best services and the best project supervision when compared to its competitors. That is, Aircrete Europe follows a Product leadership strategy. Typical of this strategy is the focus on development and technological innovations (Leeflang, 2003). Customers will accept a higher price for the products because of the advantages that Aircrete Europe offers over competitors. This is the typical strategy in a niche market. Using the DOV model, the first step is to define the ‘complaint’ of the company under study. Aircrete Europe’s basic complaint is that its market share is not big enough to accomplish the company’s goals. Aircrete Europe has noticed that North America has a large potential for AAC, but despite AAC’s benefits, the product has not been widely adopted there. The next step is to question whether this complaint is instrumental or functional. In the DOV model only functional complaints are useful for the study since instrumental complaints are complaints about the system itself and do not attribute to the output of the system. Whether the complaint is functional or instrumental depends on how we define Aircrete Europe’s system. If the complaint affects the output of the system that we define in this research, it can be classified as a functional complaint. If this is the case, the question that must then be asked is why the complaint affects the system (organisation) and why it is bad.
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2.3 Defining the system
It is tempting to see the organisation of Aircrete Europe as the whole system of the problem but we do not believe that this is the right definition of the system. To build an AAC plant, the first requirement is a machine manufacturer (a company like Aircrete Europe), next, an investor or party who will pay for the factory and exploit if it is needed. Finally, an area of distribution (e.g. builders, architects, hardware stores) is required. In this study we view Aircrete Europe and the buyer of the factory as one system. This is because there will not be a chance to succeed if the two parties do not cooperate closely. To sell a factory, Aircrete Europe has to conduct much research on the technical aspects of the final product and the plant. A significant part of this research could be done by the exploiter of the plant, but because most investors do not have the required technological knowledge, it has to be done by the manufacturer of the plant, in this case Aircrete Europe.
Total research scope
The two stakeholders who define the system
Aircrete Europe BV
Investor / potential
buyerAAC user
Figure 9 System definition To sell an AAC plant it is important to provide as much knowledge to the investor as needed in order to convince them that they are engaging in a profitable project. Because of the intense relationship between the plant manufacturer and the exploiter, and the overlapping specialism, we see them as one system. This means that the system has two important stakeholders; the manufacturer of the plant (Aircrete Europe) and the potential buyer of the plant which is not known till the plant is sold, but for the purposes of this study, we will use a fictitious investor. The needs of the end user are too important to exclude from the research. The actual end users of AAC are the plants owner’s customers. These are the actual buyers of the AAC products that the plant will produce. These buyers can play two different roles. First their needs are important for the plant owner because he wants to produce product that will satisfy the needs of the customer. AE knows how the product can be used and how it can satisfy the needs of the customer. With this knowledge AE tries to convince the investor that an AAC plant is a successful investment. Sometimes though, AE is approached by an AAC user itself. In this case, AE must convince the user that AAC is the right product for them. If this is the case, the user then has to find an investor for plant. Once an interested investor is discovered, AE has to develop a relationship with investor. In either of the two cases, the
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relationship between the investor and AE is critical and plays an important role determining if a project will be started are not. That is why together, AE and the investor are viewed as one system. For a plant to be profitable there must be customers to buy the AAC product. AE will use customer needs to strengthen the advice they give to the investor and this is why the customer is still included the research scope but not in the defined system.
2.4 Problem statement
If we consider the complaint of AE then we see that this complaint is not suitable as a research question. We have to modify the complaint in a way that can be used in our research question. We already identified the system boundaries and made clear that their problem (they do not sell enough factories each year) is a functional problem (it affects the efficiency of the organisation and does not create enough revenue) and is suitable for this study. The complaint of AE can be seen in a very broad sense must be narrowed down. Increasing sales for a machinery manufacturer can be accomplished in many ways and that is why, in order to conduct an effective study, it must be narrowed down. To increase sales one can think of building different machines for different applications or lowering the standards to reduce production standards. These do not fit into AE’s strategy as they strive to be the best in the AAC machinery building niche. AE has a strong interest in a market share in North America because of the huge potential market size (330 million people) that all need a house to live in. AE’s direct competitors are not active in the Canadian market yet and there is no AAC plant built in Canada so far. Before formulating the main research question we did some research on North America. We discovered that the USA, Canada and Mexico is too big of a region is to investigate in one thesis. To properly consider this as one region would require the study of three different cultures, three different climates and a wide spread area that is geographically altering. Instead, we made some choices. First, we looked at the current producers of AAC in North America. We discovered that Xella currently has two factories in the USA, one in Texas and one in Georgia. They also have one factory in the north of Mexico. Aercon has one factory in Florida (aacpa, 2006). There are a total of 3 factories in the United States and one in Mexico. This makes a total of 4 AAC plants in the Northern American region. All these plants are low tech, small size, old, and cannot produce reinforced panels. If we compare this to the number of plants in the British market then we see that they have approximately 30 AAC plants which serve about 70 million people. Successful factories on the European continent serve around 5 million people in a 300 km radius. To be effective, we have to find an area with 5 million people in a 300km radius, with no competitors and with the characteristics to make the plans for a plant attainable. Because there are already factories in the USA and Mexico, AE Europe wants to explore the opportunity for a factory in Canada. Canada has a total of 30 million inhabitants but most of the inhabitants live in a relatively small area (Ontario). AAC could be suitable for the Canadian market because of the insulating properties and because the right raw materials are readily available. Almost one third of Canadians call Ontario home. This makes Ontario with a little over 10 million people the densest populated province in Canada. Most of the people live in the Toronto area. Other big cities are London, Montreal, Windsor and Ottawa and just over the
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US border we find another two large cities, Detroit and Buffalo (USA). If AAC plant is built in the Toronto area, approximately 15 million people can be reached in a 300 km radius, including the two American cities. Generally 5 million are enough for an AAC plant, and only the Toronto area is big enough for this. Canada’s climate can be compared to the climate of Sweden where AAC was originally invented and became a big success. The most important difference between Sweden and Canada is the focus on the use of energy. The Swedish really focus on a durable, home while the Canadians typically are not concerned with energy consumption. With current energy prices and increasing global awareness of climate change this Canadian attitude could change and this would open the door for AAC acceptance.
2.5 Formulating the research Question:
Because of the reasons mentioned above, AE is convinced that there is sufficient opportunity to build an AAC plant in Ontario, Canada so this research will only focus on the attainability of this goal. The theory and research approach can of course be used for other cases. AE wants to enter a new market and has to explore if it would be profitable to build an AAC plant in Ontario. The goal of the research is to come up with a strategy that could be used to convince an investor to buy an AAC plant. This study should make clear how a plant has to be built, what kind of plant is needed; define the size of the plant and how to compete against the current construction market. In other words it is an attainability study for AAC in Ontario, Canada. The research question is therefore:
The research of this project actually focuses on the attainability of an AAC plant. The aim of the research is to create insight for a potential investor on which factors play an important role in setting up a plant. The research question can be answered with yes or no but these answers are not valuable or useful in providing insight to potential investors or for research purposes. In the end, the answer to the research question will be substantiated with proof from the business case. From a technological standpoint, production of various AAC products has been possible for many years. A distinction is typically made between invention, an idea made manifest, and innovation, ideas applied successfully (Mckeown, 2008). Rogers defines innovativeness as “the degree to which an individual or other unit of adoption is relatively earlier in adopting new ideas than other members of the social system” (Rogers, 1995). We see AAC products as an invention which can be innovated in Canada. Determining the ideal marketing strategy for the products will be for the future investor in the plant. The investor also has to decide how he wants to sell and advertise his products. If the investor succeeds in successfully introducing the product to the Canadian market (which will probably take some time), we can say that he has successfully innovated AAC. This would have a positive effect on AE because a successful implementation of AAC products it will create additional demand for more plants. The challenge to make AAC profitable in Canada does not lie on the technological front but more on the implementation front. This can be compared with the invention of the light Bulb. Historians Robert Friedel and Paul Israel (Israel, 1987)[ list 22 inventors of incandescent lamps (light bulb) prior to Joseph Wilson Swan and Thomas
Can an Autoclaved Aerated Concrete plant in Ontario, Canada be profitable?
