Forging a greener future

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Steel production contributes 8% of total global emissions¹. So transitioning it to a lower-carbon intensity is critical to address climate change. Currently the steel industry is “not on track” to reduce emissions to be on the International Energy Agency’s Net Zero Emissions by 2050 (NZE) Scenario². 

Damian Payiatakis, our Head of Sustainable and Impact Investing, sat down with Kimin Tanoto and Kelvin Fu of Gunung Capital, following the transformation of the family’s structural steel business and subsequent sale in June 2024, which valued the business at $450 million. 

Here’s how a major Indonesian steel producer committed to becoming more sustainable, and reorganised people and approach to help re-set the business and the family’s finances. 

Damian Payiatakis (DP): What prompted the decision to transition the family steel business to be more sustainable?

Kimin Tanoto (KT): The Gunung Raja Paksi (GRP) brand is very well-known in Indonesia. While steel is a commodity, with GRP's brand it has commanded a premium. Leading construction companies or government projects have all historically chosen GRP given the quality of the brand. 

However, when looking ahead, we saw sustainability as the only way forward. A key challenge is that Chinese and Indian peers are much, much larger. So, they have a lot more resources. They also have a huge global market to play in, while our business has been mainly focused domestically. 

We realised if the business did not transform, it would be stranded as an asset. There was really only one way we could distinguish ourselves, which was to pursue a low-carbon future for the business.

Even in 2019, the green transition made a lot of sense. Despite Indonesia lagging at that time in adopting sustainability principles, we knew that if we did not transform, eventually the business would run down. And there goes 50-plus years of family legacy.

DP: Yes, let’s go back to 2019. Several changes took place that led us back to today. GRP was listed on the Indonesia Stock Exchange. Kimin took on a leadership role for the family. The initiative to green the business gets started. How was that initial period of transformation?  

Kelvin Fu (KF): Initially, there was pushback. The public listing was intended to help position the company for more corporate governance and new leadership. But the reality was that across the six branches of the family, members started as very resistant to change because the business had worked [the way it had] for the past 50 years. And that's a natural hesitation, right?

But it also coincided with COVID-19, which prompted additional concern that the business might peter out. As well, Kimin, coming in as the second generation, was appointed as the one to lead all the other families. He brought a broader, longer-term and more strategic perspective.  

He wasn’t afraid to change what had worked in the prior 50 years – in part because, while born into the family, he hadn’t only worked in the family business. Without him, without that understanding and recognition of the need to transform, none of this would have happened.

DP: That commitment to change must have been critical to persevere. Looking back now, were there other key elements that helped the transformation? 

KT: Overall we embarked on a drive to professionalism. That started with a deep dive into the whole business, almost like doing due diligence on ourselves. Then we sought more transparency into the finances or management decisions, and we put in place the right key performance indicators. 

Also, we moved family members out of management positions and into non-executive roles, so they could be consulted but wouldn’t have to run the day-to-day operations. In fact, there are no family members in the business currently. Linked to this, more external professionals were hired to run the company, many without steel experience so they were open to change and brought new ideas. 

Finally, we made sustainability a strategic, commercial focus as much as a principled one. We could see western governments were very serious about going green; for example, setting policies such as the European Union’s CBAM (Carbon Border Adjustment Mechanism) for steel [CBAM seeks to align the price of imported goods with goods produced in the European Union based a cost for carbon emissions]. We thought it was only a matter of time until Indonesia would do the same and that helped to drive the change.

KF: I would rank managing stakeholder relationships, and having a strong and determined leadership with a committed team, as the most important factors. There were plenty of historical practices in the business that had outgrown their times. But people were very resistant to change even when it was clear that these original practices were hurting the business. Overcoming those required a mixture of diplomacy and determination. 

Also, we were diligent to identify the macrotrends that would affect our competitiveness and commercial potential; and then we have been very strategic about our approach and played to our advantages. Yes, we have a small size relative to the larger regional steel players. But that allowed us to be more nimble, and more bold to pivot to and embrace the drive towards sustainability. The valuation achieved on the sale shows this has worked greatly in our favour.

DP: The 50 years of family legacy was mentioned earlier, how has that idea of legacy influenced your thinking and decision-making? 

KT: As I look back at how my parents had built the business from scratch and reflect on my past few years of taking charge of the business, I feel a deep sense of gratitude, respect and responsibility to continue taking the business to greater heights. 

We also have many other stakeholders to take care of, including our employees, investors, and the government. They are looking to us for leadership. And this will be my next big task: to transform and position GRP for a sustainable future where we can be the most green steel player in the region.

DP: That’s a huge ambition, and Gunung Capital, as a private investment company and family office, has and will play a role there. You established it together in Singapore in 2020. What purpose does it serve? 

KT: When we set up Gunung Capital, the intent was to help successfully diversify the family out of the steel business. Foremost, as is traditional for family offices, this means deploying capital into an investment portfolio or potentially into other industries. 

But we’ve also used it as a vehicle to bring new external ideas into the existing family businesses to continue to unlock their value. We’re often looking to set up new strategic partnerships while being an investor. For example, our collaboration with Fortescue Future Industries, is exploring use cases of green hydrogen in our [steel] plant. 

