Top Global Coatings Companies Target China

25 October 2004 00:01  [Source: ICB Americas]

The top coatings manufacturers position in China as they refine their portfolios with bolt-on acquisitions and select divestments. Patricia Van Arnum reports.

Faced with the mixed bag of an improving economy but rising raw material costs, top global paints and coatings manufacturers are moving cautiously with investment plans. China continues to be a main target.

A case in point is Akzo Nobel, the number one global coatings manufacturer, which is fine-tuning its portfolio as it proceeds with a plan to double its overall sales to China over the next five years.

Akzo’s latest move was announced earlier this month: The company has agreed to sell its coating resins business to Nuplex Industries Ltd., an Auckland, New Zealand-based coatings manufacturer, for €110 million ($137 million). Akzo had been looking for a buyer for the business since September 2003 as part of an overall company-wide divestment plan.

“The transaction would complete a major round of divestments in chemicals which will, at closing, have generated some €1 billion,” Hans Wijers, chairman of Akzo Nobel’s board of management, commented.

The divestment includes Akzo’s entire coating resins business, with the exception of its Ultra Beam (UV/EB) resins business, which Akzo agreed to sell to Total’s Cray Valley SA. It also does not include Akzo’s printing inks business, which was merged internally with the pine specialties business of Eka Chemicals (Akzo’s pulp and paper chemicals business unit) and which is now part of the inks and adhesives unit.

Akzo’s coatings resins business is primarily centered on the industrial coatings segments, in particular automotive OEM (original equipment manufacture), vehicle refinishes, plastics and specialty metal markets. Its key product lines are acrylics (solvent- and waterborne), alkyds (mainly solvent-borne), polyesters (solvent-borne and powder) and aminos (solvent-borne).

The coatings resins business generated 2003 sales of €256 million, and EBITDA (earnings before interest, taxes, depreciation and appreciation) of €18 million. The sale includes manufacturing facilities in Bergen op Zoom, the Netherlands; London; Louisville, Ky.; East St. Louis, Ill; São Paulo, Brazil; Surabaya, Indonesia; Melaka, Malaysia; and a grassroots plant in operation in Suzhou, China.

Akzo’s Ultra Beam (UV/EB) resins business, which generated 2003 sales of €27 million, has facilities in Eccles, the UK and New Brunswick, N.J. The UV/EB resins business, which includes acrylated monomers and oligomers, is primarily focused on the inks, wood coatings and opto-electronics segments.

Both deals—Akzo’s sale of its coatings business to Nuplex Industries and the sales of its UV/EB resin business to Cray Valley—are expected to close this quarter and are a part of series of divestments and bolt-on acquisitions made by Akzo this year in its coatings business. Last year, Akzo posted coatings sales of €5.2 billion, a 5 percent decline year-over-year. The sales decrease was due to a negative currency impact of 7 percent, which was in part offset by autonomous sales growth of 3 percent.

One segment targeted for improvement is car refinishes. In an effort to improve business performance, Akzo is proceeding with a major restructuring plan in its car refinishes business, which involves reducing its global workforce by 10 percent or 600 full-time jobs. The plan will be carried out this year through 2006.

Akzo also divested its liquid coatings activities in the agricultural and construction equipment (ACE) segment to BASF, and in turn acquired BASF Coatings’ wood construction business (joinery). The BASF business had 2003 sales of €17 million in 2003; the ACE business had sales of €9 million. The divestment involves the ACE activities of Akzo Nobel’s car refinishes business in Germany, Austria, France, Italy, Switzerland and Spain. The manufacture of these coatings will be transferred from Akzo Nobel’s sites in Zona Franca, Spain; Stuttgart, Germany; and Montataire, France; to one of BASF’s coatings sites.

“This divestment of our ACE activities needs to be considered against the backdrop of our ambitious growth strategy for our core coatings activities, which will require considerable resources,” explains Rudy van der Meer, member of Akzo Nobel’s board of management responsible for coatings. “Our joinery business has established a strong position in many European markets in recent years through the Sikkens brand and the BASF business fits in very well with the strategic objectives we have for this market.” The BASF products in wood construction are mainly used to coat doors and windows and will be transferred from the BASF site in Muenster, Germany to Akzo Nobel’s decorative coatings site in Cologne, Germany.

