Gearing up for growth

07 November 1994 00:00  [Source: ACN]

Hoechst has set itself ambitious aims in Asia with plans to double its sales and assets base there over the next five years. Angela Macdonald-Smith reports

Hoechst, the latest German company to announce a major initiative in Asia, is making the strengthening of its position in the region a top priority. Acknowledging that it is under-represented there, the group is now aiming to double its sales and asset base in Asia over the next five years to at least 20% of the group total, chairman Jürgen Dormann announced in Tokyo last month.

Employment levels will treble in the region, from 21 000, within five years to support the effort.

'We expect the chemical markets in this region to achieve real annual growth of 3% in Japan and up to 10% in countries such as Thailand, Malaysia and, above all, the People's Republic of China between now and the year 2000... Our strategy at Hoechst is to build up our business and assets in Asia even faster than the regional market is growing.'

Such an effort will clearly require a careful focusing of the group's resources in order to exploit its full potential in Asia, admits Dormann. This will involve building on current strengths and leveraging existing expertise wherever this is located within the group as well as continuing to foster partnerships whenever these bring to Hoechst additional resources that the group does not have or cannot develop in the short term.

'The more practical way forward in Asia lies in joint ventures and the scope of such cooperative ventures does not always have to be limited to Japan,' says Dr Hans Georg Janson, member of Hoechst's board of management responsible for Asia. Janson is to retire early next year, to be replaced by Hoechst Japan president and chief executive officer Horst Waesche.

A new regional strategy will ensure coherence throughout the region and will support the company's aim to increase the proportion of Asian sales coming from local production. The group will not, however, establish a regional Asian headquarters, preferring instead to run the business from the group's world headquarters near Frankfurt.

Just over half of the group's DM5.7bn (US$3.8bn) turnover in Asia, which increases to over DM7bn if non-consolidated activities are included, is based on local production. But over the next few years this will increase as capacity in Europe, instead of being used partly to export to Asia and Latin America, is directed mostly just to European markets and the group builds up local production.

For example, should market demand warrant it, Hoechst would be prepared to establish local acetic acid production to supply its new VAM investment in Singapore, Dormann told ACN.

Projects will focus on business areas where the group is already among the global leaders and may be expected to underpin current projects, explains Lothar Hinkel, Hoechst's regional director for the Indian subcontinent, Pacific region and Southeast Asia.

The VAM plant is intended to supply product throughout Asia and this regional approach is likely to characterize Hoechst's development in the area, particularly for large investments where economy of scale is vital. Previously, some of the group's investments were only feasible with tariff protection and now this has declined only locations which offer the opportunity of establishing world competitive production can be considered.

In the case of the VAM investment, Singapore offers the maximum benefits, not only because of its geographic location close to the important markets of Malaysia and Thailand, but also for raw material supply and government support in the way of investment incentives for example, says Hinkel.

Central to Hoechst's expansion plans in Asia will be today's investment hotspot of China, where the group has pledged to double its total investment to US$600m within the next two or three years, Dormann announced in Beijing last month.

Hoechst's involvement in this market was inherited through the acquisition of Celanese and involved a cellulose acetate joint venture in Nantong between Celanese (30%) and China National Tobacco Corp (70%) for cigarette filter tow. After initial hitches the success of the jv enabled a further US$150m of investments to double capacity and integrate backwards into raw material production. This formula was then repeated at two other locations within China - at Zhuhai, Guangdong province, and Kunming, Yunnan province - involving the same partner in each. The two new US$50m cellulose acetate flake units are still under construction.

After a period of negotiation, the group signed two more contracts in China this year, one for plastic masterbatch for granulates, and a larger one, involving a US$24m investment, for antibiotics production at a facility north of Beijing in co-operation with North China Pharmaceutical Corp.

Also in the pharmaceuticals field Hoechst's generics affiliate Copley Pharmaceutical is negotiating with Chinese and international partners to invest in generics production there, while another pharma affiliate, Behringwerke, is negotiating a US$80m investment with local partners for plasma proteins production.

A US$30m joint venture contract to produce 4500 tonne/year of technical polyester fibre in Shanghai is now expected to be signed by the year end, with production due to start up by mid-1996. Hoechst will take a 60% stake, with the remainder shared between local companies China Worldbest Corp and China New Building Materials Corp, Dr Klaus Weisskopf, regional director for China, Taiwan and Hong Kong, tells ACN. He confirms the group has an additional US$250m of investments still in negotiation in China. As probable investment areas he cites dyes, automotive refinishing paints, agrochemicals and industrial gases.

