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Nurlan Smagulov: «We are trying to look into the future and we are not afraid»

The Principal of Astana Group Nurlan Smagulov answered the questions of the Kapital. kz business weekly

Нурлан Смагулов: «Мы пытаемся заглянуть в будущее и не боимся»

It is very important for me to enjoy doing business


— To what extent do you think the strategy of business diversification within the group looks justified today? Has the concept been changed since its inception? And how difficult is it to cut the cords in certain situations?

— Some assets were interesting to us. That is, in due time the Grain industry was interesting to us. We built the first pasta factories, re-equipped the mills, brought cattle and black angus from Australia. We were not innovative, but we were pioneers for sure. However, when we saw that everyone was doing these things, it stopped being our know-how, and we decided to withdraw from these projects, because we did not feel what could have further growth and what else we can bring. On the contrary, in the direction of business related to shopping centers, we felt the trends and saw how the tastes of consumers were changing — this was a fast-growing market, and we were actively developing there. And, of course, auto retail is extremely important for us. This is our alma-mater, we like it very much, and our group is very comfortable in this market. During our presentation, we said that we were expanding our brand line. Therefore, we left some assets and some of them were sold.

As for diversification, I believe that this is very correct — in such a small market as Kazakhstan, you should always have a spare airbag. We are very often helped by one or another asset in stressful situations. When Astana Motors had challenging times, there were Mega’s that supported, and vice versa. I believe that there is synergy between the two brands. We exhibit cars in shopping centers. Shopping centers take retail experience from Astana Motors.


— But both business areas are in the same cycle stage. Both shopping centers and cars suffer when domestic demand falls. Would you like to have something countercyclical?

— We tried to enter emotionally into the oil business, banking, construction, and some other areas. Nothing impressed us and did not strongly motivate us. We concluded that we were interested in what we were doing. This is psychosomatic, this is what I am interested in. I go to the shopping center, I see a lot of light and a lot of people. In the auto business there are new cars, services related to cars — it is impressive. Working in the oil business, where you do not see the end users and their emotions or giving credits in the banking system are not my cup of tea. I am doing what I like. I like working with end users. I do not have a task just to make money or survive. It is very important for me to enjoy the business. If it were not like that, I would not do it.

We were profitable in 2017, despite the low demand

— As for Astana Motors — how did it adapt to the new complex market and why did the average bill grow?— We filtered our portfolio and even refused from Nissan, because there was no normal profitability and prospects. The brand itself is good, but we did not how its development was seen by representatives in Kazakhstan. We refuse to cooperate with those manufacturers who do not see an adequate assessment of the situation in Kazakhstan. On the contrary, we are developing those brands that give us confidence in the future, so-called promising brands, that are very technological and innovative: Jaguar Land Rover, and Volvo. As for Volvo, I can say that it will not make any profit in the medium term. But this brand can be one of the leaders of the rapidly changing world, since all Volvo cars will be equipped with electric motors or hybrid motors as of 2019.
What else we have done during the crisis: increased revenues from car repairs and sales of spare parts and developed trade-in option (a mechanism that optimizes the purchase of a new car instead of the old one). We did not deal with trade-in and financial services before, did not develop insurance, and did not repair and replace spare parts on loan. Today we are doing all of these, because we are looking for new profitability sources. We reduce the level of our expenses, and when the market grows, many people work confidently. The profit is created due to the mechanical growth of sales, and when they fall, and you need to pay salaries to people, pay loans, stock warehouses, then companies face clear challenges. Fortunately, we managed to rearm: find items that could be cut as well as new income items. This made it possible to be profitable in 2017, despite the low demand in the market. Even in such conditions, we generate profit. We have a one-to-one formula, where, if the car center has not sold a single car, it must close all its expenses by means of spare parts and service. We had the following situation with Lexus: in one month we did not sell any cars, they were simply not in stock. Auto center had been making a profit for three months without selling a single car. This is a very sound evaluation system. In its framework, we evaluate each dealer center as to what extent the costs are covered without the sale of new cars at the expense of repairs and spare parts. For example, our Toyota centers has exceeded costs by 20% with the coefficient of 1, 2 using these services. That is, we are not dependent on the sale of new cars. In America and Europe profit is earned on financial products, leasing, trade-in, services, because there is no profitability for new cars. We are preparing for this.

— And if demand will not grow?

— We will still be on the market, as long as the cars go. We will survive until the fuel, exhaust and transmission systems work. When everyone switches to electric cars, then it will be hard. But it seems to me that this will not happen in the next 30−40 years. Tesla cars take electricity from the outlet. And on the other end of the network is CHPP, where the coal is burnt and electricity is generated. When the cars will be charged from solar panels, then we can talk about the era of electric vehicles. However, these are very big compromises at the moment. How can a car be clean if electricity is generated by burning fuel oil or coal?
I am sure that in 5−7 years Astana will need a new shopping center


— As for the sector of shopping centers, there is also a vast number of formats. What is the secret of Mega's success?