BASF Coatings decided to divest its Glasurit construction paints business to Akzo Nobel and acquire parts of Akzo Nobel’s agricultural and construction machinery paints business because the Glasurit construction paints unit only partly fit into the company’s main product portfolio. “With these transactions, we consistently continue to pursue our strategy of profitable growth. It is mainly the acquisition of coatings for agricultural and construction machinery that will give us another boost,” says Jean-Pierre Monteny, CEO of BASF Coatings AG. “This also applies for the foil coatings business outside of Germany we recently acquired from the Treffert Group and the expansion of our presence in the Chinese coil coatings market. Simultaneously, we assume that the window and exterior door coatings business will bring development potential to companies specializing in these market segments.”

In addition to its deal with BASF, Akzo Nobel divested its mirror coatings business to the Italian Group Fenzi. The mirror coatings business, which is based in Vilvoorde, Belgium, produces paints that are applied to the backs of mirrors to protect the silver lining that makes up the reflective surface. The business had 2003 sales of over €7 million. As part of the deal, Fenzi will continue to toll produce coatings for building components that are used in concrete roof tile protection for Akzo.

In addition to the Fenzi deal, Akzo Nobel is divesting its Vilvoorde general industrial coatings activities and plans to relocate the site’s coil coating activities to another Akzo plant in Europe.

In bolt-on acquisitions, Akzo agreed to buy Altana Group’s Rhenacoat coil coatings business in France, which had 2003 sales of €11.6 million. The deal strengthens Akzo’s position in the European aluminum coil sector and facilitates the consolidation of its entire French/Benelux coil operations at Akzo Nobel’s Montataire facility near Paris.

Akzo also increased its distribution activities in the European decorative coatings markets by agreeing to take a 30 percent stake in the decorative paint distributors Peters, which in exchange took over distributors Beissel and Kerstin, earlier acquisitions of Akzo’s. The deals follows Akzo’s announced acquisition of Timpe & Mock, Germany’s largest decorative paint wholesaler in Germany earlier this year. Timpe has annual sales of roughly €125 million.

As Akzo refines its coatings portfolio, however, its largest strategic goal is to increase its sales and presence in China. Last month, Akzo chairman Han Wijers announced the company plans to double its sales in China over the next five years.

“We more than doubled our sales in China in less than five years, and our ambition is to repeat that,” said Mr. Wijers. “We are strongly committed to further expansion in China, which has a key role in the company’s growth strategy.

Company-wide, Akzo posted 2003 sales of $484 billion in China, with the coatings group contributing the lion’s share of that total at 63 percent or over $300 million. Akzo opened a new office in Shanghai last month and is also increasing its coatings manufacturing presence in China.

In July, its coatings industrial finishes business officially opened up two new multi-purpose coating sites in China in Tianjin for the wood, coil, and specialty plastic coatings market. Akzo now operates eight coatings production sites in China, which in addition to Tianjin, include facilities in Jiashang, Beijing, Shanghai, Suzhou, Shenzhen, Ningbo and Dongguan City.

The company is also expanding its powder coatings operations in China by building two new factories: one in Langfang (halfway between Beijing and Tianjin) and the other in Guangdong Province on a site neighboring its existing powder operation in Shenzhen.

The Guangdong factory will be built on 22,000 square meters of land with another 12,000 square meters available for expansion. It is targeting customers in metal furniture, electrical and other goods as well as powder users operating in architectural aluminum and IT. The Langfang project involves relocating Akzo’s existing Beijing facility to a new site of around 17,000 square meters.

These projects come on the heels of other recent investment in China. Last October, Akzo Nobel opened a new non-stick coatings facility in Dongguan City, China. The factory produces non-stick coatings, primarily for the rapidly growing cookware industry in China, but also for a wide range of specialized industrial applications such as automotive pistons and copier rollers. It is located adjacent to the Akzo Nobel wood coatings plant, which was opened in 2001.

Outside of China, Akzo Nobel is constructing a new factory for decorative coatings near Ho Chi Minh City in Vietnam. The new plant is expected to start production by the first quarter of 2005. It also opened a new non-stick coatings facility in São Paulo, Brazil.

