business

FOR BASF, BIG IS STILL BETTER Restructuring and becoming 'transnational,' the huge, integrated company still believes in huge, integrated plant sites

Patricia L. Layman C&EN London

I n 1932, two German industrial firms-chemicals producer BASF (Badische Anilin und Soda Fabrik at that time)

and electricity company AEG—began a collaboration that culminated in the first tape recorder, introduced in 1935 at the Berlin radio exhibition. Last month, BASF signed a letter of intent to exit the mag­netic tapes business by selling its magnet­ic products operations to Turkish elec­tronics company RAKS.

The business isn't a big part of BASF—only about 3% of total sales in 1995 of the company that topped C&EN's Global Top 50 list this year. But the decision to shed some of its history is a dramatic indication that the Ger­man chemicals giant is grappling with the thorny challenge of reshaping itself

to capitalize on the strengths in its tightly integrated portfolio.

"Magnetics were originally close to our core competencies—pigments, coat­ings, and plastics," Jurgen Strube, chair­man of BASF, tells C&EN. "But in the 1980s, the business changed dramatical­ly. It is now driven by consumer elec­tronic equipment manufacturers. There­fore, [BASF's magnetics unit] is better off in the hands of a company focusing on these businesses."

Although the magnetics business had been losing money over the past few years, and management was sometimes criticized for not bailing out earlier, the exit took time, Strube says. "We have struggled very hard to turn the business around. And we have done so, so other partners could be attracted to the busi­ness. It is difficult to find a partner inter­ested in a company posting losses, but if

it is doing better than breakeven, some­one might be interested."

Besides, he adds, the employees in the business "had made sacrifices in the past." That dictated that the company's exit from the business could not be abrupt.

The magnetics sale fits in with guide­lines the company has established for υ^εφ€Γίοπηΰ^ businesses and assets. The company has established deadlines for making such assets attractive to BASF over the long-term, he says; if it becomes clear they cannot meet the deadlines, and that they would receive better care from someone else, BASF is willing to let the business go.

Another example is BASF's pending sale of most of its holding in German pot­ash producer Kali & Salz to Potash Corp. of Saskatchewan (PCS) (C&EN, Sept. 9, page 8). "Potash is not a core business of BASF, but it is of PCS—this deal will help them go global," Strube says. European antitrust authorities have expressed some concern about the purchase, but Strube believes the deal ultimately will go through: "We are convinced the question can be resolved. The sales and market po­sition of PCS is in North America and Asia, and Kali & Salz is in Europe. The real com­petitors to any European producers are the C.I.S. [former Soviet Union], Israel, and Jordan."

Such global concerns are playing an in­creasingly important role in shaping the companies of the chemical industry. As Strube puts it, "We are following and serv­ing our customers. We must identify op­portunities arising from the decisions of our customers. What kinds of companies, for example, are establishing a base in Chi­na? Should BASF establish a base there, too, or will those customers be satisfied [with being] supplied with imports?"

The company must then ask itself, he continues, "Do we really want to invest so much in country A or B? Or would that be an accumulation of risks so big we don't want to? Are the rewards big enough? It is not top-down analysis, but a bottom-up demand from our custom­ers" that shapes the company's decision on what its priorities will be.

Also contributing to the priority setting, Strube adds, is the implication for raw ma­terials. "We don't want to be raw materi­als driven—for example, to say that we need a cracker in each major market," he says. "Rather, we ask ourselves what mar­kets will be served? What do they mean to our portfolio structure? What do we need in raw materials? All those questions are tied together."

BASF's Ludwigshafen, Germany, headquarters site covers more than 3 square miles; employs 44,500 people; and includes 350 chemical production plants and hundreds of labs, pilot plants, workshops, and offices.

SEPTEMBER 16, 1996 C&EN 1 3

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Such questions become particularly important when the company begins considering a major investment, such as the one it is negotiating for China. BASF's earliest investments in China, in the be­ginning of this decade, were small and scattered—dependent, Strube says, on the desires and locations of the compa­ny's joint-venture partners.

Since then, however, BASF's historic preference for large, integrated sites has come to the fore in its proposals for a major petrochemicals complex in Nan­jing, near Shanghai, worth some $4 bil­lion—a sum that has raised eyebrows in the financial analyst community.

Strube doesn't envision "Ludwigs-hafen 2," a duplication of its highly inte­grated and intertwined, massive head­quarters complex. "Ludwigshafen can­not be repeated," he states. "There are 131 years of development in the chemi­cal industry there, it simply cannot be re­peated." He cites BASF's integrated site in Antwerp, Belgium, as an appropriate model for the Chinese site.