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Edison. It was Thomas Alva Edison though who realised that the light bulb had no chance of success if there was no electrical grid and power plant so he built power plants and an electrical power supply network to make the light bulb useful. Only then did the light bulb become a great success. For AAC it can be said that the invention was done by Axal Eriksson in the 1920s but never innovated in Canada
2.6 Conceptual Model
To structure the research approach a conceptual model with three layers is created with profitability on the top layer. Now the term “profitability” must be defined. For AE, the project is attainable when they successfully sell a plant and can use it as a reference project for future clients, but it is also to their advantage that the plant makes a profit and stays open for many years in order to test and perfect new techniques that will create extra demand in the construction material market and indirect extra demand for new plants or machinery. We define profitability as the successful implementation of an AAC plant with all the restrictions considered. In the second level there is “adoptability of the market”, “physical restrictions” and “plant income”. An increase in each of these categories will lead to an increase of profitability. At the second level of the model, the reasons which led to more or less “adoptability of the market”, “physical restrictions” and “plant income” are found. In the following paragraphs, questions for each category of the second level are formulated.
Porfitabilty of AAC plant
Adoptibility of the market Physical restriction Plant income
Quality of raw materials
Availabity of raw materials
Population distribution
Power of Competing industries
regulations
culture Market value
Market share
Market size
Top level
First level
Second level
Climate conditionsSubstitute products
Operating cost
Investment costFault lines
2.6.1 Adoptability of the market The introduction of a new product involves considerable risk. It is estimated that up to one third of the new products fail at the launch stage (Cooper RG, 1987). Adoptability of the market is the section that actually does not fit into the system as described in Section 2.3, but our opinion is that the user can not be totally left out. When an investor wants to build a
Figure 10 Conceptual Model
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plant he has to consider how to convince people to buy his products. Thus far, the Canadians do not use AAC and are instead familiar with other building materials that have a strong market position. If customers do not buy the plant’s finished product, the project will fail. AE considers the following as reasons why AAC is not used in Canada yet. These ideas can also be used by the investor to create a marketing strategy.
1. There is a different construction culture, builders are usually very rigid and stick to their ways of building. In addition, people have a certain attachment to their homes and prefer the use of materials that they are more comfortable with. Architects design buildings and they usually decide what material is used. Also architects do not readily change to new materials. It is important to understand cultural differences in order to meet the needs of the end user.
2. Building regulation. Most buildings have to be engineered and approved according to government building regulations. These regulations have to approve the use of AAC otherwise it cannot be used in commercial buildings.
3. The main products for construction in Canada are lumber and concrete. These two industries have great power, actively lobby and will try to prevent AAC entering their market.
For the adoptability of the marked we formulated the following sub questions:
2.6.2 Physical restriction In Chapter 1 we described the raw materials needed for a concrete plant. First the raw materials have to be available in the area of the plant, without them it is impossible to produce any AAC. The right quality of these materials are needed, for instance, the sand must have a high silica content otherwise it is useless to the process. A fully operational AAC plant uses a great tonnage of these materials, and to be efficient it is helpful that these raw materials are available in close proximity to the plant. Before building an AAC plant it is important to look at the input cost of the plant, this includes the raw material cost, labour cost and energy cost. If this is too high then AAC cannot compete against concrete or brick products. There are other physical restrictions, e.g. the distribution of people in the planned plant area. If the people are spread across too big of an area then the transport cost of the AAC finished product will be too high and the potential market for the product too small. Also the climate plays an important role. In the case of climate, the questions that must be asked are if insulated homes are important and if do, are materials for substitute products nearby. For example, people living in remote areas like forests will typically use trees to build their houses. Other restrictions can be earthquake danger. If the plant is built near a fault line then materials have to meet certain requirements to be earthquake resistant. This is a different type of product then products for non earthquake areas.
How can the building culture be changed so that AAC will be adopted? Do the building regulations allow the use of AAC products? Which substitute products will AAC compete with? How can AAC gain market share from bricks and lumber?
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For physical restrictions we formulated the following sub questions:
2.6.3 Plant income Before investors or banks commit to investments they want to know how quickly they will realize a return on their investment and the expected profit. Therefore for this research, an estimate on the total market size and on the value of this market must be determined. The research will also reveal what the total investment cost will be and what the cost will be if the plant is operational. Also operating cost and scalability play an important role in realizing a profit. This will be investigated and the following sub questions will be answered:
Each of the three subsections described above will be analysed in the following 2 chapters. Before analyzing these factors, tools to conduct the analysis must be determined. For the purpose of this study, we will use the theory of Ulrich and Eppinger, a SWOT analysis and PEST analysis to analyse our problems. The theory relating to these tools is described in the following paragraph and the results of the research can be found in the following chapters.
2.7 Theory
We already mentioned that AAC was invented in 1929 and has become an innovation in Europe, the Middle East, Asia and Japan but it is not yet innovated in Canada. The research question is whether or not an AAC plant in Canada can be profitable. To determine this, we must find a way to make the plant attainable. The answer will not be found by analysing the plant itself or by optimizing the production because this technique has already optimised for 80 years and only bring incremental improvements can be realized. For a profitable plant a successful innovation process plan must be developed for this specific problem. In this study, we propose an innovation strategy (meant to serve as advice for the future investor) with a business model. If an investor wants to successfully implement a plant he should monitor and control the innovation process systematically. Systematic innovation begins with the analysis of the sources of new opportunities. There are, of course, innovations that are born out of flashes of genius but that those not our focus. Most innovations, however, especially the successful ones, result from a conscious, purposeful search for innovation opportunities,
What is the market value? How big will the market be? What must be the market share? What are the operating costs of a plant? What will be the investment costs?
How are the people distributed over the area? Are the needed raw materials available in the area? Do the raw materials meet the quality requirements? Does the climate create a need for well insulated buildings? Are there any major fault lines?
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which are found in only a few situations. According to (Drucker, 2003) four such areas of opportunity exist within a company or industry:
• unexpected occurrences • incongruities • process needs • industry and market changes
Three additional sources of opportunity exist outside a company in its social and intellectual environment:
• demographic changes • changes in perception • new knowledge
True, these sources overlap, different as they may be in the nature of their risk, difficulty, and complexity, and the potential for innovation may well lie in more than one area at a time. But together, they account for the great majority of all innovation opportunities. Ulrich and Eppinger developed a generic product development process which consists of six phases, as illustrated in Figure 11. This model is an improved model on the development funnel of Wheelwright and Clark. Wheelwright and Clark describe in their model product development for the first time as a process. In their model they begin with a wide range of ideas which are funneled and filtered to final projects (Clark, 1992). Ulrich and Eppinger used the model of wheelwright and Clark and optimized it. With their model they wanted to eliminate innovations problems such as blurry innovation strategy, insufficient cohesion between innovation strategy and innovation projects and not enough focus. The basic mistake in innovation management seems to be a lack of control and no clear strategy. In this study we are going to use the model of Ulrich and Eppinger, from phase one till phase 3, to structure the research and to use as guidance to structure the innovation process.