China Is Target for Other Top Players

China is also the target for the other top paints and coatings manufacturers, with several projects announced this year. To gain a position in the growing Chinese automotive coatings market, Sherwin-Williams Company acquired a majority interest in Shanghai Kinlita Chemical Co. Ltd. based in Shanghai, China. The company has annual sales of $15 million. The new company, now named Sherwin-Williams Kinlita Co. Ltd., will operate under the direction of Sherwin-Williams Automotive Finishes Corp. and will be included in the automotive business segment of the Sherwin-Williams Company. The acquisition includes facilities consisting of 100,000 square feet of factory, laboratories and a resin plant. It will serve as a manufacturing and logistics centerto strengthen Sherwin-Williams’s vehicle refinish position in the Chinese market

“Sherwin-Williams will add technical resources to enhance Sherwin-Williams Kinlita’s position in the Chinese electro-deposition coatings market and will contribute topcoat products and technology to increase the product and service offering to its existing customer base,” said Christopher M. Connor, chairman and CEO of The Sherwin-Williams Company at the time of the acquisition earlier this year.

DuPont has also strengthened its position in the Chinese automotive market. Earlier this year, DuPont acquired additional equity in its DuPont Red Lion joint ventures in Beijing and Changchun, China. With government approvals obtained at year-end 2003, DuPont increased its equity position in the DuPont Red Lion–Beijing joint venture to 76 percent from 60 percent and renamed it DuPont Red Lion (Beijing) Company Limited (DRBC). DuPont also acquired 100 percent ownership of its other DuPont Red Lion joint venture in Changchun, China, by purchasing the remaining 40 percent interest held by Red Lion. The company is now known as DuPont Performance Coatings–Changchun (DPCC).

“By increasing our equity position for coatings supply in China, DuPont will be better able to meet the growth objectives of the Chinese automotive industry with the latest technology to meet worldwide expectations for aesthetics, durability and environmental compliance,” said Marty M. McQuade, vice president and general manager for the automotive OEM coatings unit of DuPont Performance Coatings, DuPont Herberts Automotive Systems, earlier this year.

Current coatings manufacturing in Beijing will relocate to new facilities in a Beijing industrial zone and begin operations by the end of 2005. The facility will also include a technical center. In Changchun, DuPont will upgrade facilities to meet international standards and will increase capacity. The plant is capable of manufacturing a wide variety of modern automotive coatings including water-borne coatings. DuPont says the resin facility provides sufficient capacity to localize supply. The facilities will include a laboratory and application center.

DuPont has increased the number of experts from Europe and the Americas working within both companies to further train local staff, particularly in technical manufacturing and customer technical service areas, and to accelerate the upgrade and expansion of the production facilities. Currently, more than 500 people are dedicated to provide locally produced coatings products and services in China.

Effective in September, BASF Coatings became the supplier for all four paint coats—e-coat, primer, basecoat, and clearcoat—for the new Car Plant II of FAW-VW, the joint venture between the FAW Group and the Volkswagen Group, in Changchun, China. Initially, the new plant will produce the VW Caddy for the Asian market, with additional models to follow. Eventually, the plant’s annual capacity will be 300,000 vehicles. A delegation from Changchun will soon visit the successful system supply of BASF Coatings at the VW plant in Poznan, Poland, where the VW Caddy is produced for the European market.

PPG Industries Inc. is also expanding in China. Earlier this year, PPG Total Service Solutions signed a contract with Wuxi Vehicle Body Co. to provide the vehicle manufacturer with a chemical and process management program at its facility in Wuxi, China. Initial implementation of the program—the supplier’s first comprehensive product and service program in China—began in March. PPG Total Service Solutions is providing the facility all indirect materials and chemicals associated with the coatings application process, including detackification and paint line cleaning solvents, consumables and lab equipment. In addition to the program, PPG is also supplying all the materials required for the coatings application process.

PPG’s Asian coatings sales have doubled since 1999, including a 25 percent increase in 2003. PPG posted 2003 coating sales of $4.83 billion, a 7.8 percent increase year-over-year. Its first six months coatings sales were $408 million, up from $347 million in the year-ago period.