Integration is particularly important— and valuable—to BASF, Strube contends. He refers to the concept of "verbund"— basically translated, a compound or associ­ation, but in context, much more. "It does not mean just integrated production units. It also involves know-how sharing; inte­grated energy management; and synergies in logistics, distribution, and infrastructure as well as in raw material supply and waste management," he says.

And although financial analysts often criticize the company's integrated depen­dence upon "heavy chemicals"—of the major German chemical producers, it is the least diversified into areas such as pharmaceuticals and health care—BASF remains convinced of the soundness of this approach.

As Strube argues, "We believe that in logistics, infrastructure, and energy man­agement alone, BASF profits from an inte­gration bonus worldwide of at least 1 bil­lion deutsche marks [about $675 million] every year." He cites an example: In Ant­werp, BASF has "optimized energy man­agement in our 50 plants. Despite our en­ergy-intensive processes, and due to our energy recovery systems, we need almost no fossil fuels to generate process steam."

The company's chemicals unit shows particularly strong operating links, he points out. Last year, he notes, some 20% of sales output was exchanged among the chemical operating divisions. Anoth­er 25% of sales was passed on to other operations of BASF, such as plastics, fi-

Yangzi BASF Styrenics Co. Ltd., a joint venture between BASF and China's Sinopec Yangzi, in mid-1997 will begin producing polystyrene and intermediates at BASF's plant in Nanjing.

bers, and colorants. Net sales to third parties represented only one-half of the corporation's entire total.

"Our Chinese partners have been to Ludwigshafen and Antwerp," he says. "They appreciate that BASF is a very competitive partner in integrated opera­tions, integrated research, and so on. They know that we would therefore be a good partner to help set up this kind of integrated site."

Strube says BASF is continuing its ne­gotiations with the Chinese government and partners about the Nanjing project. He expects results on the negotiations by early to mid-1997.

"The investment market [in China] is very competitive," he points out, "with lots of companies working to invest." Among the points being considered are questions about import duties, cost of im­ported equipment, and availability of lo­cal equipment. Those concerns, however, "are true for all companies considering investing there. Our basic consideration remains that growth in China will contin­ue. So there is room for more than one project, although we don't want over­building.

"We consider an investment in China a very long-term commitment." What's more, Strube says, "long-term, we are convinced that a commitment to an inte­grated site will be more economic than many individual sites. Even with the pos­sible risk, we are convinced integration is the way to go."

The desired investment in China, as well as others in the Pacific Rim, are helping reshape the company's capital spending and asset distribution.

According to Hanns-Helge Stechl, deputy chairman of BASF, with the com­pany "globalizing more and more, the percentage of capital expenditure being spent in Ludwigshafen will be reduced— from a historic level of about 50 to 55%, to perhaps 35 to 40%" of the company's total capital spending over the next few years. The company has budgeted some $13.5 billion in capital spending over the next five years, a quarter of which will be for its chemicals division.

And the division already has plans for at least some of that money. Among the latest round of projects: in Antwerp, a 10th furnace under construction at the ethylene cracker; in Ludwigshafen, a new plant to have alternative production of methanol and ammonia, and produc­tion units for vitamins A and E; in Free-port, Texas, an oxo-C4 plant expansion and an acrylic acid plant under construc­tion, scheduled for completion at the end of 1997; and in Ulsan, South Korea, a new facility for polytetrahydrofuran for elastic fibers, part of a new site in Ulsan that will be built up over 10 years.

The company has already put major investment funds into the site it picked up in Schwarzheide, in eastern Germany, upon reunification of the country. BASF was one of the first large German compa­nies to put major investment into the

14 SEPTEMBER 16, 1996 C&EN

area, and the site has operated at a loss since BASF took it over, to much skepti­cism in the industry. However, the com­pany predicted at the time that it would take five years for the site to prove prof­itable. And, about on schedule, Max Dietrich Kley, BASF's board director, now says that Schwarzheide turned in "a good operating result in first-half 1996. It most probably will be at breakeven in pretax profits by the end of this year."

All the projects are helping to shape the company into what Strube wants to achieve: a "transnational" company.

"We want to be accepted across all countries of the world, not be just a Ger­man company bringing German customs, traditions, and so on," he explains. Strube believes the "transnational" concept re­flects changing attitudes toward industry around the world. " 'Multinational' used to equal 'bad.' But lately," he points out, in the World Investment Report, compiled by the United Nations Conference on Trade & Development, "these transnation­al companies have become recognized as the engine of growth. They are even more important than development aid. They are bringing not just capital, but technology management know-how, access to distri­bution channels, and other resources.