Figure 11 Ulrich and Eppinger their process development model The model of Ulrich and Eppinger consists of of six phases which are followed in a chronological way. In phase zero you determine the corporate strategy and include assessments of technology developments and market objectives. We discussed these things in chapter 1 and 2. We try to keep the standard technology and choose a type of plant that is flexible enough to produce a wide variety of products. In case there is a special request out of the market, AE can adapt the technology to these market needs.
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2.7.1 Phase 1 “The concept development phase". In this phase the concept of the final product is made by identifying the needs of the target market. We have identified the lead users on the basis of AE experience and have interviewed them. The information from the interviews is used to develop a concept product which has the attributes that the users preferred. For concept testing we provided them with samples and information on the product. We will look at construction sites and determine what types of materials are used and what the work methods are.
2.7.2 Phase 2 “System level design”. We already identified the customer needs and know the type of products to start with. Next we must conduct a strategic analysis for the business case. Once the type of product you want to sell is known, the next step is to determine whether or not production of the product is possible. To accomplish this, an analysis of the external environments within which the enterprise operates must be conducted. This assessment process is sometimes called the scanning of the external environment (Morden, 200). The process of analyzing the external environment can be done with using a PEST analysis. The acronym PEST stands for “Political, Economical, Social, and Technological”, and are factors within the external environment. The PEST analysis is a useful tool for understanding market growth or decline, and as such the position, potential and direction for a business. We explored the Canadian market used the PEST analysis as a tool and the outcomes of this PEST analysis were used as headings for a SWOT analyses. The SWOT analysis is an extremely useful tool for understanding and decision-making for all sorts of situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats (Schilling, 2005). The Pest analysis is used to analyze the market while with the SWOT analysis is used to analyze the business proposition.
2.7.3 Phase 3 is the detailed design phase. In this phase the proposition of the business will be described on a detailed level. This means that we give information about the location, the scale and the cost of the project. We also give information about raw materials, operation cost and labor. The strategic decisions are made on the basis of the Strategic analyses described in phase 2. The investment cost and operating cost are based on quotations, interviews and on information from data provided by plants operating in Europe. In this phase we will point out a suitable location for a plant and determine the physical restrictions of the plant.
2.7.4 Phase 4 and 5 Phase 4 and 5 of the model are beyond the scope of this research paper. These phases are testing, refinement and production ramp-up. These phases can only be done when a plant is finished and in production and this will not be studied in this paper. It would be advisable to keep these phases in mind when the project is mature enough.
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2.8 Conclusion
The research will focus on the attainability of an AAC plant in North America, preferably in Ontario, Canada. The research will begin with the identification of the building materials that are now being used in construction. Then these materials will be compared with AAC products and the most suitable product will be identified. This part of the research can be viewed as advice to the potential investor to provide information about the market he intends to serve. In the end, this does not affect the relationship between Aircrete Europe and the future investor. When the product type is chosen a location will be selected for a possible plant location. Once the location is decided, a business model for such a plant is created. The business model will be used to calculate the cost for the output of the factory. The costs being determined here are, the cost of the factory, cost of land, cost of raw input materials, cost of labour, and distribution cost of the finished product. Finally, the AAC products will be compared with the existing building materials and a strategy will be formulated to determine how AAC can be introduced so it will be successfully adopted by the market.
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Chapter 3. Adoptability of the market AAC products have been used around the world for nearly 8 decades and successfully used by builders in Europe the Middle East and Asia. The potential for North America is great and yet the continent has been slow to use the product to build their houses. AAC was invented in Sweden, and the Swedish were very successfully using the product to build an ecologically sustainable and energy efficient house. If you compare the conditions in Sweden to the conditions in Canada you will discover many of similarities. In this chapter we consider why the Swedish build with AAC while the Canadians still prefer their wooden houses. We defined the research system as AE and an investor, but before AE can properly inform the investor the demand must be clearly understood. This chapter is used to determine the adoptability of the market section of the conceptual model.
3.1 Building culture
The construction material market is a global market with an enormous size. Worldwide various kinds of building materials are used such as ceramic products, precast concrete, pouring concrete, lumber and sand lime bricks or blocks. Price and availability are the major determining factors as to which product(s) will dominate the market. The users of the building materials are the contractors and the do-it-yourself home improvers who buy most of their supplies in the local hardware store. The contractors usually build residential and commercial buildings. Residential buildings are houses for the private homeowner and commercial buildings include; hotels, factory buildings, office buildings, government buildings and any building for community use. Most of the commercial buildings are designed by architects. Architects decide what kind of material is used for the building. Most countries in the world also have building regulations which outline what materials can be used where. If architects are familiar with AAC and AAC is approved by the regulations then the market potential is high.
3.2 Regulations
Most countries in the world have all kinds of regulations and habits which are difficult to change; Canada is no exception. To investigate the market for AAC uses we conducted a PEST analysis. PEST stands for Political, Economical, Social and Technology and is used for an external analysis of the market. In conducting the PEST analysis we brainstormed with the employees of AE and interviewed Canadian contractors. Political Canada has a parliamentary government with strong democratic traditions. Canada is a western European country which is politically stable and it has an open border for world trade. Recent politics has adopted a more eco-friendly approach with subsidising of extra insulating in homes, ground heated furnaces, double glass windows etc. These subsidises are given to the end user, this is the person who actually pays for the construction of his or her house.
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The current building regulations are described in the National building Code of Canada and was issued in 2005. AAC is recognised in the building code as a construction material and therefore for permitted for use. The code does not recommend AAC for any particular use or oblige any use of AAC yet. As an example, considering some international regulations, the use of AAC in elevator shafts is required in Europe and Japan because of the fire resistant properties of the material. This is not the case in Canada. The building code is rewritten every 10 years and it also gets minor updates every year. Exporting and importing building materials to the USA or Europe does not incur extra taxes or border fees. Canada has a high pollution building industry but they defend these actions by dividing their carbon emission over the total area of the country, and this is large given that Canada is the second largest country in world, after Russia. However, politics are changing and as Canada attempts to become “greener. Economical Canada has a strong and stable economy as is evidenced by the country’s economic performance in the last economic crisis. Not a single bank in Canada fell during the last crisis and Canada was the first country officially out of the recession. For AE this means that doing business with Canadian customers would not be too difficult. Canada is an exporting country, with exports mainly to the USA. A lot of large US manufacturers of cars and trucks like GM, Honda, Ford and Toyota have plants in Ontario. In addition, 3M, Atlas Copco, Lafarge, and Dupont have been attracted to Canada because of the highly educated population with lower labor costs than the United States. Manufacturers such as Magna, Linama and Bombardier are the cornerstones of Canada with their own manufacturing capabilities. Canada does not have a high tax rate. Taxes on products are divided in provincial taxes 7% and federal taxes 6%. Large incorporations have to pay a large incorporation tax each year. If your ownership in large incorporation is greater than 5 million, you would pay around 25000 dollars incorporation taxes each year. Each year property taxes on your property must be paid. The rate of property tax depends on the use of the property; it is higher for commercial use than private use. Around one third of the labor cost is for pension plans, insurance and benefits. Almost all goods can be imported without any excessive import rates and there is a free trade with Europe. Since 2008 the interest rates have been very low, around 2.5% for a variable loan. The interest of Canadian banks usually follows the trend of the US rates. Interest depends on the branch you are in and the risk of your investment. Canada has its own dollar and must not be mistaken with the US dollar. Exchange rates fluctuate between the US dollar and the Canadian dollar. A high Canadian dollar rate towards the US dollar is 1USD/1CAD and a low Canadian dollar toward the US 1CAD/0.75USD. Social
The people of Canada enjoy a western lifestyle very similar to the lifestyle to that of the United States. When compared to the European standard there is a small difference with respect to interests. Because of the large distances in the country the ownership of a car is really important. A house usually comes in second place and should not cost much money. Canadians do not have such a high expectation on housing quality than Dutch people. But
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the average house price in Ontario is around 370.000, - CAD dollars. This attitude may originate out of the time when there wasn’t any global heating and the cost of energy was really low. But since the prices of gas and electricity has increased and there are government grants for cleaner cars and more energy efficient houses there is increasing public shifting to a more eco-friendly lifestyle. Consumers typically do not save money, instead spending most of their income. Leasing is the order of the day. Canadians tend to support local produced products and usually this is made apparent. Technology The technology of AAC has improved over a period of nearly 80 years and can be considered mature. The construction market is rigid and there is a reluctance to change. If AAC wants to compete against the lumber and brick technology then it must provide a competitive advantage on price. The opportunities for AAC are increasing with the shifting focus toward more and more on green buildings and an industrialized construction. If the building code can be changed requiring the use of AAC for some types of construction (like elevator shafts) then it would be a major advantage. The technology is available in Europe and does not conflict with any patents in Canada. The AAC technology does not have to be adapted for the climate or demographic properties.