Like other coatings manufacturers, PPG says it is not likely to do a major acquisition in the near future. “Although we don’t see any large acquisitions on the horizon, small acquisitions, especially in our optical products, and architectural and industrial coatings businesses, are possible,” said Raymond W. LeBoeuf, chairman and CEO of PPG Industries earlier this year. “Over the next five years growth will come from these businesses.”

PPG is also seeking to bolster its position in automotive coatings. Earlier this year, PPG and Kansai Paint signed a non-binding memorandum of understanding and entered into negotiations for an automotive coatings alliance. Under the deal, PPG and Kansai would set up marketing and sales operations initially in North America and Europe for Japanese automotive OEMs. PPG and Kansai would then set up marketing and sales operations in Shanghai, China, and later in other Asian countries to serve all of the region’s automotive OEM customers.

The PPG-Kansai deal follows the termination of a like agreement between DuPont and Kansai. Late last year DuPont and Kansai Paint Ltd., agreed to end their automotive coatings joint venture relationships due to incompatible global strategies. DuPont and Kansai operate three joint ventures that provide coatings to Japanese auto makers in North America and the UK. They are: DuPont Kansai Automotive Coatings Company, formed in 1990,based in Troy, Mich.; Pinturas Automotorices DuPont Kansai, SA de CV, formed in 1990 and headquartered in Mexico City, Mexico; and DuPont Kansai Automotive Coatings (UK) Ltd., formed in 1997 and headquartered in Hemel Hempstead, UK. The joint ventures were formed to supply and service the automotive coatings needs of Japan-headquartered auto companies for their operations in the UK and North America. The joint ventures will continue to service customers for a one- to two-year transition period.

Sherwin Williams Leads Other Moves

However, China has not been the only source of activity for coating companies. In a large move, Sherwin-Williams Company acquired Duron Inc. and Paint Sundry Brands Corp. for a combined $625 million. Duron, which has annual sales of $350 million, is a leading coatings company in the eastern portion of the US, servicing the professional painting contractor, builder and do-it-yourself markets through 230 company-owned stores. Sundry Brands provides paint applicators to professional paint contractors and do-it-yourself users under the Purdy, Bestt Liebco and other brands. 

“These employees and businesses will assist us in the continued implementation of our growth strategy of supplying high quality products and services to professional paint contractors and do-it-yourself users through various channels of distribution,” says Christopher M. Connor, chairman and CEO of The Sherwin-Williams Company.

Sherwin-Williams is financing the acquisitions through the use of cash, liquidated short-term investments and $350 million in proceeds from the sale of commercial paper under its existing commercial paper program.

In addition to its deal with Akzo in construction coating, BASF Coatings, which posted 2003 sales of €2 billion, recently opened a new €20 million distribution center at the Muenster-Hiltrup site in Germany.

 For its part, ICI Paints has centered on expanding its distribution network in architectural coatings in North America. Earlier this year, ICI Paints formed a three-year exclusive agreement with Champion Homes to be the provider of paint for Champion’s Manufactured Housing division. Champion is now using ICI Paints products exclusively in all of its 30 North American plant locations. Champion Enterprises Inc., headquartered in Auburn Hills, Mich., is the parent corporation for a family of companies that manufacture and retail manufactured and modular housing.

Also, McCoy’s Building Supply Centers has added the ICI’s Glidden paint brand to its paint department throughout McCoy’s 85-store chain in Arkansas, Mississippi, New Mexico, Oklahoma and Texas. ICI has also partnered with This Old House Ventures, Inc. to produce a new line of paints under the This Old House name. Paint was the first category as part of This Old House’s licensing program. This Old House Ventures Inc. is an affiliate of Time4 Media and a subsidiary of Time Inc., which is a wholly owned subsidiary of Time Warner Inc.

Rising Raw Material Costs Pressure Earnings

Rising raw material costs continue to threaten the profitability of coatings manufacturers as several point to these margin pressures. Earlier this month, RPM International Inc. reported net sales of $661.5 million, a 13.9 percent increase year-over-year, for the fiscal 2005 first quarter ended August 31, 2004. Organic growth increased sales by $65.5 million, or 11.3 percent. Net income reached $54.5 million, an improvement of 14.3 percent over last year’s first quarter.