— We are trying to look into the future and are not afraid. We are trying to predict some trends. Sometimes we are mistaken, the future is not so optimistic as it seems to us. However, we include the most pessimistic targets, for example, about how the structure of consumption can change. We are striving for the centers to turn into social spaces. We are consciously going to reduce shopping. Currently, on the second floor of Almaty MEGA-1, we remove stores and make a big food court that will bring less money. But we want to be better and grow. Almaty MEGA has been the market leader for 12 years. Many shopping centers appeared after us, we were the first, and are still leading. Therefore, our self-improvement and the fact that we are doing upgrade all the time, add new premises, change, rotate brings correct results. Our philosophy is effective and justified.


— Mega Silk Way at some point seemed a politically motivated project.
— No, this is a superficial view. It was politicized because we attracted funding from UAPF. We took a loan at 18.5% per annum.
In fact, if EXPO was not held, we would still have built a large shopping center. But EXPO provided an opportunity to take a fresh look at this market. In the spirit of the new energy, we created a new space — the Mega Silk Way. Of course, it should be noted that all administrative procedures ran quickly due to EXPO, and at first EXPO provided a great interest to the shopping center. The Mega Silk Way will not pay off in three months which is the exhibition duration. The payback period of a modern shopping center is 15−20 years. Three months is a drop in the ocean. Nonetheless, we decided that the last shopping center was built 10 years before us. During this time, firstly, the population of Astana has doubled, and secondly, the culture of consumption has changed greatly. I am sure that in 5−7 years it will be necessary to build another shopping center. I do not know if we or anyone else will do it. The world is changing so fast now. At the time of our parents, people drove cars for almost 20 years, and lived in the same apartment for the whole life. Nowadays everything is changing globally and dramatic changes in technologies happen every two years.
We have a very sound ratio of loans and own funds

— The renewal of private investments is critical for the Kazakhstani market. What is the institutional environment for large business investments now? Several years ago, you criticized banks for their pricing and loan policy.
— Dialectics has always been and still exists. The borrower wants to receive long money for a maximum term and for cheaper. The bank says that we need to look at things soberly, we have many challenges and there is not a lot of money. The National Bank sets a high base rate; it has just been dropped to 9.75%, but it is still high. Borrowers are always unhappy; banks say that they are not to blame. It will always be happening. Even if the entrepreneur can raise money at 5% per annum, he will ask for 4%. I do not justify either one or the other. This is normal. Sometimes in my interviews it is mentioned that the lending rates are high. In fact, they do not allow the development of Kazakhstani business. Our offers have always been to use either the money of the National Fund or the money of the UAPF for private business lending.
This is an issue of ideology: if we do not believe in the future of private business and do not give it money, why develop it at all? Fairness is somewhere in the middle: some of the money would have to be cheapened at the expense of our various reserves and give it on a strictly repayable basis through banks. Currently, as you see, the problems are not even with borrowers, but with banks. Business has always been suspected in failure, but de facto banks themselves poorly issue loans. In general, I am for making loans cheaper and affordable, then they will be easier to get for business.

— And Astana Group cannot be called debt-ridden now?

— No, we have removed a significant part of the credit burden by selling a few of our assets, because it is impossible to serve with such rates. Currently, we have a very sound loan capital. As I said, leverage on shopping centers is slightly more than 2, and for Astana Motors it is slightly less than 1, that is, we feel very comfortable. Almost all our auto centers have already been paid off — we do not have debts for auto centers. There are commercial and turnover capital borrowed by Astana Motors — this is acceptable. And here we widely use letters of credit and bank guarantees.
As for shopping centers, they cannot be built at the expense of their own financial flows. These are very capital-intensive projects, but we have a very sound ratio of loans and own funds, where own capital is greater than loans.
During the crisis, we are sharply beginning to gain market share

— You said that one of the key principles in business was to try not to do what all or many do and look for something new. Is it applicable now?

— As I said, we went ahead of all trends with cars and we brought new brands. We return Volvo that was not on the market for 10 years. We also want to bring many more to the market of Kazakhstan. Even if those brands already exist, we are ready to build auto centers for them. The moment of crisis for us is a time of challenge in a good sense, because we see the niches. We are sharply beginning to win a share in the market, including cars and shopping centers. We built all our shopping centers and opened auto centers during the crisis. When everything is good, competition grows, and there is not much interest in increasing the market share. The entrance ticket is very expensive. We buy land, but it costs several times less than if we were to buy it in the years when the market was overheated. The entrance ticket is now cheaper. Therefore, we use this opportunity. And when everything goes well, you can speculate simply as a business case that the land is very expensive, and you need to try to build this auto center. (During the press breakfast, Nurlan Smagulov reported the news about the new auto center on Al-Farabi Avenue in Almaty, — author's comment). It involves a completely different cost of construction work and materials.
In addition, many free niches are created during crisis, and we, on the contrary, are expanding. This is our philosophy, we look at the crisis as a time of opportunity, not a time of disappointment and pessimism.
Source: kapital. kz