Gaining lost ground

01 December 1999 00:00  [Source: PCE]

The fine and speciality chemicals sector of central and eastern Europe has never been a world leader. But with help from western investors it is becoming more competitive, as Ivan Berenyi reports

Central and eastern Europe's chemical sector lost ground during the communist years and has been struggling to catch up. Initially, after their nations were freed from the political straight jacket of communism, companies were wary of too much foreign involvement in their chemical industries. Lacking a competitive edge, the chemical industries of Poland, the Czech Republic and Hungary thought they might be overrun in pharma, agchems, paint/dye and other speciality chemicals sectors, by R&D-intensive western companies.

The fears were unfounded and the investors, when allowed in, brought capital and organisational knowhow, activating R&D and marketing, working with their eatsern partners. They relied, to a large extent, on local executives to run the plants.

Slowed by the break-up of federal Czechoslovakia, the reorganisation of the Czech chemical industry only started in 1993. The conservative government of Vaclav Klaus believed that its manufacturers could free themselves of the Comecon time-warp - without western expertise and finance - as members of the localised Chemapol and Unipetrol industrial conglomerates. This proved to be a mistake.

Chemapol's years of agonising stifled progress for the likes of Synthesia, Chemicke Zavody Sokolov, MCHZ, Kaucuk, Chemopetrol et al, as did the Czech government's obstinate blocking of the influx of foreign capital. Moravske Chemicke Zavody is Europe's leading producer of aniline and a major supplier of resins, yet, despite 80% exports and a turnover approaching Koruna3bn ($85.3m) it is still striving to attain profitability.

Synthesia, of Semtex fame, is now one of the production divisions of Aliachem, a new conglomerate devised by the industry ministry in Prague. A traditional producer - explosives apart - of resins, pigments, pharma substances, dyes and dye intermediates, it is a 6000-strong company with Koruna6bn turnover and 55% exports. It is abandoning the production of dye intermediates, which are now universally imported from the Far East, according to commercial director Frantisek Novak, and is looking for ways to expand its production of synthetic APIs and is using custom contracts where available to fill capacities.

Synthesia is also a producer of intermediates and active substances for crop protection, based on phosgene chemistry and is continually investing in increasing phosgene-based production.

Agrochem manufacturers with intermediate and active ingredient production of their own abound in the three countries, but are invariably impacted by accumulated environmental liabilities, which makes it very hard for them to nail enterprising western strategic investors.

An example of a highly successful investment in the Czech Republic is Lonza's biotech facility at Kourim, 40km east of Prague.

Lonza's first major push into biotechnology was the acquisition of the Kourim site from the former Czechoslovakian government's Spofa organisation, a manufacturer of animal feeds, in 1992. 'One of the major reasons why Lonza decided on an acquisition in eastern Europe was the unrealistic price/earnings ratios of western biotech companies and their strategic approach of becoming - or being acquired by - a pharmaceutical company,' said a company spokesman at the time of the purchase.

'It was so much cheaper, both in terms of plant and skilled personnel, to establish a biotech business in eastern Europe.' The acquisition of Kourim 'enabled Lonza to transform results from development into production and carry out biotransformation and bacterial fermentation on an industrial scale'.

Since 1992, Lonza has invested millions of dollars in Kourim to equip it with state-of-the-art bioreactors and feed tanks. There is also 900m2 of storage facilities and a waste water treatment plant which Lonza shares with the town of Kourim.

To utilise the available capacity at Kourim it was designed for customer fermentation as well as for the regular production of Lonza's nutrition products such as L-Carnitine.

Lonza's investment is an example of how western firms were not just attracted by low cost. They wanted to invest in the best technology and produce high quality products.

Under Comecon, the east European trading block during the communist years, the established Hungarian pharma industry was the dominant supplier of the Eastern Bloc alliance and it also exported to the West. After the break-up of Comecon it was hit, initially by the loss of Eastern markets, and again following the Russian fiscal crisis of 1998.

With the high fliers - Egis, Gedeon Richter, Chinoin, Pharmavit - all heavily tied to the west and becoming partially or predominantly western-owned, the industry regained strength, quickly recovered market share and continued a policy of acquiring pharma intermediates subsidiaries in neighbouring countries.

Sanofi-Chinoin is an example of a successful enterprise involving western partners. The Chinoin Academy provided Hungary's pharma industry with R&D high fliers and the robust pre-war period gave the company a worldwide reputation. Chinon was the first Hungarian pharma company to develop co-operation with a western firm (Ciba Geigy), to receive World Bank credit in the late 1980s, and to become privatised. Sanofi holds over 99% of equity (registered capital $25m). While Chinoin remains a major R&D force in the French firmament, its independent research is dwindling, the workforce is down from 4200 in 1990 to 900, but exports have doubled to $80m since 1994.

Hungary's Budalakk was quickly dismantled into seven distinct units. Its future is uncertain, since the home market is smaller and the export potential in paints non-existent. Subsidiaries of western firms dominate the market. Local chemicals manufacturer TVK did try its luck, forming Akzo-TVK in 1990, a 49:51 joint venture with Akzo-Nobel.

In Poland, the sell-off of equity in local chemical firms commenced in 1994. Its pharma sector was less stabilised than Hungary's and the production of intermediates and base substances was less wide-spread.

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