Action now to avoid failure in the future

10 April 1993 00:00  [Source: ICB]

Immediate, high level action is Dow Europe ceo, Andrew Butler's solution for Europe's deteriorating industrial competiveness - Mary Heathcote reports on his hardhitting speech at the recent EPCA annual meeting in Vienna.

URGENT AND high level action must be taken to tackle Europe's deteriorating industrial competitiveness, Dow Europe ceo Andrew Butler told delegates at last week's EPCA annual meeting in Vienna.

In a strongly worded speech entitled, 'European chemical industry - danger ahead,' he pulled no punches on the implications of a failure to deal with the issue. And he stressed that the responsibility for action lies at every level of the chemical industry, as well as with company chiefs and politicians.

'A failure to take action can only mean a continued erosion of European competitiveness,' he said. A continued loss of competitiveness will only lead to a further loss of jobs and the inevitability of calls for trade protectionism that lead ultimately to the creation of a petrochemical 'fortress Europe'.

'Politicians who fail to act in time always do this, and this I believe is one of the most important danger signals in front of us. A fortress around Europe will only protect a realm of falling output and demand, declining profits and technical innovation, and rising unemployment. All of us in this room should be acutely aware of the devastating consequences of such a reaction for a globalised trade sector like ours.'

Already, it seems, the message is getting home where it counts. Butler pointed to recent political statements echoing the concerns industry has been reiterating since the early 1990s. He referred to the recent comments of DGIII director general Ricardo Perissich who said: 'The only conviction I have is that there should be a large manufacturing base in Europe. That is still the main source of prosperity in our society. The fashionable ideas of the 1980s, that we are going towards a post-industrial society, are rubbish!' And Butler saw developments on pay and wage agreements in Germany, Spain and potentially the Netherlands as encouraging signs of a new level of realism.

He argued that the issue deserved high level attention. 'One of my favourite quotations from Samuel Johnson sums up well what is happening today: "When a man knows he is to be hanged in a fortnight, it clears his mind wonderfully."

'Twenty million unemployed and a trade deficit of $70bn may not quite bring about hanging in a fortnight - though perhaps they should. But there is a new spirit of awareness around Europe. We need it. There are problems in many other vital European industries: steel, automotive, aluminium, glass, fertilisers, airlines, even electronics and telecommunications.'

But encouraging as a dawning political recognition of the problem may be, it is only the start of tackling the fundamentals of the problem. Butler spelt out a three point programme that industry should, in his view, push for now.

'First, European industry needs an aggressive revitalisation strategy. We need fresh and creative thinking and new forms of consultation.' He argued for the need for high level meetings between the EC and industry leaders on a practical agenda, undistracted by Maastricht, subsidiarity and the rest of the politics.

'This could take the form of a high level "Council on Competitiveness." The agenda must be clear - stop the decline in Europe's share of world trade, improve the trade deficit and reduce unemployment.

'This council must provide quantitative measurements and a timetable to deal with each element of uncompetitiveness,' he said. Secondly, he stressed the chemical industry's unique position to understand the totality of this crisis. 'We are an enabling industry because we supply products to almost every other industry in Europe. We understand technologies and markets and we are truly global. In fact the heritage of our industry is to catalyse and stimulate industrial growth and we must continue to look outwards, rather than concentrate on our own problems. We must accept the responsibility to be restless, creative and aggressive externally.'

In his third point he proposed that, 'everyone of us must do something. Our companies have many people actively engaged in a multitude of external committees, both nationally and in the institutions of Europe. Each of us must demand that every agenda be rooted in the urgent need for improved competitiveness in Europe. Mindsets must be changed. It is our future that is at stake. We should take charge of the agendas.'

Industrial gas and electricity prices
Pfg/kWh/yr Index Pfg/kWh/yr Index
US 1.38 100 7.7 100
Germany 2.15 156 12.6 163
The Netherlands 1.70 123 8.2 106
UK 2.03 147 8.8 114
France 2.00 145 10.2 132
Italy 2.16 156 9.4 122

1Q1 1993 taxes included, for firm contracts of 530m kWh/yr
2Q1 1993 taxes included, for firm contracts of 10MW, 7000 hr/yr

Source: Dow Europe

Labour costs
  US Germany Japan

Dow labour cost index
  (June 93 US $/fur worked)
100 139 127
Chemical industry productivity
  growth % (1985-92 value
  produced/manpower cost)*
28 16 37
Chemical industry employee
  growth % (1985-92)*
2.5 5 3.7

* Institut der deutschen Wirtschaft, Koln
Exchange rate: 1 US$ = 1.60DM/107.25 Yen

Source: Dow Europe

Impact of energy costs on
manufacturing costs for chemicals
  Energy cost,

Raw material
& feedstock,
Other costs,

Vinyl acetate
20 65 15
Propylene oxide 45 25 30
PVC 38 22 40
Polystyrene 15 65 20
Chlorine, caustic 52 12 36

Source: Dow Europe

Butler believes that five key factors underlie Europe's eroding competitiveness: energy costs; infrastructure and logistics; taxes, trade and subsidies; labour costs; and ill-thought-out environmental costs. 'I am not fatalistic about the future of petrochemicals in Europe,' he emphasised, 'because I still believe the fundamentals are strong.'

