Werner Wenning: Chairman, board of management, Bayer AG

31 May 2004 00:01  [Source: ICB Americas]

CMR: What would you identify as the major concerns for chemical industry competitiveness in the near term? In the long term?

Mr. Wenning: The major challenge for the chemical industry in Europe and the United States in the near term are the high production costs resulting from very high raw material and energy prices as well as overcapacities in certain areas. There is also growing pressure from imports, which are intensifying competition in our home markets.

Relocations of customer industries to regions with low production costs are altering the chemical industry’s internal structures and those of our customers. The consolidation in chemicals and in customer industries is set to continue. However, the necessary adjustments—such as site consolidations and the construction of further, highly efficient world-scale facilities—will strengthen our competitiveness, especially in Europe.

Of major importance for our industry is the political framework. We need a less regulated environment and more flexible labor markets, for example. Governments should place as much importance on assessing the opportunities offered by new technologies as they do on evaluating the risks.

It is also important to raise awareness of the significance of our industry for the economy as a whole. High energy and raw material costs that are not entirely market-based but partly the result of political considerations are detrimental to prosperity.

CMR: What specific issues do you see as being of greatest importance of the US chemical industry? For the European chemical industry?

Mr. Wenning: It is of crucial importance for our industry to safeguard and expand its innovative potential. We must apply our high level of expertise—biotechnology being a good example—to continue generating growth in the future.

The point is that the European market has a growth problem. Most markets in this region are saturated and suffering from low growth rates even during economic upswings.

Europe’s—and especially Germany’s— international competitiveness is hampered by high labor costs and over-regulation. Sadly, there is no sign of any relaxation in the latter—on the contrary! Examples that spring to mind are the European Union’s chemicals policy and emissions trading. In the long term, this will make Europe a less attractive base for production and ultimately also for R&D. Investment in new facilities will tend to be channeled to future growth markets.

In the United States, too, regulatory issues are of great importance. Evaluation of the costs and benefits of major US federal regulations, alongside improvements in pesticide regulations, packaging and labeling rules, are just a few examples of the need for action. As in Europe, energy costs and especially natural gas supplies and prices are major issues for our industry. The US urgently needs a robust energy policy—one that encourages the best use of energy resources and strengthens the energy infrastructure through expansion of North America’s vast natural gas resources.

CMR: How has the model for effective chemical competitiveness changed over the past several years? Looking forward, how do you see that model evolving?

Mr. Wenning: Globalization means that in our traditional markets we now have to compete with suppliers from a wide range of countries. Some of them can produce the same quality at much lower cost and can therefore sell their products far more cheaply. That applies particularly to commodities, and less to innovative and research-driven products. Given this trend, we have to come up with new business models for those activities affected by tough competition in pricing and at the same time provide all the resources needed for those that depend on customer-focused solutions and R&D. Our motto has to be: “Think ahead today to the day after tomorrow.”

That is why Bayer has decided to transfer large parts of its industrial operations serving more mature markets to Lanxess, an independent new company that we plan to float on the stock market by early 2005 at the latest. Bayer will then concentrate on the research-intensive, innovation-driven areas of health care, nutrition and high-tech materials. Both companies will benefit from the split because it will enable them to focus their resources and concentrate on their respective strengths.

The European chemical industry can only remain successful in the long term if it adopts lean, low-cost structures. Strategically, this will be reflected in further structural change in the industry. Companies will become increasingly specialized, hiving off businesses on the one hand while making suitable acquisitions on the other. For example, since 2002 Bayer has bought or sold businesses with a total transaction value of €13 billion.

CMR: What approaches do you think the US and European chemical industries need to take in order to remain competitive in basic chemicals, particularly as regards energy and feedstock costs? Do you think the sourcing/production/distribution model in basic chemicals will change significantly over the next few years, and if so, how?

Mr. Wenning: In basic chemicals, particularly, there will be only minor technological improvements. At the end of the day, it is competitive costs that count. These are dependent on a wide range of factors, only some of which are endogenous. For instance, supply chain management has rightly been identified recently as a key area in need of improvement. Other factors are the trend to world-scale facilities, including production alliances, closer collaboration with customers, and new procurement and distribution channels such as e-commerce and B2B business—even though the high expectations placed in these have not yet been fulfilled.

However, all these efforts to optimize operations can be negated by external influences, whether politically motivated increases in energy costs, bureaucratic hurdles that hamper product registration, or the failure to recognize the importance of the chemical industry as an innovative interface with the industries that process the starting materials we supply. In the light of this, more goodwill on the part of the politicians and greater recognition of our achievements would be useful and would help protect jobs.