"We wanted to use that spirit—we are striving to be a transnational chemi­cal company by 2010," the year targeted for a reborn corporation in the compa­ny's "Vision 2010" statement that Strube frequently cites.

Strube: customers shape company's priorities

Such cross-border integration is never simple and has proved a tough challenge for German companies, which are histor­ically stereotyped as heavily Teutonic and inflexible.

Melding cultures is difficult, Strube agrees. "Generally, mind-set is fixed ear­ly in life. When we made several acquisi­tions in the U.S., for example, we had to work out how to bring people together."

That led, he says, to an annual gather­ing of all the international executives of BASF—about 350 of them—for a two-day meeting at which the executives get to know each other. That, in turn, "leads to respect for each other and leads to plac­ing confidence in each other, to be com­fortable with each other." The result: "It is easier to pick up the phone and give a colleague a call. It used to be that you would write a letter, which was probably reviewed by your supervisor—and the le­gal department."

International contacts within the com­pany are also important for management development, he says. At BASF, "Interna­tional experience is mandatory for pro­motions. It is a must," Strube says, to help overcome differences in mind-set.

To be a transnational chemical compa­ny is the first goal mentioned in the com­pany's Vision 2010 statement. Among its other statements are, "Our customers view BASF as their partner of choice," and "Our market is the world."

The company began working on its Vision 2010 in 1993, says Strube, as it

became clear the company— along with others in the Europe­an chemical industry—was "fac­ing difficult times. Our central idea was that we cannot become absorbed by tackling the difficul­ties of today. We must look for­ward with a perspective that is convincing and attractive, using that to direct our efforts." How­ever, he adds, such a perspective "needs sufficient lead time—for example, for R&D, 15 years is ab­solutely required. After all, some­times the lead time for a new drug or active [ingredient] is 10 to 12 years."

The Vision 2010 statement also marked an increasing will­ingness for entering into joint ventures and alliances. BASF has had some ventures in the past, of course, including Rheinische Ole-finwerke, which was established between BASF and Royal Dutch/ Shell several decades ago. In gen-

BASF at a glance Headquarters: Ludwigshafen, Germany Sales: $31.14 billion in 1995 Net profits: $1.66 billion in 1995 Employees: 106,565 at end 1995 Major divisions:

• Plastics & Fibers: Polyolefins, polyvinyl chloride, engineering plas­tics, urethane foams, and nylon and polyester fiber intermediates. First-half sales were 24% of total corporate sales of $16.35 billion.

• Colorants & Finishing Products: Colorants, process chemicals, printing inks, pigments, dispersions, and coat­ings. First-half sales, 23% of total.

• Health & Nutrition: Pharmaceuti­cals, fine chemicals, vitamins, crop protection agents, and fertilizers. First-half sales, 21% of total.

• Chemicals: Petrochemicals; indus­trial chemicals, including oxo-alco-hols; intermediates, including diols, glycols, formic acid and derivatives, and amines; and specialty chemicals, including surfactants, complexing agents, biocides, and fuel additives. First-half sales, 15% of total.

• Oil & Gas: Crude oil and natural gas production and marketing; joint venture with Russia's Gazprom. First-half sales, 9% of total.

• Information Systems: Magnetic media and compatible mainframes and peripherals. First-half sales, 5% of total. With plans to sell magnetics unit announced in August, in the future this division will be included in the "other" category.

• Other: Miscellaneous businesses. First-half sales, 3% of total.

eral, however, BASF has had a somewhat go-it-alone attitude.

That has changed, says Strube: "BASF has adjusted to the idea that strong part­ners are important for promoting BASF through the world"—in certain respects. Vision 2010, for example, approves efforts to "further strengthen our raw material position throughout alliances with strong partners." Joint ventures also provide ac­cess to new markets in the Pacific Rim, where, as he points out, in Asia, "you are more or less tied to finding partners."

"The pace has become so frantic, de­mands on resources [have become] so great, and the challenges and opportuni­ties are arising more rapidly," he says. "Often bringing together the resources of two companies is the answer."

Continued on page 18

SEPTEMBER 16, 1996 C&EN 15

business

Will this TV show get good ratings? Starting this week, BASF will begin broadcasting its own television pro­gram on the new German regional ca­ble channel RNF.

The channel serves about 1.2 million people in 500,000 households in the area bordered by the towns of Neustadt, Weinheim, Worms, and Bruchsal, with­in a radius of about 15 miles from Lud-wigshafen. This area includes the homes of many BASF employees.

