Market intelligence: BASF shifts strategy

12 December 2011 00:00  [Source: ICB]

The German chemical giant wants to go in a direction that capitalises on global megatrends and moves from 'classical' chemicals towards functional materials and solutions BASF's strategy will see it move closer not only to the consumer but also to the sort of intermediaries that are making things happen across industries in the developing and developed world.

Chairman Bock stresses BASF's innovative strength

Sustainability lies at the heart of a lot of what the Germany-headquartered chemicals giant wants to achieve. The greatest challenge will be to turn sustainability concepts into successful business reality for this maker of a wide range of basic chemical intermediates. BASF sees this as a move away from what it calls classical chemicals towards functional materials and solutions.

Recent acquisitions have seen it strengthen the customized products part of its portfolio, where market strengths can be built in downstream chemical value chains. BASF bought Ciba Specialty Chemicals and Cognis in order to gain deeper access to some of these more specialized, consumer-oriented businesses.

The company says that it wants to enter selectively "materials and solutions businesses where chemical competence is [a] growth driver".

A great deal of scenario work and market analysis has pointed BASF in the direction of fast-growing industries in emerging market economies, as well as newer industrial sub-sectors in the developed world.

Recent examples of the push into areas of this type are the development of lithium-ion batteries for vehicles and the acquisition of the ultra-filtration companyinge watertechnologies.

Successfully developing some of these sustainability-driven emerging-technology businesses - linked in these cases to mobility and the availability of clean water - will be key to driving growth. The company's growth plans are ambitious.

There was clearly some concern at BASF headquarters in Ludwigshafen, Germany, as to the timing of the release of details of the company's latest strategic goals (which are expected to culminate in sales growth of 6% per year between 20102020 and a doubling of earnings before interest, tax, depreciation and amortization (EBITDA). The eurozone crisis casts a great shadow over business currently. There are deeply worrying questions over growth in the US and, most importantly as far as chemicals are concerned, the path of economic growth in China.

BASF believes it can capture stronger growth in the emerging markets for chemicals if it applies its "Verbund" concept carefully.

"The scope of skills and know-how that we combine under one roof is what sets us apart from our competitors. These factors include our innovative strength, our broad technology basis, our operational excellence and our global access to relevant customer industries," said the chairman of the board of executive directors, Kurt Bock. "We add value as one company by combining these strengths."

The production Verbund should allow it to make certain chemicals more cost-effectively than others. The technology Verbund gives it the chance of making connections that potentially can drive new businesses.

"Having a deep understanding of our customers' value chains will be even more important for us in the future," BASF says.

In some areas, it works closely with customers and has what it calls "excellent access" to them. But it wants to use this access more intensively so it can apply its competencies in a more focused way.

So the next decade for BASF will be about focus down a variety of chemical and customer value chains.

Its competencies in chemicals have stood it in good stead over many years and helped produce particularly strong sales and earnings in 2010, just a short while after the 20082009 downturn. At the beginning of what is likely to be another difficult period for industry and the global economy, it is likely to prove difficult to grow or match targets in the way it might like.

But who knows what the period around and post-2015 might bring?

BASF is the major global chemicals producer but also has a sizeable oil and gas business, which plays an important role in the portfolio, stresses Bock. The oil and gas operations generated 17% of group sales in 2010 and contributed around 28% to earnings before interest and tax (EBIT) before one-off charges and gains, and 20% of net profits.

They provide a steady cash flow and also a financial hedge against volatile prices for hydrocarbon feedstocks.

There are signs that more can be made of the technological synergies that exist between oil, gas and chemicals. Enhanced oil recovery (EOR) using a proprietary biopolymer called Schizophyllan could develop into a big business for BASF, Bock believes. Schizophyllan is being produced by BASF from a fungus, currently on a pilot scale, but EOR trials are scheduled to help confirm laboratory results.

The fact that BASF will be able to apply its technologies through multiple market chains in very different geographies puts the 2020 sales and earnings goals into perspective.

BASF expects to make a quarter of its sales, worth €29bn ($38.7bn) in Asia-Pacific in 2020, from one fifth of sales worth €13bn in 2010. One-half of BASF's Asia-Pacific sales in 2020 will be made in China, principally from its Nanjing and Chongqing production sites, vice-chairman Martin Brudermüller said at the strategy presentation.

The company's sales growth in Asia-Pacific between 20102020 is projected to be 8% per year, a rate matched by that expected for South America, Africa and the Middle East. BASF's sales in these regions are forecast to be 10% of the total in 2020, compared with 8% today.

To spur organic growth in Asia and South America, it intends to invest in new production facilities, increased sales forces and regional research & development (R&D), it said.

Projected sales growth is slowest in Europe at 4.5% per year and in the US at 5.5% per year, although Europe will continue to generate the most sales for the company in 2020, worth an estimated €53bn and 46% of the total, from 52% in 2010.

The company is looking at shale gas opportunities in North America, particularly the expected permanence of feedstock cost advantages, said executive board member Hans Ulrich Engel.

BASF pinpoints sustainability and innovation as key drivers of growth across its businesses over the coming years. The clever application of chemistry - alongside a few other disciplines, of course - will help it capture that growth.

By: Nigel Davis
+44 20 8652 3214

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