After the crisis, is management confidence returning?

Confidence returns?

08 June 2009 00:00  [Source: ICB]

After the economic storm and chaos, are we returning to a period of stability and leadership confidence? ICIS and J&M Management Consulting asked ICIS readers and interviewed selected CEOs to understand what the chemical industry might look like after the storm
John Baker & James Black/London

MUCH HAS been written about the global economic trauma and the precipitous fall in demand for chemicals at the end of 2008. This was amplified by the respondents to our survey and through the executive interviews.

CEOs, typically with experience of three to four previous downturns, talked in terms of "we fell off a cliff." They did not know where demand was going and were living day to day.

This should have come as no surprise, because all the CEOs mentioned falls in demand during Q4 2008 and Q1 2009 of between 20% and 50%, with some facing up to 80% reductions. These were swings they had never seen before.

But the downturn is slowing now. Half of respondents to the online survey indicated that demand in April, in comparison to the previous six-month level, had fallen by over 10%, with 22% seeing a drop in excess of 20%.

FINANCIAL TRIGGER
The financial sector downturn and resulting impact on financing/debt cost was unanimously seen by the CEOs we interviewed as the key trigger to the severity of the downturn.

Most of the CEOs also associated the mid-2008 high energy and high raw materials costs as being contributory factors to the rapid collapse in demand and customer destocking.

"A lot of our customers had been building stock to hedge raw materials availability and prices" one commented. Another said: "Some of our customers where even destocking for financial reasons irrespective of their own customer demand - in effect shorting delivery to their customers to pull down cash costs."

Other comments included: "For some of the sectors, we were already expecting a downturn due to the stage of sector cycle, and also due to lower cost capacity coming onstream in the Middle East and Far East" and "Three or four fundamental business issues came together to create the perfect storm for the sector."

The overall effects across sectors were different by sector, with construction, commodity industrial raw materials (eg steel), automotive, consumer products and electronics the most regularly mentioned as being dramatically impacted.

In contrast, consumer packaging, basic food ingredients and pharmaceuticals were the most commonly mentioned examples of robust sectors holding their own during the downturn.

Everyone talked about this being the first truly global downturn they had seen. The general view was that North America was first into downturn. Europe went in slower but it looks as if the downturn will last longer and have more fundamental longer-term structural consequences.

One CEO commented that the "Asian region has been brutal - but might come out quicker." Another said: "China went quickly but is already showing signs of recovery linked to local domestic demand of 6-7%."

Most CEOs talked about being caught out by the speed of the downturn and not having the time to respond to the consequences and implement action plans. "We ended up fire fighting for a while; our actions plans are really starting to take hold now", said one.

Should we have seen this coming? The majority of CEOs agreed that, though hindsight is always 20:20, a gut feel said that the financial bubble could not continue and the most quoted quote was "if it looks too good to be true - it probably is".

Some CEOs had liquidated their private equity positions during 2007-08 due to personal concerns with financial market risk - but agreed this did not mirror the action of their business teams.

The other insight from CEOs was that though most of them ran scenario planning and risk mitigation, they had not planned a scenario of such speed or severity - though most will include a disaster scenario in future business planning!

TOUGH YEAR AHEAD
Two-thirds of the responses to the survey expected the severe downturn to carry through into Q2 2009.

The CEOs we interviewed were split into three groups - one or two believing they would see a slight drop in demand in Q2 versus Q1; the majority expecting to see a flat quarter in Q2 compared to Q1; and the final group expecting a slight upturn towards the end of Q2 which would fall away again in Q3 and Q4.

"The massive swings and shock we experienced in Q4 are behind us, we have a much more stable demand profile which will swing within the 5-10% spreads we are well position to handle as business as usual", said one CEO. Another commented that "we are starting to get a good view of 'real' customer demand which we can manage."

