BASF heads for the watershed

07 April 1994 00:00  [Source: ICB]

In parallel with its longstanding US and European counterparts in the region, BASF Japan has suffered the discomfort of the recession. But this temporary setback blurs into insignificance against the backdrop of the chemicals powerhouse that is Asia-Pacific, where the company is evaluating its market.

By Mary Heathcote

THE EARLY 1990s have proved a watershed for Japanese chemical producers, denting beyond simple repair the high expectations and confidence that for some decades have been the norm.

For foreign chemicals investors, the experience has also been sobering. BASF Japan is typical in reporting losses in both 1992 and 1993 in its Japanese operations, and sales down 12% last year.

But unlike their Japanese counterparts, which are now facing up to sweeping and fundamental surgery in their operations, foreign subsidiaries in Japan have not been so much shaken by the experience as stirred into action. From the distant vantage of many a parent company, the temporary discomfort of a Japanese recession blurs into relative insignificance against the heady backdrop of the world's chemicals powerhouse in Asia-Pacific.

The development of BASF in Japan has paralleled that of many of its longstanding US and European counterparts in the region. A century or more of trading contacts was bolstered in the 1960s and 1970s by moves to put investment in on the ground through joint ventures.

In the 1980s, with some solid manufacturing and marketing experience under their belts and resources to spare, the shift to 100% owned investment in manufacturing was initiated.

These ventures are now reaching the stage where their success can realistically be evaluated. However, it is becoming clear that, regardless of their performance, external factors such as shortage of finance and shifting markets will prove the significant influences when it comes to future investment decisions.

BASF Group in Japan (Yen bn)
	1992	1993
Sales	131.52	115.33
Total assets	96.63	91.20
Capital expenditure	5.61	2.13
Employees	1244	1235
Paid-in capital (BASF share)	13.91	13.91
Sales by operations (%)
Plastics	41	40
Chemicals	19	20
Dyestuffs/finishing products	33	33

Hans Kast has been president of BASF Japan and president of the Japan regional division since May 1993, so he has witnessed directly the scale of the decline. '1993 was a very difficult year for the Japanese economy as a whole and for BASF in Japan,' he told participants at this year's financial press conference in Tokyo.

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'The worldwide economic downturn finally also hit Japan: Japan experienced the most severe recession since the end of World War II. At the same time, the yen reached its highest appreciation ever against the US dollar.

'The chemical industry, as a major supplier to all other industries, was hit hard by this crisis. And unfortunately, the business of the BASF Group in Japan also suffered significantly from the recession.'

The strong yen proved particularly painful, though exports account for only perhaps 10% of the Japanese economy. Kast anticipates 1994 will also be difficult, though the first effects of cost cutting will start to show through. Recovery, however, will come at the earliest during 1995.

The BASF Group in Japan consists of BASF Japan itself plus 12 affiliated companies (see box). Group turnover last year was Yen115bn ($115m), while BASF Japan generated Yen55bn sales, both down 12% over 1992.

And, says Kast, even though cost-cutting measures were given 'highest priority in all our companies, the profit situation was completely unsatisfactory'. BASF Japan recorded a loss of Yen350m, its second year in the red, though cash flow remained substantially positive.

The workforce will be sustained, however, Kast stresses. Numbers have risen from around 200 at the start of the 1980s to a total in the group of 1200 now, and 500 in BASF Japan. Reductions are being sought through reduced graduate intake, for example, he explains.

The decline was suffered to a similar extent across BASF's operating sectors in Japan, which comprise by sales, 40% plastics, 33% dyestuffs and performance chemicals, 20% chemicals and 7% consumer products.

In BASF global terms, however, BASF in Japan takes on a different perspective. 'The 1990s will be a decade of growth in Asia-Pacific for BASF, and BASF Japan is the foothold for development of the region,' Kast told ECN in Tokyo. 'BASF will use the Japanese operation to support growth in surrounding countries, whether exporting products or service and support.'

The existence of BASF Japan and the regional division in the country, however, is down purely to the importance of Japan and its significance for the whole BASF group. All other Asean countries and Australia are managed by the other regional division, BASF Southeast Asia, based in Singapore.

Central to BASF Japan's operations is its 160 000m² manufacturing site at Yokkaichi, between Tokyo and Osaka. The site is adjacent to the extensively integrated petrochemical, refinery and chemical operations of companies such as Tosoh and Mitsubishi Petrochemical. It is, however, quite separate from the rest, linking in only for waste water treatment and nitrogen supplies.

