BASF looks to profit from lower growth

If you do not expect to grow at the rate you might have done in the past then you can at least strive to be profitable.

The most telling slide in BASF chairman Jurgen Hambrecht’s presentation to the press on Wednesday (10 December) was that charting future chemicals growth rates. It showed that between 1981 and 2000 world GDP (gross domestic product) grew at about 2.8% per annum and the chemical industry at about 4.0%. BASF’s own forecast put 2001 to 2015 world GDP annual growth at 3.1% and chemicals growth at only 2.7%.

Everyone knows this business has matured rapidly and that real growth has moved towards Asia and China. High-tech growth is not so easy to find and intimately tied up with advanced customer service and, indeed, brand recognition.

That the world’s big chemical companies have begun to reposition themselves reflects a deeper understanding of new realities. BASF showed its (new) colours today: a company more focused on the East, on its customers, on its brand and on profitability.

The key messages were that the changes have been made that allow the different business units to fully recognise and plan around their own returns (earnings before interest and tax) after the cost of invested capital, which for the world’s largest chemicals company is about 10%. The businesses are going to have to earn their right to grow and capital spending will be held back below depreciation for the foreseeable future.

BASF is looking towards growth in China as the driving force for much of its business and it knows that everywhere it has to focus on seizing market share if it is to achieve any growth premium.

New technologies offer a lot but so does greater customer focus that give the parties a chance to add value rather than slip into destructive price wars.

For every company, BASF included, the future is less certain. Well known for its extensive scenarios planning, the company said little today about its possible futures but Hambrecht stressed the point that economic forecasts are becoming less reliable – or they at least have to be recalculated with greater frequency. It makes great sense for a company – indeed an industry – to have a deep understanding of where it could be going and the main factors that might affect its possible futures.

BASF probably does not have to but it is re-positioning itself as "The chemical company". This reflects the unfashionable recognition that chemistry is vital to our health and well-being, economic growth and sustainable development. BASF has been successful in the past at positioning itself to capture value in chemicals, particularly through its complex and highly integrated ‘Verbund’ structure. The changes being wrought now – that apply to the long-term rather than the next quarter or indeed the next year – focus the company on the Verbund but also on developing opportunities that relate to a deeper understanding of what pressured customers in the developed economies might need and what fast growing new competitors and partners in other regions of the world might want.

Hambrecht says the company is "filling the Verbund with life" and in doing that it is focusing on what it can do profitably and where big opportunities might lie in future. That means that BASF can be expected to very much build on what it has but also to develop rapidly new capabilities in technologies like fuel cells, nanotechnology and elsewhere. Given its oil and gas business, energy is becoming very much a focus but the company remains first and foremost the pre-eminent producer of chemicals.