AT THE BOTTOM?
Some 40% of survey respondents expect a 5-15% reduction in demand over the next 12 months, while over 43% expect the downturn to last through to the end of 2009, and 39% expect it to last through to mid/end 2010.

CEOs and company chairmen have stated a split view during their Q1 reporting season. Dow Chemical, for example, reported net income 39% lower in Q1 compared to 2008.

Presenting the figures in April, chairman and CEO Andrew Liveris, noted: "there are some signs that the pace of global economic decline is moderating it's prudent to expect that 2009 will still be a recessionary year globally, and we are not counting on material improvements in economic conditions in the near term."

For the same quarter Huntsman reported a 33% decrease in revenue, with president and CEO Peter Huntsman commenting, "we did see positive order patterns within the first quarter and left the quarter with stronger demand than we entered."

Bayer MaterialScience reported a Q1 drop in demand of 33% compared with 2008 Q1. Bayer chairman Werner Wenning, noted: "This is an unprecedented development for Bayerthe downturn seems to be bottoming out. The first signs of a modest recovery in demand are appearing."

German compatriot BASF saw sales 23% lower in Q1, prompting chairman Jurgen Hambrecht, to note that "there is currently no sign of a reversal of this trend and we do not consider temporary topping up of inventories is some regions and industries to be signs of a sustainable upturn."

In private, the CEOs we interviewed shared some cautious views: "If 2007 was peak cycle we likely won't return to -10% down on that until 2011-12 and get back up to peak cycle until 2015", said one. Another commented: "We'll see the early signs of sustainable growth towards the end of Q4 2009, these will continue slowly during 2010 and onward".

Several CEOs mentioned they expect to see some kind of "false dawn" or "flat cat bounce" along the way - but this would be short and sharp and they are watching for it and prepared for it - timing for this "blip" was varied and specific to their particular sector(s).

All in all, CEOs have now planned to run their businesses for an extended period of time (the next 18 months to two years) at significantly reduced volume (typically 10-15% down).

The overall sense was that the CEOs are more confident that they are back in control. They see the bottom of the cycle and that volumes are recovering gradually from the end of the year.

A few CEOs mentioned that they see a change in the behavior of their people - returning to more of a "on their front foot" attitude and increased confidence in the consequences of their actions and decisions.

CASH IS KING
Free cash flow and cash were at the forefront of most CEOs minds. The survey results also showed the increase in importance of cash and cash-flow in KPIs. The most quoted comment was "cash is king".

CEOs talked about cash and free cash flow as being more important than EBIT/EBITDA at the moment. Said one: "This is all about conserving cash and keeping a healthy balance sheet to survive the downturn."

And according to another: "We have really understood the importance of inventory - it's moved from being an operational measure to be being a strategic issue which is the consequence of several decisions across the value chain."

Other comments included:

• "We found we didn't have the correct information, processes, or decision-making to manage cash and other critical aspects - so we started key task teams that were run daily by myself (CEO) and other executives to manage them directly"
• "Cash is the lifeblood of my business - we need to preserve it carefully to survive the downturn"
• "We'll see some more companies running out of cash before the year is out - you have to nurture it carefully"
• "We have had to move to a shorter cycle decision making process for key issues - this typically has meant that my team and I have got more closely involved"
• "We are on a war footing at the moment and behaving, acting and making decisions in shorter time frames - some time the team will need to rest and get some R&R - but not quite yet!"

 

Most of the CEOs we met said that they had been preparing for some kind of downturn. They already had actions plans in place and the severity of the downturn meant they merely accelerated these plans.

It was fortuitous that they had already mobilized their organizations somewhat so they did not have to start from scratch. As one said: "Speed matters - this eventually snowballed quickly and issue became how long do we wait, how fast should we and can we react."

MANAGEMENT EXPERTISE
The chemical sector has been managing cyclical downturns for many years. As one CEO pointed out "this isn't rocket science - we unfortunately have experience of doing this before".