The 30-minute magazine program will be repeated at five different times on Fridays, Saturdays, and Sundays. The program will look at different as­pects of the company's activities—for example, interviews with researchers discussing a current project—as well as cultural and sporting events that BASF supports. It will also include con­sumer tips and information on the company. According to company offi­cials, the program will depend heavily on employee input. A teletext service will also be included.

Continued from page 15 He cites as a good example the Du-

Pont-BASF joint venture in China in ny­lon intermediates. "In other parts of the world, we compete fiercely—intense­ly—with DuPont in nylon intermediates. But looking at the opportunities today-okay, this makes sense," he says.

Acquisitions also are welcome. "We intend to keep investing," says Strube, "in America, Europe, and Asia," but with prudence. "The prices of [many poten­tial acquisitions] today are quite high, so we are not trigger-happy."

The company must evaluate an acquisi­tion's potential, he adds, for reaching the company's goal of 10% return on average capital employed, averaged over the eco­nomic cycle. In the first half of 1996, the corporation as a whole achieved a total re­turn of 11.6%, according to Kley.

In BASF's chemicals division, adds Strube, the average return on investment last year topped 40%, and the annual av­erage for 1990 to 1995 was about 25%. The main reason for the strength of this particular division, Strube says, is the eth­ylene chain the company can exploit.

"We have the broadest palette of downstream ethylene products," he con­tends. Indeed, looking only at products derived directly from ethylene and ethyl­ene oxide, "We have 250 products with high added value."

Even the world's largest chemical company, however, must keep alert to market developments. Strube says BASF is "continuing to analyze the possible im­pact on us" of the joint ventures an­nounced last month by BP Chemicals and Dow Chemical and by Exxon Chem­ical and Union Carbide in metallocene catalysts and polyethylene.

"They took us by surprise and are strong positions that will undoubtedly cause changes in the marketplace," says Strube. "We try to be realistic: We do not see metallocenes having a major impact on polyethylene sales in the next few years. Maybe early next century they will. Metallocene technology will certainly be there, but it probably will not be a goose laying golden eggs. For the time being, we look at our own capabilities, but we do not rule out possible alliances."

In general, however, the company pre­fers to rely on its own technological strengths. As Strube puts it: "We combine our know-how with that of external con­tractors when planning and building plants for manufacturing basic chemicals such as ethylene, methanol, or ammonia. However, almost all of our other chemical plants are designed exclusively in-house."

The company's R&D spending for new products and processes in 1995 was $1.41 billion. "At BASF, we are working

quite hard in developing the concept of ecoefficiency—processes and products attractive in both economic and écologie terms," he says. This is, in fact, one of the points in the company's Vision 2010 statement: "To consider economic, so­cial, and ecological requirements in a re­sponsible manner . . . to reconcile busi­ness interests with society's demands."

The Responsible Care program sup­ported by the International Council of Chemical Associations, he predicts, will help convince society that the chemical industry is a responsible world citizen and that the industry "is not going overseas to do something outside the law in the U.S., the U.K., Germany, and so on.

"People must recognize that in to­day's world, electronic media make pos­sible instantaneous knowledge of what goes on," Strube says. "We are living in a global village, and you can't escape anything even if you want to, and we don't. We are devoting huge amounts of money to new processes and products. It would be unacceptable to see something that could be done and leave it undone."

"Leaving things undone" is not the way BASF likes to do things. Far more the company's style is tying up loose ends, working them into a process, plant, or chemistry stream for an integrated portfo­lio in a global marketplace.^

CFC Ban Beginning To Bite U.S. government targets CFC smugglers, alternatives finally gain marketability

E arlier this month, a Miami federal grand jury indicted three Miami residents for smuggling 8 million lb

of chlorofluorocarbon-12 into the U.S. between 1993 and 1995. Refrigeration U.S.A. Inc. owner and president Roland Wood and two employees were charged with violating the Clean Air Act and anti-smuggling laws and with conspiring to defraud the Internal Revenue Service. Each faces a potential sentence of 625 years and fines exceeding $30 million.

With a $5.80-per-lb excise tax and a ban on U.S. production and imports from Jan. 1, 1996, chlorofluorocarbons (CFCs) used in automotive air conditioners have

been favored black market products at Mi­ami ports. But along with increased cus­toms controls and highly publicized ar­rests, circumstantial evidence—in the form of skyrocketing CFC p r i c e s -suggests smuggling has lessened in the U.S. this summer. And that means replace­ments are finally edging into the U.S. re­frigeration and air-conditioning market.

The indictment stems from Operation Cool Breeze, a nationwide network of agents from the U.S. Customs Service, the Environmental Protection Agency, the 1RS, and the Department of Justice. Operation Frio Tejas targets smugglers who bring CFCs through the Mexico-

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