3.2.1 Conclusion Pest analyses If we look at the political, economical social and technological factors of Canada and compare it to Western Europe, there are not many differences. They are in actuality very similar which it such a mystery that AAC has become big in Europe and not in Canada. The major difference is the attitude toward natural resources and the use of energy. Canada has always had plenty of space, cheap energy and cheap lumber. Europe is more densely populated and the cost of energy has always been higher when compared to North America. The climate is changing however, and Canadians are becoming increasingly aware of this and that is potentially good news for AAC. If AAC products are well marketed and supported by architects and the government, then there is great potential for AAC to become an adopted building product.
3.2.2 SWOT analysis In the SWOT analysis we conduct an internal research of the business proposition keeping in mind that we are researching the AAC product made in an AE plant. It important to note that there can be a big difference between AE produced products and the products made in the plants of competitors. A large part of the technology is in the machinery and knowledge of the plant manufacturer and this affects the quality of the end product. AAC Strengths
- Product is fire resistance - Products is not affected by water - Good load carrying capacity
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- Perfect insulation capacities - Needed natural resources almost always available - Smooth surface, no finish needed anymore - AE has 35 years of experience - AE offers complete system including; machinery, installation, commissioning - Short completion time 14 months after final order - With adoptability of the market fast payback time - If successful adopted there is a huge market potential
Weaknesses
- High investment cost - Plant is useless for any other use - AAC floor panels and roof panels cannot compete against concrete - capacity is not really scalable - capacity cannot react well on seasonable demand fluctuation - contractors are not familiar with the product - 2 years of investing before income - No supply chain defined for the product - Only metric sized blocks - No direct price advantage apropos of lumber studs with drywall - No local supplier of spare parts and services
Opportunities
- Green building thinking - Government grants and stimulus for green materials - Export to USA - Maybe partnership with Aercon or Xella for start-up - AE partner in Canada for maintenance - Construction company which uses own products - Mortar plant - Use of road or aircraft barrier - AAC board (replacement of gypsum board) - Prefab houses
Threats
- Boycott by architects and legislative agencies - LSS walls or other new techniques - Boycott of contractors - Lobby of cement and lumber industry - Winter period with low demand
3.2.3 Conclusion SWOT The AAC technology is mature and tested enough to be a good building material. We know that AAC has all the properties to be a success in the Canadian climate. The fact that Canada
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has not adopted the use of AAC is concern because there may be some underlying reason for this that has not been captured in this analysis, and that may affect a future investment. When investing in an AAC plant, an investor must keep in mind that blocks must measured using inches rather than millimeters. AE should start a joint venture with a local company in Canada who can supply service and spare parts because after-sales service is very important to North American companies. Before investing in a plant a good marketing plan should be developed and building regulations adapted. This is the task of the plant investor and does not influence the relationship between AE and the plant investor. However, AE has experience with the start-up of European factories and can play an advising role. If the market does not want the product then the factory is useless and cannot be used for an alternative product so it is a typical niche. There are some tests with barriers in airports where they use AAC to stop runaway planes and also as road barriers. These could provide new opportunities, the same with AAC wallboard which can replace gypsum board; AAC board is lighter and water resistant.
3.3 Substitute products
Before we can identify the customer needs we have to analyze what the current building materials are and used for houses. We already mentioned that we distinguish the residential building market from the commercial building market. First we have to determine what is used in the residential building market. The commercial market is really uncertain at the moment and we will not focus on this in this study. If we look at the type of houses which are built in Canada, we can classify them in four different types, mobile homes, wood framed covered with vinyl siding, brick homes and apartment buildings. For each class we will describe the main materials used.
3.3.1 Mobile homes or prefab houses: The framework of mobile homes is usually made out of lumber and plywood. The outside finish is usually of vinyl siding and the roof is covered with shingles. The average price of a mobile home varies between the 38.000, - and 78.000, - dollar. These houses are mainly used in the country and are made to be very cheap. Everything is made light and is not durable. The size is chosen such that it can be transported over the road. These houses do not last very long. For these types of houses, AAC would not be a good material because AAC is too heavy, and will crack easily during transport
3.3.2 Non brick home
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Non brick homes are usually built as one or 2 story homes and have an average size. The framework is made of wood framing and wooden trusses. Sides are covered with vinyl siding. Non brick homes can be found in the cities or in the country. They have the advantage that they are relatively cheap and quick to build. Almost everybody can remember the scene of the devastation of a Tornado where every house is completely flattened. This is due to the weakness of these houses, because they are not strong, not durable, not fire resistant, and vulnerable to termites. AAC would be a good alternative for these houses. AAC blocks or panels could be used for inside walls but it would also be possible to build the complete house out of jumbo blocks, the result would be one single thick wall. This is still a cheap and quick alternative for wood but would have more strength, fire and termite resistance.
Figure 13: House constructed out of AAC jumbo blocks
3.3.3 Brick Homes Brick homes are the more durable and typically used in luxury houses. They have more strength and can better stand the forces of Mother Nature. Brick houses are constructed in different ways. Sometimes they have a wood frame which is covered with plywood and dry-wall. The outside shell is made out of bricks. Some builders use polystyrene molds which are filled with concrete. The inside will be finished with dry-wall and the
outside with brick. Also for these houses, panels or AAC blocks could be a good alternative as well as AAC floor and roof panels. It is possible to build up to 5 stories high with reinforced AAC panels and this is sufficient to cover most of the brick home market.
3.3.4 Apartment buildings Apartment buildings can range from 2 storeys to skyscrapers. Most apartment buildings are constructed out of concrete and the high buildings have a mostly steel structure. The structure that carries the load is mostly made of steel or reinforced concrete. Non supporting
Figure 12: Typical wood framed house
Figure 14 Polystyrene fill blocks
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separation walls are made of wood with drywall or Light Structural Steel wall. These are walls that are made out of light structural steel channels which are fabricated on site and cladded with drywall. AAC does not have sufficient strength to carry the load of more than 5 storeys so steel or concrete structures still remain the best alternative for high rise buildings. But in Europe, in almost all high rise buildings, AAC panels are used as separation walls. This is a good alternative because of the fire resistance, sound and heat insulation characteristics.
3.3.5 New markets We see that all building materials have their pros and cons but AAC can offer a big advantage on durability and sustainability. Because of climate change people are more aware of energy use and sustainability. AAC is fully recyclable and it will provide better insulation for houses. The durability when compared to wood of LSS is much higher and AAC can resist water, fire and termites. Because of these reasons and the public shift to more environmentally friendly building materials AAC would be perfect for the “green” generation; especially for the construction of wet rooms or firewalls it would be a great solution. New uses are always being discovered. AAC can be used as a barrier at the end of a runway to stop airplanes, and in the future it is maybe used as road barrier for crashing cars and sound insulation. These last two are completely new markets which have to be explored in the future.