Experienced management teams have deployed their experience typically in the following areas:

• Reducing throughput and capacity, using a combination of short-term working, ad hoc/accelerated maintenance, mothballing plants and some permanent plant closures, but linked to accelerating strategic closure plans.
• Stopping all discretionary out-of-pocket spend, including stopping all non-critical travel, escalating and managing purchase authorizations to the executive (CFO/CEO) level, stopping consultant spend, reducing or stopping use of temporary/agency employees.
• Reviewing and adjusting accounts payable and accounts receivable terms.
• Pricing management - accelerating escalation decisions, moving from quarterly to monthly or weekly pricing terms, and pro-active margin management plans.
• Sales & marketing - reaching out to increase customer touches and prioritizing spend on these activities.
• R&D/innovation - ruthlessly prioritizing projects/skills for innovation and future growth and is some cases looking to increase velocity of new projects by doing fewer faster.
• Stopping all non-essential capital expenditure (safety and sustenance continued) and ring fence critical asset builds, eg in future growth areas
• Freezing recruitment - apart from strategic hires authorised at CEO level
• Understanding and managing both supplier and customer risk
• Managing all aspects of cash on a day-to-day basis - at the executive level.
  

 

Some of these activities were reflected in the response from our survey respondents.

The one issue that CEOs were somewhat split on was protecting market share. One side of the view was "we need to maintain our market share so that we have the foundation for future growth when the upturn comes."

The counter view was: "Market share isn't so important at the moment - it's all about survival and preserving cash - and if that means we reduce share or even bottom slice our client base to survive then so be it."

Others cautioned that "years of good work on restructuring could be lost be people chasing volume to fill assets and the margin impacts will be lost forever."

FOCUS ON THE CORE
The industry has minimized fixed costs on an ongoing basis for the last several years and made associated reductions in headcount and labour costs. This time, companies appear to have been adopting more focussed approaches to protect future core competence.

The majority of CEOs we discussed this with appeared to be applying some kind of core competence-type of thinking and approach. Common activities were linked to protecting/ring fencing the following:

• People and key skill and capability
• R&D/innovation for future growth
• Key new asset builds/projects in growth regions
• Sales and marketing/customer intimacy
• Safety and nurturing of assets
• Values and ethics.

 

Most of these actions are recognized by the respondents to the survey, with 55% saying they are not scaling-back R&D/innovation investment and with 59% saying the plan to bring new innovations/products to market faster.

The majority of respondents viewed the actions taken by their company as protecting the core competence and foundations for future growth, and that the actions also supported long-term viability of their company.

EXCITING SECTOR
Despite the current turmoil, the chemical industry is still viewed as an exciting sector to work in - but it will be difficult for new entrants over next 18-24 months.

Some 92 % of the respondents believed their companies would survive the downturn, while 89% of them believed they themselves would still be working in the industry 12 months out. Over 60% believed the sector was worthwhile joining as a new employee with only 15% believing the converse.

All of the CEOs interviewed believed this was an attractive industry for future employment and new joiners to the industry. The one caveat people mentioned was that it might be difficult for new joiners, like graduates, to join the sector during next 12-18 months.

"This is a dynamic industry for people to join, those prepared to grow their careers in the growth regions of the world will get fantastic opportunities to manage new projects, cost centres and be promoted quickly," commented one CEO.

Another noted: "This sector holds the solutions to some of future problems around sustainability, water shortage, energy efficiency, environmental issues and feeding the world - this is the place to be".

FUTURE IS DIFFERENT
But, the future will look different. Most CEOs expect North America and Europe to shrink in relative terms and the Middle East and China/Asia to continue to grow.

That means smaller, leaner, fewer and probably stronger players in North America and Europe - probable with more proliferation in other markets. In mid-term we will see more financial defaults, ongoing plant consolidations and capacity closures.

Said one: "It will be a tough industry for people to enter for the next 18-24 months, but thereafter it will be a dynamic place to grow careers - particularly in the likes of China and the Middle East".