All these investments will be carried out through joint ventures with local partners, which Weisskopf believes is a fully justified approach. 'We need the help of local partners... and partners with some experience in relevant production, not just an investment or financial partner.'

Hoechst started work internally in China in the 1980s, originally through its Hong Kong subsidiary. But in recognition of China's important links with other countries such as Taiwan, for example, it now applies an approach for the whole of the greater China region. The group still has legal entities in each country but manages business there as an integrated region, through an umbrella company, Hoechst China Investment Co, set up in July this year, notes Weisskopf.

A similar co-ordinated regional approach is now used for the Indian region, which also includes Sri Lanka, Bangladesh and Afghanistan, adds Hinkel.

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Highlighting the more significant of Hoechst's recent and planned investments in Asia, Hinkel points to the acquisition in Australia of the remaining 49% of shares in Biotech Australia, which now operates as a strategic location for its worldwide genetics research work for pharmaceuticals, agro-chemicals and veterinary products.

With good availability of 'excellent' scientists and suitable facilities, salaries that are one-third or even one-half lower than in Germany, fewer public concerns and relatively easy government approvals, Hoechst believes it has 'drawn a cheque on the future', says Hinkel. The keenness in Australia to develop technology there will enable it to gain access to value-added production.

Most recently, Hoechst Australia increased its chemicals trading activities with the acquisition of Allied Petrochemicals. The business, which focuses on fine chemicals trading, is synergistic with HAL's existing trading activities and has an annual turnover of around Aus$10m (US$7.3m).

The future in Australia for some of Hoechst's traditionally more established activities, however, does not appear so sure. Similar to in India, Hoechst has problems with raw materials supply for its polyolefins operations there due to its non-integration upstream to ethylene.

In Europe, where it is the biggest ethylene buyer, along with Solvay, this is no problem, but in its much smaller Australian operation, where the group's main competitors have their own ethylene supplies, the situation is 'a bit tricky', admits Dr Gunter Metz, Hoechst board member responsible for polymers and fibres. 'We are still considering our position as a stand-alone producer,' he says, indicating that the small and outdated PP operation, in particular, 'could form part of a bargain one day' in the course of the ongoing restructuring of the petrochemicals sector in Australia.

The group chose not to participate in earlier restructuring involving Exxon and Mobil in Australia, which could have given it access to upstream production.

Hoechst's polyolefins business in India has already seen changes, with the company's withdrawal from the hdPE venture PIL. A decision is now imminent on whether to go ahead with a new 120 000-150 000 tonne/year hdPE plant in a jv with IPCL, which is integrated upstream. Hinkel is also 'optimistic' for negotiations underway with Reliance for a technical fibres project, and, encouraged by the advances in the liberalisation of the economy and by the huge developing market, many more ideas are in the embryonic stages.

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In neighboring Pakistan, Hoechst is starting up production of DOP plasticisers for PVC production, in a DM43m jv in Lahore, as well as of resins dispersions at the same site and of the starch-based plasma product Haemaccel in Karachi. These plants will almost double the company's existing sales in Pakistan within two or three years.

In both India and Pakistan, Hoechst sees potential for following the fast upward movement in the chemical industry and to satisfy the basic chemical needs in those countries, stressed Janson in Tokyo. The group's business in the well-developed Japanese market reflects the high technology base there. In addition to it counting among Hoechst's worldwide pharma research centres, Japan is also likely soon to see an investment or alliance in the generic pharmaceuticals field, says HJL's Waesche.

In biotechnology R&D, a third project for the worldwide group is likely to be given to Japan, in addition to the recombinant factor XIII and interleukin-1 receptor projects already located there.

New technologies will continue to be exported to Japan from the worldwide organisation, although Hoechst will try to exploit these first, before going to partners, says Waesche. Opportunities to co-operate with local partners are being discussed continually.

The intensifying competition in Japan has led HJL to continue to restructure its businesses there and further moves would appear to be on the cards. It has taken a number of steps from early this year to separate its pharmaceutical activities from its other chemical operations. As from 1 January Hoechst Industry Ltd, 100% owned by HJL and which took over HJL's chemical production activities in January 1994, will take over HJL's industry unit, which produces and sells electronic materials and handles the sale of organic and inorganic chemicals and speciality chemicals. This will enable it to strengthen the business's competitiveness and improve customer services and flexibility, HJL says.