3.4 Conclusion Adoptability of the market
Although it is out of the defined system we still analysed the expectation of the AAC user, the customer of the AAC plant. This is important because with no customers the plant would be useless. In similar projects AE often sees that the investor has no idea about the market he is going to serve with an AAC plant. This is the reason for including this analysis to the research. In the end though, it is still the responsibility of the plant owner to determine how he is going to sell his products, this is not AE’s core business. In the conceptual model, under adoptability of the market, 4 sub questions were formulated. We will list the sub questions again and answer them with the results of the analyses described in chapter 3. Sub question 1: How can the building culture be changed so they are willing to adopt AAC? AAC can be successfully integrated if the contactors and architects are willing to use AAC. Because wages and transport costs are increasing, contractors are looking for a more industrial way of building. AAC has an advantage over wood and light structural steel framed buildings in terms of building time. With AAC, contractors can build faster and more durable and when it used in the right way, it is also cheaper. The most important thing is to educate builders how to use AAC. Only with a skilled workforce is its advantage realized over competing products. European factories began with their own installation team who actually installed AAC panels onsite. In this way, builders were educated by the people from the plant, this could also be a good strategy for a future investor in Canada.
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Sub question 2 Does the building regulation allow the use of AAC products? There is a building code which changes every year. It allows the use of AAC but it does not compel the use of AAC. If the building code could be changed toward an obligatory use of AAC for some parts of buildings (firewalls, cladding of elevator shaft), this would be a major opportunity. Sub question 3 With which substitute products will AAC compete? The main competitors of AAC in Canada are wood and light structural framed buildings cladded with gypsum wall board. Other competing products are poured concrete, clay and sand lime bricks. AAC cannot be compared one to one to these products but AAC still has the most positive characteristics of all competing products combined. Sub question 4 How can AAC take over a market share of bricks and lumber? The new owner of the future plant should start with a good marketing strategy before constructing the actual plant. It may be a good idea to build some sample houses of AAC near the plant. It may also be to his advantage to lobby for changes to the building code. Because of the increasing awareness the changing climate, and the increasing wages and other costs, AAC has a more competitive advantage against bricks, concrete and lumber than 10 year ago.
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Chapter 4. Physical restrictions and plant income According to our analysis on macroeconomic levels it would be possible to build an AAC plant in Canada. As said before, the aim is to build a plant in the most populated area in order to reach a lot of people and enjoy a big market size potential. Looking at the conceptual model from chapter 2, we see in the second level of the model that physical boundaries and profitability are two of the three most important aspect of an AAC plant. In the next subsections we will describe the physical boundaries and explore the profitability of the plant.
4.1 Type of Plant
As described in chapter one, an AAC plant can be divided in 5 basic subsections. The cutting machine of a plant is the section where the plant can distinguish itself from the competitors. The cutting line has by far the most technology and R&D input and is the most costly part of the plant. AE offers two types of cutting systems to produce AAC products. Customers can choose between a tilting cake system where the green block of AAC is tilted before cutting and the Durox system where the green cake will be cut in a flat position. With a tilting cake system, only AAC blocks of different sizes can be produces. The tilting cake system uses cutting wires of a smaller length. Because of this smaller length the cutting machine can be simpler and less expensive then the Durox system. The Durox system is more costly but offers many advantages. The biggest advantage of a Durox system is that it offers the opportunity to produce AAC panels and reinforced panels. The Aircrete system is equipped with the special cutting system to produce smooth surfaces for direct painting or thin film stucco. This unique cutting technology, with high-speed moving dual-wire cutting frames, allows for the production of block, partition panels, lintels, and other reinforced products. Using this system, Aircrete achieves very precise dimensional accuracy and tolerance, far below those specified in DIN EN 771-4 (Specification for Masonry Units Autoclaved Aerated Concrete Masonry Units). This technology offers in Europe and Middle East better openings for AAC products in comparison with former Hebel and Ytong systems. Key here is the better and quicker realization of building projects. Based on flat cake Durox Technology, the green cake is cut vertically in a flat position thereby preventing any sticking
Figure 15: 3D model of suggested plant
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problems after the autoclaving process. By using this system, there is no need for an extra separating machine or splitter to separate the hardened products layer by layer, thereby decreasing the risk of breakage. Therefore, production losses are the lowest in Aircrete plants. A loss rate below 1 % is realistic and achievable for blocks. This loss can be recycled back in the process again. The reduction of waste evidently leads to production with the lowest manufacturing cost per m3. We anticipate a big demand for panels in Canada and because of the flexibility, the Durox system would be the right system to choose. The Aircrete Durox Machines have a long lasting lifetime, and they can commonly endure for more than 40 years. In fact, there is no Durox factory closed since the first one built in 1955. After technology, an important aspect of the plant is size, in Table 1 you see a short summary of the three different plant sizes.
AE offers three sizes of AAC plants small, medium and big. In the small and medium type the autoclaves are the bottleneck machines. The more autoclaves added to a plant the more capacity is has till maximum capacity of the cutting machine or Mixing section is reached. The autoclave capacity is the bottleneck in the medium and small size plants and the cutting machine is the bottleneck in the big size plants. If you purchase a plant from AE it will come with a standard one size cutting machine and standard one size mixing tower. If you want to scale-up your plant then you can increase the number of autoclaves for a relatively low initial investment cost. When you start a plant and choose for a small or medium size, it will only be a 7% bigger investment. Labour and energy used is almost the same and that is why we would advise to begin with, at the very least, a medium sized plant. For an overview of such a plant see Appendix B Plant lay-out. Most plants which are in use run 24 hours a day because you cannot shut down the mixing and cutting section, doing so would cause the slurry seize up and all the pumps and agitators would be jammed with hardened concrete. Additionally, the boiler and autoclaves are the most efficient when they do not have to start up or cool down. This is why we choose for a 24-7 production of the future plant. To vary output, cycle time can be increased or decreased and some autoclaves can also be temporarily shut down.
4.2 Availability and quality of raw materials
For the production of AAC 6 basic materials are needed (high silica sand, cement, lime, gypsum, Aluminium and water). These are the ingredients for the green cake. To sell the material it has to be packed correctly by strapping and sealing, and the material has to be placed on skids. If the plant is running, it also needs mould oil to prevent sticking of the moulds and if reinforcement is used rebar and paraffin must be applied to the rebar bath. We assume that the moulding oil, paraffin and packing materials are not a major impediment to the location of the plant because they are readily available all over the world and the quantities are relatively small. Even having to transport it over a large distance will not influence the production cost too much. Aluminium powder is a rare good and is only available from Carlfors in Husqvarna Sweden (Carlfors, 2009). The quantities needed for the AAC process are very small so it does not affect the location choice. For sand, lime cement and water it is a different situation. These materials need to have a certain quality and
Table 2 three different plant sizes offered by AE
Plant size Production per day in m3 Number of autoclaves Small 300-500 2 Medium 700-800 6 Big 1100-1300 10
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because of the heavy tonnage needed, it can influence the production cost strongly. For the exact technological data of the raw materials see 0, we did research on the 6 different ingredients and the results are as follows: Water: The right quality water is available in all of Ontario. City locations can use city water but in most cases factories have to drill their own water well and purify the water themselves. The depth and diameter of the well usually determines the water capacity of the well. (Hayden, 2009)
• Sand: Sand can be found in most parts of Ontario but most sand is not usable because it contains too much clay. A usable sand source was discovered in Tilsonburg ON (Ryan, 2009).