SUMMARY
James Black, chemical practice leader at J&M Management Consulting summarized the CEO interviews and discussions: "It sounds like people, at least in private, believe we have bottomed out. They expect a long, slow sustainable recovery and we probably won't get back to peak 2007 levels until 2012 or later. Europe and North America will grow slower than the likes of Middle East and China.

"The stability of 'real' demand has brought back more feelings of confidence and predictability to leadership teams but this will take a while to permeate the total business. We still face ongoing consequences in terms of downsizing, asset consolidations, and business failures - but it's been interesting how companies have been trying to protect future core competence for growth.

"The refreshing thing is that 92% of those who responded to the survey saw a positive future for their company and 89% saw a longer term future for themselves in the industry, and all the CEOs interviewed believed the sector to be a dynamic industry for future employment and for new people to enter and grow their careers . . . it would appear that there is real light at the end of the tunnel!

LESSONS LEARNT
Key lessons learned by our CEOs included:

• Don't forget the voice of the customer - it is too easy to become inwardly focused - this is the time to embrace customers and get closer to them.
• If it looks too good to be true then it likely is - trust your instincts and experience
• Run scenarios and plans that include wider spreads of volumes and other key assumptions
• Develop triggered escalation plans - ahead of the situation
• The value and use of inventory, and cash management is a critical life blood to the business and must be managed at the executive level
• We have to rigorously manage both cost effectiveness AND growth continuously - not either or.
• Speed is of essence during a crisis - never do tomorrow what you can do today
• It is easy to forget during a crisis that people are what make us successful - they are easily lost and difficult to replace - identify and protect core competence
• You need different business models, decision processes, information and shorter management review and decisions cycles during downturn - need to consider war and peace type operating environments and when to move from one to the other.
• Downturns give CEOs a rare opportunity to really see who the strong people are in their team, and also to see the real rocks at the bottom of the operational lake - make sure you look carefully for both of these
• This isn't rocket science and there isn't a silver bullet - it needs lots of tough work, determination and confident leadership to steer the ship through the storm
• Stay humble and appropriately conservative during the next upturn when it arrives!

 

METHODOLOGY
This study of chemical industry dynamics was carried out by ICIS and J&M Management Consulting using a three-stage approach. First, readers of ICIS Chemical Business were surveyed online in April 2009 with 275 responding to the questionnaire. Senior managers and industry leaders made up 38% of respondents (typically at CEO, chairman, executive vice president, vice president or president level), with another 17% in general management and leadership roles. The majority of respondents (72%), had in excess of 10 years' experience in the industry.

The respondents came equally from companies with global revenues of up to and above $500m; there was a similar equal balance between companies with fewer than and more than 500 employees . Respondents were equally split (one-third each) between working for organizations publicly listed, privately owned or family owned.

Second, the survey results were complemented with 10 face-to-face executive interviews carried out by J&M with CEO/business unit leaders of global chemicals companies, to explore their personal feelings and beliefs and to enable a number of issues to be examined in more depth.

And third, public statements of several chairmen and CEOs from their quarter one public financial reports were analyzed.

The survey and face-to-face interviews were undertaken under a confidentiality agreement and all comments are therefore non-attributable.

This survey is part of a series of offerings from ICIS custom publishing, headed by global editor John Baker. For more details, please contact john.baker@icis.com

J&M Management Consulting combines management consulting with IT consulting. By optimizing business processes and supporting their performance with modern IT solutions, it helps chemical companies achieve strategic goals faster and with sustained success. J&M's expertise includes supply chain management and its associated business processes, including distribution, marketing, purchasing, finance and controlling. The Hidden Champions Study 2009 named J&M the best management consultancy for supply chain management).

Read the full results of the survey

ICIS Copyright © Reed Business Information 2009

Author: John Baker
+44 20 8652 3214

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