KF: I view Gunung Capital as a crucial conduit for innovation. Through it, we’ve established new partnerships, explored new business opportunities, and brought new ideas and best practices back to the core businesses. For example, we have embraced the private equity industry concepts around value creation, translating them for our industry.

DP: Let’s speak more personally, what are the dynamics like between you in terms of working style? What works? Where are there differences? 

KF: I would describe Kimin as the architect who can connect seemingly disparate dots together. He has the ability to hone in on any given issue with intensity. His clarity of vision means that I am able to create a roadmap for execution and rally our team to march in the same direction. So, I see myself more as a builder. 

KT: I think we work quite well together. We have the same mindset around business operations – we don’t like waste and want operations to be efficient. Also, we have a similar worldview in terms of the opportunities we’re looking at – there’s no question that going green and sustainable is the right way to go for us. This has evolved over time. We discussed it a lot in terms of the business and wider world. I see Kelvin as my partner who constantly pushes me to get better.

KF: While our working styles and mindset match, Kimin faces tensions that I do not. I can see he feels a deep responsibility towards his family business. So, while I can see his urgency to transform the existing business, I’m eager to look at how we build Gunung Capital to establish new businesses and provide intellectual capital back to the group.

DP: After the carve-out and sale of the structural steel business to strategic partners, what plans do you have for the family office and remaining operating businesses? 

KF: There's still work to be done in the [flat] steel business. We’re taking lessons learned over the past few years of delivering and we have to basically repeat the process. In the flat business, the machines are older and therefore require a major capacity upgrade. To establish green capacity may cost up to US$600 million. So, this again is another big conviction to transform this business. But once done, it will probably create one of the lowest carbon steel players in the region. We are working with key stakeholders to source green power, replace with the most advanced and energy efficient steel making equipment, and identify key customers that have high demands for green steel. 

We’re also targeting new products for Indonesia actually, such as replacing asbestos roofing with new coated-steel roofs. Or Electric Resistance Welded (ERW) steel pipes, which have numerous green applications and can be produced with a lower carbon footprint. We are very cognisant of the need, and opportunity, to solve for the green demand across Asia.

KT: He’s right. Looking further out, there’s a tremendous opportunity for us to position GRP as the most green, technically advanced, efficient and profitable steel business in the region. We’re working to make this a reality as we speak. 

Asian steel mills are not known to be green because of the prevalence of blast furnace steel mills. GRP is one of the very few electric arc furnace steel mills in this region. If we can be very targeted with our product mix and be fully integrated, I think we can capture a lot of the margins that have previously been left on the table. 

DP: OK, so that’s the business side, what about the investment portfolio? 

KT: We do not want to be purely financial investors. We still want to find operating businesses that will continue to deliver a lot more value for us. The family still wants to think and act like business owners, in a sense we can see us becoming more like a private equity firm. 

For us, there's no fun in only being an LP (Limited Partner) in funds. We do, and will invest in funds though. We can learn through them, and we also see co-investment opportunities. We can get to know multiple businesses and then we get to pick and invest in the one that we like. 

DP: Interesting strategy, and we see more families investing in climate funds looking to benefit from their focus and expertise, and gain visibility to pick companies to take further from the portfolio. So which sectors and industries are interesting for future investments? 

KF: At this phase of our evolution, we’re looking at opportunities that are adjacent to our core business. And that fundamentally means industrial de-carbonisation. 

We already understand it. We deep dove into the green economy and said, “OK, what are the sectors that we can invest in because we have experience?”. Of course, we will still look at where our impact can be maximised too, which is existing steel and other operating businesses.

KT: Also, we have proven that we've managed to transition a brown business and sold it for a higher valuation than if it had not been more green. If we can repeat that, it will demonstrate that we have strong value creation capabilities in a very tough environment, transforming a family business to operate professionally and making it more sustainable. The question therefore is can we translate that expertise into running the other companies that we invest in?

DP: What role do you imagine the family will play in the future? How do you think about younger generations? 

KT: I recently arranged for my children to visit our steel manufacturing plant in Indonesia for the first time. I think they finally caught a glimpse of what exactly I do at work. While understanding the family business is important, I place more emphasis on their education, critical thinking, global exposure, and abilities to adapt and learn.

The challenges facing younger generations are going to be different from the ones we face presently. I believe that AI will be disruptive. It has already started to make significant impacts in all aspects of businesses. 

My focus is to create a more sustainable future for them. A world where they can thrive. I am doing that through my work in pursuing green steel and investing in other industries that support decarbonisation.

DP: Any final thoughts for other families? 

KF: Don’t try to do 50 things at once – running, or greening, the operating business, and managing investments, and coordinating family dynamics and more. My view initially was “I’ve got be very hands-on”, but then I realised my resources are limited. Decide what you are really good at, and then be willing to pay to outsource the rest. Then you can focus your time and energy on where you add the most value.

KT: Recognise the tension that resides in the responsibility towards your family and the existing operating business versus professionalisation and future wealth. 

Many family offices in Asia are newly set up and they’re all figuring out their way forward. Even we are still doing this; it takes time. So be patient but determined.

Image credit: PT Gunung Raja Paksi Tbk