• Lime and Gypsum: Lime is excavated out of a pit in Woodstock ON and processed by
a nearby plant of Lafarge. Both materials are available anytime (Lafarge, 2009).
• Cement: A big cement supplier with the right quality cement is located near St. Mary’s ON.
All the bulk raw materials are located in a 50 km radius of Woodstock. Some of these materials can be found elsewhere, but not located close together and not with the proper quality.
4.3 Location, climate and population
In the analyses we figured that we need a place for a factory where the raw materials are available and the location should be chosen to serve a lot of people in a small radius. In
Figure 16 Map south west Ontario (google maps)
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Europe a guideline is used that the factory should serve an area of 5 million people in a 300km radius (Rilem, 2005) . A 300km radius around the Woodstock area would serve 15 million people. In Table 3 you can find the total population of all the big cities which are located in this circle. Our research is based on the population of Canada and using only the city of Toronto, there is sufficient population for a profitable plant based on European figures. If the future investor can penetrate the Canadian market then there are an extra 10 million people to serve in the effective area around the factory. In the PEST analyses we saw that Canada’s biggest trading partner is the US. Most of the export is lumber which is used for the building market. Also AAC could be exported to the US and this would create extra sales for the future plant owner.
Table 3 Population of nearest largest cities (agency, canada's national statistic, 2008) The climate in Ontario is a typical mild Land climate. Winters are cold with a lot of snow and the summers are hot. For buildings this means a lot of heating in the winter and cooling with air conditioners in the summer. Good insulation would help to bring energy cost down for the summer and winter. The Rocky Mountains are located on the East Coast. This area is a fault line and all the modern buildings in this area should be earth quake resistant. Ontario is around 3000 km away from this fault line and does not have any earth quake regulations.
4.4 Investment cost of a medium size plant
Investing in a new plant requires not only the plant equipment but also the building, the land, the infrastructure and the utilities. In the following table we sum all the separated costs for the total investment. euro/dollar
exchange rate euro Canadian dollar dec 29 2009 € 1,00 $1,50 Description Cost euro dollar 100 acre field (40 hectares) near Woodstock ON
€ 866.666,67 $1.300.000,00
excavating and gravel for yard and foundation € 366.666,67 $550.000,00 Steel insulated building with overhead cranes, office space, laboratory and product storage. See drawing in Appendix
€ 1.066.666,67 $1.600.000,00
2 water wells and water treatment facilities € 86.666,67 $130.000,00 1 Mega Watt Electricity connection and natural € 356.666,67 $550.000,00
City name Population Average Distance from Woodstock
Toronto and Area (GTA) 5,555,912 145km London ON 457,720 45km Woodstock ON 35,400 - Detroit MI 5,354,225 235 km Buffalo NY 2,292,648 182 km Total 13,695,905
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gas hook-up 1 Pay loader and three forklifts for material handling
€ 320.000,00 $480.000,00
total plant equipment cost supplied by AE € 9.800.000,00 $14.700.000,00 training, commissioning and installation cost € 506.000,00 $759.000,00 unforeseen cost and on site labor during construction phase (15% of total cost)
€ 2.006.900,00 $3.010.350,00
total investment cost € 15.386.233,33 $23.079.350,00 The price of equipment installation and commissioning were provided by AE and were given in Euros. The actual cost in Canadian dollar could fluctuate because of shifting exchange rates. The exchange rate used here is based on the exchange rate of December 29 of 2009. For unforeseen costs and onsite labour we maintained a percentage based on experience from former AE projects of a similar size. All other prices were given in Canadian dollars. For the prices of land we approached a real estate broker from Remax in Woodstock. They showed us plots which were available in the fall of 2009. The price for excavating is based on an estimate provided by J-aar excavating based in London, ON. Excavating work cost is almost always on an hourly basis because it depends on ground and weather conditions. Hydro-one provided an estimate for the hook-up of 1MW power source. For a more accurate price we first would have had to pay an engineering fee of 15,000 dollar, and because of this, the estimated price was used instead. The building price is based on a square foot price and was provided by Steelway buildings based in Aylmer, ON. For availability and cost of water wells we asked the specialist of Hayden water wells in Lucan, ON. They also gave an estimate because you cannot predict how deep you have to drill to find water. Cost for the hook-up of gas and the price of gas was supplied by Union Gas.
4.5 Operating cost of a medium size plant
We choose a medium size plant with a high degree of automation and sufficient building space to size up to big size plant. For this type of plant we made a calculation of the annual operating cost with 100% utilisation of the capacity. For the medium size plant we calculated a cost price per produced cubic metre AAC. The plant will run 24 hours a day and 7 days a week because a lot the plant equipment cannot be shut down and the autoclave cycle is around 12 hours. But not every hour can be used for production because a plant also needs maintenance and cleaning time. Also, breakdowns will slow down production. According to the information of the modern H+H plant in Untrop, Germany a theoretical 320 days of total production can be achieved. We investigated how much labour is needed to run a plant. The amount of labour that is needed to run a plant varies between different countries. In some countries like Turkey or the Ukraine there is a subsidy on the creation of jobs. In these countries the owner of the plant usually chooses for a low degree of automation because labour cost is relatively low. If you choose for the maximum degree of automation then you need at least 5 people to run a production shift. In a production shift you have 3 equipment operators, a shift manager and a chemist who monitors the process. Because
Labor force plan
Department Number of shifts
FTE per shift
Total
Office 1 5 5
Operation 1 6 6 Production 5 5 25
Director 1 1 1 Total FTE for operational plant 37 Table 4 Required FTE for operational plant
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Canada is a western country and labour is relatively expensive we choose for a highly automated plant. Because of a high degree of automation it easier to find labourers who are willing to work in a concrete plant and this will give us an advantage in the labour market where we have to compete against other plants. The plant will run 24 hours 7 days a week, to fill these production hours you need 5 different teams of people who all work in 8 hour shifts. In the so called production teams there are operators who are also trained to do the maintenance if there is a breakdown. The chemist keeps track of the quality of raw materials and the slurry mix.
Daily tasks include loading and unloading of finished products and grinding of sand in the ball mill. Also, scheduled maintenance, ordering of spare parts and equipment check and clean-up will be done in the dayshift. The laboratory manager has to inspect the quality of raw materials which arrive daily and do test finished products, slurry and green cakes. In the office department sales, financial control, H&R and office management are required. The total overhead is based on experience out of western European plants. The labor cost
Figure 17 labour overview
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depends on the degree of education and the amount of experience. We asked some other manufacturing plants and they pay an average price of $78000, - CAD for their staff each year. The operating cost of a plant is not only labour cost but also raw material cost. We investigated in the area what the raw material cost would be if we would run the plant on full capacity. These raw material costs include the cost of, aluminum, sand, cement, gypsum and lime. Water is pumped out of the ground and is basicly free. The energy costs are based on the energy rates given by Hydro One for electricity and from Union Gas for natural gas. For a total overview of these costs see paragraph 4.7. Most gas is needed for the steam production. Electricity is used to run all the equipment.