CMR: What role do you see China playing in the future of the chemical industry in the near term? Do you think the chemical industry is facing a shift in its installed manufacturing base from the US and Europe to China?

Mr. Wenning: China, and indeed Asia as a whole, is the fastest growing region. China has a low cost base, is attracting a growing number of industries that need chemical products, and has a great deal of catching up to do. For those reasons China will be a major location for the global chemical industry in the future.

An expanding Chinese chemical industry will increase global competition, but also present opportunities (already being realized) for European and American chemical companies to invest in China and to benefit from this development.

That also applies to us: We are investing around $3.1 billion to expand our manufacturing base in China. The focus is on building production capacity for polyurethanes, coating raw materials and polycarbonates at Caojing, near Shanghai. Our aim is to ensure that we derive above-average benefit from the rapid growth in the Chinese economy.

CMR: What do you see as the key strategic implications for the chemical industry resulting from the enlargement of the European Union?

Mr. Wenning: Just as happened when the southern European countries first joined the EU, we expect trade with the new member states in Central and Eastern Europe to increase.

The chemical industry already plays a very important role in some of the new member countries. Expansion of the single market will provide additional impetus for both sides. However, trade with the new members has already been increasing steadily in recent years, so the direct impact will be less than it otherwise might have been.

Bayer has also participated significantly in recent years in the growth in trade volumes with the Eastern European countries. Access to these markets will become easier in future (e.g. simplified product registration following the adoption of EU legislation). However, rapid implementation of quality and safety standards in the new member states is of high priority to ensure the integration process.

CMR: How would you evaluate innovation in the chemical industry as a whole? From an industry perspective, do you think the industry strikes a proper balance between basic and applied research? What factors do you think are most important for the US and European chemical industries to maintain a competitive edge in research and development and innovation?

Mr. Wenning: Chemicals are an acknowledged innovation driver for industry as a whole. Our innovations stimulate customer industries and often open up new potential for those industries to develop their own innovative products.

However, as an industrial enterprise, we and our products depend on acceptance by society. Product developments and innovations that have clear benefits for customers and are successful on the market are therefore of paramount importance. The more successful we are in this respect, the higher will be the return on our research expense, and that makes investment in R&D more attractive. I see basic and exploratory research as a prime area for cooperation with universities and other institutions because the results generally benefit a wide range of scientific disciplines and industries. Through its research-driven focus on health care, crop science and high-tech materials, Bayer is committed to its traditional role as an inventor company. Naturally, we have to set priorities to ensure efficient use of our resources.

In my opinion basic, exploratory and applied research are balanced. But, of course, in all segments increased efforts would be desirable. But first we need to receive more support and encouragement from the authorities for our endeavors in this field. At present, there is little moral support, and thus little public-sector support, for the development of new technologies, especially in Europe. Examples range from the high cost of patenting new developments to the often over-cautious approach to, and evaluation of, any potential risks.

We would certainly benefit from more government support in promoting biotech-nology and nanotechnology or from increased support for research and for scientific education in schools and universities.

CMR: How critical is public perception of the chemical industry in the strategic direction of the industry? What positive steps do you think the industry has taken to improve its image? What additional steps can be taken?

Mr. Wenning: Public perception of the chemical industry really matters and is of great concern to the industry. It therefore plays a key role both for individual companies and on an industry-wide scale in our industry associations.

Public opinion does not simply influence our markets. It also has a major impact on the framework in which we operate because it also represents the electorate that chooses the governments, which in turn define the statutory framework in which we operate.

The chemical industry has many facets. This is reflected in public perception. While other sectors manufacture end-products onto which they can project emotional values, for example cars, the chemical industry’s role as an innovative supplier of starting materials for making precisely these products is far more difficult to put across. A constant effort is therefore needed to communicate the benefits our industry provides. In our life-science segments, however, products and solutions provided to society are broadly accepted and to this extent are to be seen in a different light than industrial chemicals.

Accordingly, we have to make sure we concentrate on those fields where we can directly influence public perception. That includes a clear commitment to Responsible Care and a systematic top-down approach to implementing its principles. The same applies to product stewardship, sustainable development and social responsibility. We can influence public perception by building a stronger presence in these areas, being more willing to engage in dialogue, and by effectively explaining how our industry benefits society. Our communication activities both on the company and the industry association level have been substantial since the 1980s at least and have significantly improved our image. This must continue in the future.

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