Energy costs is the first place many chemical producers look. For most petrochemical products, energy represents between 15-50% of the cost of manufacture, Butler said, but industrial gas prices in Europe are seldom less than one and a half times the price of gas in the US, and electricity is also much more costly here - 20-60% more than in the US.

A second handicap for Europe compared with chemical competitors in the US is its poorly developed and fragmented transport infrastructure. Aside from the well-documented figures on the advantages of the US Gulf Coast pipeline network, European chemical producers move about 560m tonne of products mostly by road, not railway. 'In fact about 97% of road transport volume in Europe is essentially domestic transport, 66% of which is moved over distances of less than 50km.

'You don't need to do a lot of arithmetic to quickly conclude that a lot could be saved by expanding the rail infrastructure and service beyond the narrow focus of national design to respond to the needs of pan-European railusers, such as the chemicals producers.

'Although we look to governments to allocate resources wisely and for the maximum benefit to society, for the transportation sector this can only be achieved if our transportation infrastructure reflects European-scale planning and allows a more practical balance of transportation modes.'

Butler emphasised that taxation was another area where governments fail to allocate resources wisely. 'It is no secret to those of you who live within European borders that we are a heavily taxed continent. And the burden of that taxation begs the question of whether money taxed away from private hands and spent by governments is allocated as efficiently and beneficially as it is by free markets.'

Butler acknowledged that this issue would be vigorously and long debated. But, he stressed, 'it is clearly understood that in some countries in Europe, tax revenues are used to prop up and continue fundamentally non-viable operations in all sectors of the economy.' Including petrochemicals.

In the early 1980s. he pointed out, subsidies were instrumental in reducing the overall competitiveness of the European petrochemical industry.

Given this danger, Butler was emphatic in his support for continuing the privatisation of the French and Italian petrochemical majors. But he also warned again of the dangers of giving in to the temptation to protect. 'Except in clear cases of dumping,' he said, 'each of us who deal with trade issues with our national governments must resist efforts to erect protectionist barriers to trade.'

'I believe eliminating trade barriers between western Europe and the new democracies of central and eastern Europe is particularly important. There are many important opportunities in these newly opened markets that can only thrive in a competitive environment. 'Our attitude towards this region is key. The bottom line is - we need each other.'

A third area of competitive disadvantage is the cost of labour. 'We all know that European labour costs a lot - so does Japanese labour. But the actual cost of labour doesn't matter so much. It's what that labour brings you.'

Dow's labour costs in Japan, the US and west Germany demonstrate some interesting differences in the hours worked. 'Our Japanese workers gave us 2035 hours/year, and our US workers 1975. Our German workers, however, only worked an average of 1560 hours in a year - 23% less than their Japanese colleagues and 21% less than their US counterparts. On a per-hour-worked basis, the US employee still comes out as the best investment, but the Japanese workers - even at a 54% annual higher cost - actually cost us less on a per-hour-basis than their German colleagues.'

German workers are not inherently uncompetitive, Butler stressed. It is the mandated 37.5 hour work week and 30 days of paid vacation entitlement that creates an unsustained handicap when comparing them with workers in other parts of the world.

'The reality today is that these generous benefits simply exceed what industry can afford. How absurd it is then to think about introducing a 49-hour maximum work week across Europe.'

The final issue Butler raised was the environment. And his concern rested with the effectiveness of the expenditure currently required. The European petrochemical industry spends considerable amounts in environmental, health and safety improvements - more in recent years than its US and Japanese counterparts. In 1992, for example, European capital spending on environmental protection was $2.8bn, compared with $1.4bn in the US and $1.1bn in Japan.

'We know that waste reduction and pollution prevention makes good business sense. And we know that environmental fitness is crucial for long-term financial success. But the reverse is equally true. Without long-term financial success, continued investment in environmental progress will be impossible. It is, therefore, critical that we direct our money and effort into the projects that bring the highest return in environmental progress.'


Butler was particularly critical of politicians who even now speak of the need to go beyond current legislation and impose an international level playing field. 'This is an environmentally and economically self-defeating policy,' he said. 'It is an incredible pursuit of diminishing returns, pursuing as it does increasingly smaller gains from the control of industrial emissions while giving little attention to the range of environmental influences at all links in the chain of consumption and human activity.

'Each of us in this room can support the development of better policy choices by working with environmental authorities to ensure that appropriate cost-benefit analysis is performed before regulations are adopted.' He made it clear that the actions required to restore competitiveness in Europe were both challenging and demanding, but stressed that achieving these goals 'will only be possible if we each commit to take action and to change traditional thinking within our industry and within European institutions.' This is key. And he warned: 'if we do not act on these issues immediately, there will be cause indeed for fatalism and gloom.'

By: Mary Heathcote, Asian Chemical News
+65 6780 4359

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