4.6 Potential market size
The people of Ontario spent in 2008 31.8 billion on housing. The average house price in Ontario is around 370.000 CAD dollar. In 2008 a little over 75000 houses were constructed in Ontario (agency, canada's national statistic, 2008). For an overview see Table 5. An average Dutch houses are around 120 square meters and have a height per floor of 2.40 metres. Usually the inside walls are around 10 cm thick these dimension result in an average use of 12 to 16 cubic metres of AAC per house. Of course this depends on the type of AAC product that is used and the size of the average house. In the Netherlands we use mainly panels of 10 or 7 cm thick but Germans prefer to build with jumbo blocks which are three times the thickness of a panel. The Germans mainly build with a single wall and that will require three to four times the amount of AAC compared to the Dutch style. We believe that the panel production will have the biggest change of success. The average Canadian house is around 20% bigger than a European house, but the average cost price will be around the same as a European house. We estimate that an average Canadian house will need around 20 cubic metre of AAC and that must be sold for the same price as 16 cubic metre in Europe. In Europe the cubic metre price of AAC is around 150 to 160 euro per cubic metre. This would mean that an average house contains for €150 x 16m3 = €2400 of AAC per house. If we convert this to a selling price of a Canadian home this would mean 20 m3 of AAC for $3600, - Canadian dollar (2400 euro x exchange rate 1.5). The selling price per cubic metre would be $3600/20m3 = $180 CAD per m3 . It would be interesting to compare this estimated selling price to an American standard. We conducted an interview with Jim Holland formal director of the Aercon plant in Florida. They sold their products for 160 USD dollars per cubic meter. If we calculate this to Canadian dollars and then we see that the sale price we estimated is fairly close to the actual sales price in the States. If we consider the total number of houses that were built in Table 5, taking 2008 as a reference year, the total building market for Ontario is around 75.000 houses. If each house contains an average of 20 cubic meter of AAC then the total production volume needed to serve 100% of the building market be 20 x 75.000 =1.5 million cubic metre of AAC.
Table 5 overview starts of new houses
Total houses constructed in Canada and Ontario
year 2004 2005 2006 2007 2008 Canada 233,000 225,000 227,000 228,000 211,000 Ontario 85,000 79,000 73,000 68,000 75,000 percentage 36,5% 35,1% 32,1% 29,8% 35,6%
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We compared this with the maximum production capacity of a medium size plant. The plant would not have sufficient capacity to produce the estimated required amount of AAC. It would be unreasonable though to expect a 100% market share. If we look at AAC in The Netherlands then we see that a plant has after 35 years a 15% market share in the home building market and a 60% market share in dividing walls for the residential market. When a medium size plant is run at full capacity, it can produce 256.00 cubic meters of AAC each year. If all this material would be used for the inside walls of the Ontario home building market then the needed market share for Ontario would be 17% see numbers inTable 6. If AAC is adopted and the market is used to the use of AAC like the Dutch market then it is reasonable to expect a 17% market share. At start-up a new plant cannot expect to have it maximum potential market share and start maybe with only 5% market share. This means that income will also decrease. In the research we give a clear perspective of what the operation cost and the investment cost of the plant will be. Also the market share and the total market size are given. These are true numbers and can be used by the investor. The investor should decide how much money he wants to put in the marketing plan and what kind of risk he wants to take with starting up the plant. It is the task of AE that the plant technically can produce as much products and that it is delivered in time, it is the task of the investor to keep it running. The investor also has the choice to widen his market scope, he can try to sell the products in the USA (Buffalo and Detroit) and he can try to enter the commercial market. Plant and market information amount Unit
total production days 320 Days theoretical daily production 800 m^3 total houses build per year 75.000 Houses average required AAC amount per house 20 m^3/
house selling price per cubic meter AAC 180 $/m^3 max theoretical AAC residential market size 1.500.000 m^3/year total market value $270.000.000,00 max annual production medium size plant 256.000 m^3/year theoretical needed market share 17% Table 6 Plant and market capacity
4.7 Annual plant income
We calculated a needed market share based on the houses that are built in Ontario and the capacity of a medium sized plant. In our plan and choice of location a part of the US market can also serve be served, but we did not take the US market into account for the calculation of the needed market size. We only calculated the market size for residential buildings and did not mention the potential for commercial buildings. This is because of the uncertainty in the commercial building market. A lot of office buildings and warehouses are empty after the crisis and the demand for this type of construction is very unstable at the time of the research. If the commercial market recovers from the crisis then it would only have a positive effect on our business plan. We calculated a manufacturing cost price per cubic meter of produced AAC. This cost price is based on the situation of a plant running at full
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capacity within its own limits. We asked the raw material suppliers to provide price estimates for these volumes. Wages are based on an average income of an average Canadian plant. Energy prices are calculated on the base price of the energy suppliers. material needed per m^3
produced AAC raw material
cost per unit raw material cost per produced m^3 AAC
sand 267 kg $0,01 $2,67 lime 70 kg $0,09 $6,30 gypsum 10 kg $0,04 $0,40 cement 112 kg $0,09 $10,08 aluminum 4 kg $5,00 $20,00 water 286 liter $0,00 $0,00 gas 10,5 m^3 $0,21 $2,18 electricty 9,00 kwh $0,10 $0,90 labour 11,27 $ - $11,27 total direct production cost per m^3 $53,81 Table 7: Production cost per cubic meter AAC We calculated the operation cost of a plant and the raw material cost for the production of AAC. The use of energy is based on a similar plant in the Ukraine with a similar climate. If we put all the important cost and income in a table the result is: Annual use of energy, labor and raw material Total plant investment cost $23.079.350,00
total annual production 256.000 m^3 average cost 1 FTE per year $78.000,00 dollar estimated selling price $180,00 dollar/m^3 total labor cost per year $2.886.000,00 dollar total raw material cost per year $10.099.200,00 dollar total energy cost per year $789.849,60 dollar total operating cost per year $13.775.049,60 dollar total income out of sales $46.080.000,00 total net to income w ithout taxes
$32.304.950,40
Looking at the bottom line, the total income is very high. If the plant managed to sell its full production capacity at a sale price of 180 CAD dollars per cubic meter, the investment in the plant would be returned within a year. This does not include interest and corporate tax. We have to note that the market share is based on the plant capacity and on the estimated amount needed for the construction of an average size house. If constructions of the houses change it has the effect of either requiring more or less AAC per house. The total construction projects are based on figures of 2008, because of the crisis this number can
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change. The profitability depends on the success of the market penetration which is done by the future plant owner and the real selling price which will be set when the plant is in operation. In the first years there may be start-up problems and all production may not be sold. The investor should decide how to estimates the start-up risk and how to approach these problems.
4.8 Conclusion Chapter 4
In this chapter we described a conceptual model and we also gave the system definitions of the research. The main goal of the research is to determine for AE if there is the potential for the successful establishment of an AAC plant in Canada. We researched the physical restriction for such a plant in Canada and we provided an estimate of the plant income. In chapter 2 we also formulated sub questions for these problems and in this conclusion we are going to answer each question. Sub question 5 How are the people distributed over the area? Ontario is the most densely populated area of Canada and has enough people living in the Toronto area to make a plant profitable Sub question 6 Are the needed raw materials available in the area? All the suitable raw materials like sand, lime, gypsum, cement and water can be found in a small area around Woodstock, Ontario. Woodstock is a 100 km drive from the Toronto Area. Sub question 7 Do the raw materials meet the quality requirements? We researched if the materials around Woodstock have the right quality found them suitable for the use in the AAC process Sub question 8 Does the climate create a need for well insulated buildings? Ontario has a mild land climate, this means hot summers and cold winters. Houses are heated or cooled and need insulated walls. Sub question 9 Are there any major fault lines? The west coast of the American continent has a major fault line and this area has earth quake regulation for the building industry. This fault line is 3000 km away from Ontario and does not affect the building code. Sub question 10 What is the market value? We only included the Ontario housing market in this research. We took 2008 as a reference year and in this year around 75000 houses were constructed. It depends on the construction and the size of the house how much AAC is needed. We analysed that a average house would require 20m3 of AAC. The total market volume, if 100%of the houses were
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constructed with AAC would be 1.5 million m3 AAC. The estimated sales price for the Canadian market is 180 CAD dollars per m3. This would bring the theoretical market value for AAC in the home building industry 270 million CAD per year. Sub question 11 How big will the market be? Considering the experience of Dutch factories we see that they have a 15 % market share in the construction of residential houses. For dividing walls in commercial buildings like high rises they have a 60% market share. Sub question 12 What must be the market share? In the research we focused on the residential building market. If an investor purchased an AAC plant, we advise the option of a medium size plant. A medium sized plant operating at full capacity requires a 17% market share. He can widen his market scope to the commercial market and to a part of the American market (Buffalo and Detroit). Sub question 13 What are the operating costs of a plant? The total production cost of each m3 produced AAC on full capacity is $53.81 CAD. This price is based on local cost of raw materials and labour costs. Sub question 14 What will be the investment cost be The total investment for a plant in Woodstock is $23 million CAD dollar.