Land was first acquired at Yokkaichi in 1985, following the decision to invest in wholly owned manufacturing. Some 50 000m² was purchased, and in 1988 the process chemical plant operation started.

A further 110 000m² of land was acquired in 1989, and part of this used for the tetrahydrofuran (THF)/polyTHF plant which came onstream in 1992.

The same year BASF Japan's technical centre and materials research laboratory were opened at the site, and last year the MDI products technical division transferred to Yokkaichi from Kashima, east of Tokyo, where polyurethanes joint venture partner Takeda has its operations. To date, the investment in Yokkaichi totals Yen15bn.

The acquisition of additional land was, Kast explains, an opportunistic move. 'It is very difficult to get land in Japan in the first place,' he says. 'So when the opportunity arose to buy more, we made the purchase for longterm strategic reasons.'

Approximately half the site is available for development, 'space for another two projects,' in Kast's estimation. 'We have got a few things in mind,' he concedes, 'but they are only at the feasibility study phase. It is clear we need a breathing space after the THF development.'

Engineering plastics which, including Styropor EPS and polyurethanes, account for 40% of Japanese sales, may look like a reasonable investment contender, particularly as earlier investments have followed the establishment of a market presence.

PP similarly is clearly a gap in the Japanese line-up at a time when global and European position have been lifted to number three by the purchase of ICI's business.

Kast, however, plays down the possibility of investment in either production or acquisition in both sectors. 'You need a significant market share to sustain manufacturing capacity in engineering plastics, so we rely on exports from the US and Europe,' he comments on the former. And on the latter: 'we have almost no PP business in Japan, but instead have licensed our technology to Japanese manufacturers.'

In general, Kast observes, money is so much tighter now than in the 1980s, alliances look a much more attractive prospect than an acquisition or grassroots investment.

'We are looking at cooperation opportunities with Japanese companies in areas of common interest,' he discloses. In mind is the possibility of a production collaboration, for example in areas where BASF as yet has no position in Japan.'

He even concedes that, if there were a need, BASF would consider participation in a cracker in Japan, though he emphasises there 'will be no need for this type of involvement at Yokkaichi for a very long time.' And in line with the corporate definition of a petrochemicals' role (ECN 21 March), he points out that BASF's Japanese operations to date have all been downstream, a situation he expects to continue.

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At Yokkaichi, meanwhile, manufacturing attention is absorbed by the process chemicals batch production plant and the THF/PTHF continuous facility. The process chemicals operation comprises seven lines with capability of producing as many as 200 product types, though more typical is the 120 generated last year. Key markets are dispersion, speciality textile, leather, printing and paper chemicals, the latter by far the largest.

Maximum plant utilisation attempted to date is around 80%, an annual output of 25 000 tonne/year. However, though the actual limits of production have yet to be established, investment in a debottlenecking will probably be needed to lift output significantly.

The tetrahydrofuran operation involves conversion of 1,4-butanediol to THF (16 000 tonne/year capacity) and then polymerisation to polyTHF (13 000 tonne/year). Raw materials, predominantly 1,4-butanediol, are imported into the Yokkaichi site - 70% from the domestic market, and 30% from the parent company in Ludwigshafen.

Two grades of polyTHF are produced, under 2000 tonne/year of wax with molecular weight 1000 for use in plastics, predominantly polyester; and close to 11 000 tonne/year of 2000 molecular weight product for use in plastics, synthetic leather, polyesters and Spandex elastic yarn. Korean producer Tae Kwang is the major customer for the 2000 grade, last year taking 63% of the total production output.

PolyTHF production at Yokkaichi is already running close to flat out, BASF reports, and will top full capacity in 1994, only its second full year of operation. The facility is the only one of its kind in Asia-Pacific, but BASF operates a number of plants worldwide so any decision to expand production at Yokkaichi would be balanced against competitive investment opportunities elsewhere in the global market.

BASF Japan affiliated companies
Mitsubishi Yuka Badische	Expandable + foamed plastics, acrylic dispersions
Polyurethane Chemical Co	PUR systems and elastomers
Polyurethane Engineering Co	PUR processing machines, ESTA process equipment
Mitsui Badische Dyes	Dyestuffs
Knoll Japan	Pharmaceuticals
Morimura Badische Co	Toners, resin colours, wax compounds
Nisshin Badische Co	Vitamins and feed additives
Nippon R-M Co	Automotive refinishing paints
Knoll Taisho Pharmaceutical Co	Pharmaceuticals
Takeda Badische Urethane Industries	Thermoplastic PUR, MDI production
BASF Engineering Plastics Co	Engineering plastics
BASF Nichiyu Coatings	Automotive paints

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

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