“We are pleased with the strong growth in our first quarter, though it is important to note that we may not be able to sustain this level of sales growth as we face tougher comparisons to the prior year in the coming quarters,” said Frank Sullivan, president and CEO earlier this month. “Additionally, rising raw material prices will continue to be a concern. Despite these challenges, we continue to anticipate high single-digit growth in revenues and 10 to 12 percent earnings growth for the full 2005 fiscal year.” For fiscal 2004, the company posted net sales of $2.3 billion, a 12 percent gain year-over-year.

Valspar Corp. posted a 10.2 percent gain in sales (January through September) of almost $1.8 billion, although it expects its fourth quarter earnings to be flat because of rising raw material costs pressures.

In terms of deal-making, Valspar made one bolt-on acquisition this year in the building products arena and also formed a strategic alliance to build its position in concrete coatings. It purchased select assets of the forest products business of Associated Chemists Inc., which posted 2003 sales of $28 million. The acquired product line includes edgesealers, surface primers, paints and stains, inks and specialty chemicals for oriented strand board manufacturers and others in the forest products industry. Valspar also gained a manufacturing facility in Orangeburg, S.C.

Valspar also formed a strategic alliance with Quikrete to manufacture and market what it says it’s the first complete line of premium concrete coatings, which will debut in early 2005.

“Concrete coatings is currently a fragmented category that is confusing for consumers,” says according to Bill Mansfield, Valspar executive vice president and chief operating officer. “There is definitely a need in the marketplace for a comprehensive program,” he says particularly in light of strong growth in the home improvement market.

Outside the US, SigmaKalon is adding to its portfolio in central and eastern Europe on a geographic basis and in marine coatings on product basis. Earlier this year, it acquired Primalex from The Riverside Company, a private equity fund based in Europe and North America. Primalex is a producer of wall paints in the Czech Republic and Slovakia, with sales of €20 million.

In marine coatings, SigmaKalon and Samsung Fine Chemicals (SFC) and SigmaKalon agreed to put their Korean coatings operations together into a joint venture company, Sigma Samsung Coatings, with SFC holding 40 percent and SigmaKalon 60 percent. The new company is positioned as a major coatings supplier to the Korean shipbuilding industry as well as to the protective coatings, coil coatings and general industrial coatings markets.

The coatings activity of SFC has sales of roughly €43 million and is mainly active in marine and cell phone coatings in Korea. The business has production facilities in Ulsan, Korea. Sigma Coatings in Korea sells exclusively to the marine market and has sales of roughly €20 million. Under the joint venture agreement, the SFC Coatings and Sigma Coatings operations will continue to serve their separate customer bases but with combined facilities for manufacturing and technical support.

The Numbers

The $16.1 billion US paints and coatings market is coming off a year in 2003 that saw strong growth in architectural coatings and mixed results for sales of product OEM (original equipment manufacturers) and special-purpose coatings.

Overall volumes in the US coatings market increased 4.5 percent in 2003, according to The ChemQuest Group Inc., a Cincinnati, Ohio-based consultancy, with some analysts projecting growth on roughly 6 percent for 2004. On a segment basis, architectural coatings, which account for roughly 47 percent of the market, grew by 15.3 percent by volume to 781 million gallons in 2003 and 6.1 percent in value to $7.6 billion. The top players in the US market include Sherwin Williams, ICI, Akzo and Valspar

Product OEM coatings, which account for 33 percent of the US market, declined 10.1 percent in value in 2003 to $5.3 billion and 7.3 percent in volume. Product OEM coatings include coatings used by original equipment manufacturers (OEM) for automobiles, furniture and other durable goods. The top players in the US market include DuPont, PPG, Akzo, BASF and Valspar

And special purpose coatings, which account for the remaining 20 percent of the market, increased by 11 percent in volume in 2003 but declined 2.5 percent in value in large measure due to the declines in auto refinishing, which makes up half of the special purpose segment, according to ChemQuest. Industrial (exterior) accounts for 19 percent, followed marine/offshore (8 percent), traffic marking (8 percent), industrial-interior (7 percent), aerosol (7 percent) and other (1 percent). The top players in the US market include PPG, DuPont, Azko, RPM and BASF.

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