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Conclusion We conducted an analysis for Aircrete Europe to determine if it is possible to build a profitable AAC plant in North America. We narrowed down the research scope and finally decided on a profitability research in Ontario Canada. It is not the goal of AE to build an AAC plant themselves but before you can sell an AAC plant, you have to convince a potential buyer if a plant would be profitable and how it can be made profitable. The Canadians are not familiar with the use of AAC. Ontario has a building code with all the building regulations in it. The code is renewed every ten years and updated every year. The code allows for the use of AAC but does not recommend it for any typical application. It would be useful if the building code were changed to require the use of AAC in some applications. The construction industry is really rigid and not open for change. Joint ventures between the construction companies and the plant owner would provide some certainty in sales. Presently, the construction industry mainly uses lumber, brick and concrete for the construction of homes and apartments. AAC blocks and panels have to compete against these markets and can do this with its unique properties. By using AAC you can build faster and more durable and in the end these advantages will give AAC a competitive advantage. For the location, we choose Woodstock, Ontario. In a 300 km radius of Woodstock around 10 million can be reached in the Toronto area. This population is more than sufficient for a medium size Durox plant. If you would cross the border you can find another 5 million in the effective radius of the plant. With a medium size plant you can produce 256.000m3 meter of AAC each year enough for the construction of around 13000 houses each year. This number is an estimate and really depends on design and size of the house. We discovered that the reinforced panels and blocks have the most interest for the Canadian contractors. Because of the cold winters and hot summers it is useful to have a well insulated house. AAC products provide sufficient insulation and would be suitable for the climate. There are no fault lines in the area so earthquake resistance is not an issue. If you would build a plant in the Woodstock area then all the raw materials with the required properties except aluminum powder would be in a 50 kilometer radius reach. We researched what the market potential could be for AAC. We separate the residential market form the commercial market because the commercial market was in big turmoil after the crisis. For the residential market we used 2008 as a reference year. In 2008 around 75000 houses were constructed. Each house needs around 20 cubic meters of AAC. With an estimated sales price based on European prices adjusted for the Canadian price difference, the total market value would be around 270 million. To run a medium size plant on full capacity, a 17% market share in the residential building market is required. The total investment will be around 23 million, and if all production is sold, the initial investment will be returned in less than a year. Experience out of the past let us know that the start-up of a plant usually goes slow. An investor should count for at least a 5 year pay-back period. The above investment cost is based on real market prices but the sales price of AAC is an estimate. An investment in an AAC plant can be profitable as long as the output is sold. The Canadian market and conditions are ready for AAC but only with a good marketing strategy and a lot of commitment from the plant investors can it become a success.
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Schilling. (2005). Strategic management of technoligical innovation. New York: McGraw-Hill/Irwin.
Ulrich, E. (2008). Product desig and development. New York: McGrawHill.
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Appendix A Technical properties of raw materials Next listed Raw Materials specifications are standard values and used in most AAC factories. Quartz Sand SiO2 min. 85 % from weight Fe3O3 max. 3 % from weight Al2O3 max. 7 % from weight CaO max. 1,5 % from weight MgO max. 2 % from weight SO3 max. 1 % from weight Na2O max. 1,5 % from weight Loss on ignition max. 5 % from weight Residue on 0.063 mm screen max. 2 % from weight Lime CaO min. 85 % from weight MgO max. 2.0 % from weight CO max. 4.0 % from weight Loss by ignition max. 5.0 % from weight SO3 max. 1.0 % from weight ≥ 95 % passing through a 100-μ sieve CaO values below 92 % by weight increase the lime consumption correspondingly Reactivity 2 minutes: 35°C ± 4°C to 45°C ± 3°C 5 minutes: 45°C ± 3°C to 50°C ± 2°C 10 minutes: 60°C ± 3°C to 67°C ± 2°C 20 minutes: 66°C ± 2°C to 72°C ± 2°C 30 minutes: 69°C ± 2°C to 72°C ± 2°C 40 minutes: 70°C ± 2°C to 74°C ± 2°C Test conditions: 600 ccm distilled water at 20°C ± 0.5°C and 150 g ± 0.1 g of unslaked lime. Portland Cement 45 N/mm2 Fineness (Blaine)
3,500-4,000 cm2/g
Setting times Initial 160-260 minutes Final Max. 300 minutes Compressive strength of the test cube 3 days 20-25 N/mm2 7 days 30-35 N/mm2 28 days 40-45 N/mm2 Alkalinity 0.4-0.8 % Ground, Natural Anhydrite CaSO4 min. 80 % from weight
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≥ 98 % passing through a 150-μ sieve Gypsum or Synthetic Anhydrite is applicable after careful testing. Magnesium Oxide (if requested)
Admissible range of application
Admissible range of fluctuation
MgO ≥ 85.0 M-% ± 1.0 M-% CaO ≤ 2.0 M-% ± 2.0 M-% Bulk density ≥ 900 kg/m3 ± 100 kg/m3 Calcing temperature 900 – 1100 °C - MgO is advised mainly for the production of reinforced elements to avoid cracks during autoclaving. Aluminium Powder Metal content 90 – 95 % Max. oversize with 45 μ 20 – 50 % Average grain size 20 – 45 μm Specific surface area acc. to Blaine 10,000 – 20,000 cm2/g Fatty acids Max 1.5 Reinforcement Steel
Yield point Tensile strength Elongation at failure
Type of reinforcing steel Similar to DIN 488, the steel shall be free of grease, oil and rust.
Nominal value *
Recom. average value
Nominal value *
Recom. average value
Nominal value *
Recom. average value
N/mm2 N/mm2 N/mm2 N/mm2 % % Fe 500 500 550 550 600 8 9 * 5 % breakable Welding point strength FS: FS = 0.35 * As * ßs * 10-3 [kN] As = Cross section of longitudinal bars [mm2] ßs = Yield point – nominal value [N/mm2] Corrosion Agent for reinforcement Anti corrosion agent KS 95 or Wörwag or equal
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Raw material calculation The next listed values may be used as indicative values. The specific raw material consumption will depend on local quality of the raw material and could be lower.
Raw Material Calculation for 480 Dry Density Blocks Production / year (m³) 150.000 Working days / year 320 Nett cake volume (m³) 5,49 Daily theoretical Capacity 500 m³
Required amount of: per m3 product per cake
per day
per year
"Dry" sand 267 kg 1467 kg 133,6 tons 40088 tons Lime 70 kg 383 kg 34,9 tons 10477 tons Cement 112 kg 614 kg 55,9 tons 16763 tons Gypsum 10 kg 54 kg 4,9 tons 1471 tons Aluminium 0,40 kg 2,21 kg 201 kg 60 tons Total mix water 286 l 1571 l 143,1 m³ 42917 m³
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Appendix B Plant lay-out