Hoechst's current and planned major investments in Asia (1993 figures)
	Turnover (DMm) (excl. AgrEvo)	Employees	Name	DMm
Australia	499	1516	Biotech Australia:increase in stake to 100%, purchase of land, buildings and research investments Hoechst Australia: new unit for tensides and agents, incl. completion of new site Hoechst Australia: purchase of Ferro's masterbatch activities	51 11   5
Bangladesh	18	385	Hoechst Bangladesh: production transfer from Chittagong to Dhaka	2
China & Hongkong	430	1300	Hoechst China: antibiotics Hoechst China: Trevira spunbond Hoechst China: masterbatches Hoechst China: plasma fractionation Hoechst China: dyes, technical gases, plant protection, car refinish paints	38 35 3 120
India	500	6579	Hoechst India: increase in stake to 50.1% Hoechst India: expansion of production of pharmaceutical active ingredents Hoechst India: change of partner in plastics	8 3.6
Indonesia	204	976	PT Pulosynthetics: new plant for resin dispersions, tensides and agents Hoechst Cilegon Kimia: capacity expansion of Remazol production PT Herberts Indonesia: new plant for powder coatings	12.5   10   6
Japan	2524	3618	Hoechst Tokuyama: new plant for detergent builders Hoechst Japan: completion of pharma R&D laboratory Hoechst Japan: modernisation of distribution logistics Hoechst Japan: completion of masterbatch unit Hoechst Japan: plant for purification of recombinant Factor XIII Hoechst Teijin: completion of Trevira monofilament plant Hoechst Gosei: expansion of resins dispersions Herberts DNT: new operation	54   42   20   7 6   20   5
Korea	464	902	AgrEvo: purchase of plant protection formulator	19
Malaysia	114	244	Hoechst CeramTec: new operation and transfer of moulding and laboratory ceramics production to Senawang	9
New Zealand	40	55
Pakistan	136	1071	Hoechst Pakistan: new plant for PVC plasticiser (DOP) Hoechst Pakistan: new plant for Haemaccel production Hoechst Pakistan: new plant for resins dispersions	43   8   6
Philippines	89	244
Singapore	66	72		128
Sri Lanka	18	59
Taiwan	380	586
Thailand	239	1139	Hoechst Chemical Industries: new plant for resin production in Rayong	50

In any case, business there will not be negatively affected by the dispute between the group and the National Tax Authorities, which saw HJL pay Yen4.42bn (US$44m) to the NTA in February as a result of a transfer price investigation, stresses Dormann.

Some plans in other countries are less well developed, or are at least not yet ready for publication, although the group is clearly harbouring significant ambitions.

In Indonesia, for example, the group is 'doing very well' with small expansions and investments in existing activities underway, but 'we feel we should have a big project sooner or later in Indonesia', adds Hinkel, pointing to the country's adequate natural resources and the presence of large industrial groups active in core areas such as fibres and polymers. A new managing director for Indonesia to take up the position next year will be asked to come up with proposals for a large-scale project, although Hinkel admits this will not be easy given the existing established industrial activities. 'In fibres and tyre cord, for example, it is already too late.'

Similarly, Malaysia 'is always in discussion for a considerable investment', says Hinkel, pointing again to its ample natural resources and government investment incentives and to the fact that the country is now regarded as being strategically located in the centre of the action in Asia.

Hoechst's experience in its sole investment to date in Malaysia, in ceramic moulding, encourages the company in its ambitions there. Hinkel points to the rapidity in setting up the operation, which, after initial difficulties with the location, took just nine months to build and put into operation, and was profitable in its first year of operation. 'In Germany that would be impossible - we would still be discussing the first stage.'

The managing director for the Philippines is also to come up with ideas for future investment, based on the large market there, the predominance of the English language, and the potentially key role that country will play in Asia's development.

In Thailand too, Hoechst feels under-represented. The company is about to decide whether to take up an option it acquired in December on a site in a new industrial park in Rayong which it is studying for resin production. Production would be in a joint venture with the Bangkok Bank and a Japanese partner, with whom Hoechst already co-operates.

Plans for the emerging Vietnamese market are still developing to build on Roussel Uclaf's existing activities in pharmaceuticals and agrochemicals, but Hinkel appears confident some decisions, including a partnership venture for Hoechst in industrial chemicals, could be finalised by the year-end.

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