Arkema Gets Set for Life on Its Own

Thierry Le Hénaff, president and chief executive officer of Arkema, the newly named industrial chemical arm of the oil giant Total, does not like to compare his company to its French compatriot Rhodia. Total is set to spin Arkema off as a separate company by 2006, and Le Hénaff is determined that, unlike that other French chemical spin-off, his firm will be a complete success.

The spin-off, a financial maneuver in which a company creates a new entity and gives shareholders stock in it, is a painless way for a large corporation to leave a business that no longer meets its long-term goals. Although it is common in the chemical and life sciences industries--Bayer, for example, is now advancing the spin-off of Lanxess--the practice has received a black eye in recent years, thanks to the less-than-successful launches of firms like Rhodia, Solutia, and Celanese.

Total is planning the Arkema spin-off for the same reason that its oil industry peers like BP and Shell have shed chemical assets: Chemicals don't make as much money as oil, and oil companies don't want too much capital tied up in them. Total employs 26% of its capital in chemicals today, whereas Shell has methodically pared down its chemical business over the past five years until it accounts for only about 11% of capital employed. BP announced earlier this year that it will further lower its chemicals presence by selling or spinning off its $8 billion-per-year olefins and derivatives business.

Total accumulated much of its chemical heft almost accidentally, through acquisition of the oil companies Petrofina and Elf Aquitane in 1999 and 2000, respectively. Total began reducing its exposure in 2000 with the announcement of plans to divest chemical-related assets worth $1.5 billion. That completed, it embarked on a second, $500 million round of sales last year--only to change course and, in March, announce that it will spin off three of its industrial chemical businesses as a whole.

Le Hénaff, 41, notes that the change came from the realization that the piecemeal approach could not continue to work. "Instead of selling piece by piece," he explains, "we wanted to have a real industrial project that could take its destiny in its hands." Le Hénaff was chosen to lead the project on the strength of a year running three Total chemical units--agrochemicals, fertilizers, and thiochemicals--and 10 years in the firm's adhesives business, where he helped turn a troubled unit into the world's number-two adhesives company.

However, unlike the adhesives business--which Total is keeping, along with other specialty chemicals units and its petrochemicals business--Arkema is going to be pulled from the protective arms of its corporate parent and forced to fend for itself. "Total has protected us from the reality of the business," Le Hénaff acknowledges. "Total is a very strong group, so our need to perform is not as strong as it should be."

HE ALSO ACKNOWLEDGES that the spin-off business--known in its early months as CIP, for chlorochemicals, intermediates, and performance products--was at first compared in France to Rhodia, which has had a rocky time since it was separated from the French drug company Rhône-Poulenc in 1998 and is only now righting itself financially after completing a major divestment program.

However, Le Hénaff maintains that those comparisons faded as the financial markets came to see Arkema as a different animal. He declines to reveal whether he believes Rhodia's problems stemmed from the assets it inherited, the debt it was saddled with, or management mistakes. What he will say is that the foremost difference between the two is that Arkema is starting with a low, 30% debt-to-equity ratio, about what Total itself carries. "In the chemical business, this will be a very strong asset," he says.

Le Hénaff believes that Arkema also has the right size to succeed. With some 20,000 employees and sales last year of just over $6 billion, Arkema is smaller than Dow Chemical, BASF, DuPont, and Degussa, but in the same size league as the 10 next biggest stand-alone chemical companies. Financially, Arkema would have broken even in 2003, a very tough year for the chemical industry, and it is doing "significantly better" this year, Le Hénaff says.

He is also counting on being able to operate faster and more flexibly as a stand-alone company than as part of Total, one of the world's largest private oil companies. "In a big group, there is always more bureaucracy, and more procedures, than if you stand alone," he says. In addition, Atofina, as Total's chemical operations were called, often put executives in charge of disparate businesses. Le Hénaff knows this pattern from his own recent experience running three unrelated chemical units. The new company's businesses, he says, will be run by dedicated managers.

But for Le Hénaff, Arkema's biggest strengths are the people and businesses it is inheriting. Although the company is no overall giant in the world of chemicals, it does claim to be number one, two, or three globally in businesses that account for 60% of its sales. These include fluorochemicals, thiochemicals, hydrogen peroxide, acrylics, organic peroxides, molecular sieves, and technical polymers. In vinyl products, Arkema is number three in Europe.

In fact, the slow-growth vinyl business is the only part of Arkema's portfolio in which Le Hénaff will concede any kind of weakness. He's convinced that real money can be made in vinyl, even in the oversupplied European market, but he says Arkema must cut costs further before it is in a position to do so. "The name of the game is to be lower cost than the competition," he says.

Le Hénaff also acknowledges some geographic weakness, evidenced in Arkema's slim presence in Asia, where it achieves just 10% of sales, compared with 24% of sales from North America and 60% from Europe. His goal is to double the company's Asian sales by 2010, mainly through the expansion of its manufacturing presence there.

TODAY, THE COMPANY has 90 plants worldwide, 10 of which are in Asia, including five in China. Le Hénaff says he is looking to invest in industrial and performance chemical businesses such as thiochemicals, acrylics, and technical polymers where the company has no Asian manufacturing, possibly by building near the large petrochemical complexes being erected in China by BP, Shell, and others. Businesses in which the company is already a local producer, such as fluorochemicals and hydrogen peroxide, are also candidates for further investment via site expansion.

Indeed, getting more out of the assets--and the people--that Arkema already has is a frequent theme for Le Hénaff. By doing a better job of harnessing innovation, he contends, the company can get more chemicals from the plants that it operates and extract more new chemistry from the R&D labs that it manages.

"Our level of innovation today is not sufficient, especially if you look at the quality of our R&D," he says. "With our commercial position and the quality of our R&D, we should have a level of new business from innovation that is much greater. We have what we need, but we can exploit it better."

According to Le Hénaff, Arkema needs to simplify and de-bureaucratize the chain that runs from R&D to manufacturing to sales and marketing. Top managers need to be more involved in key R&D projects, and middle managers need to be less afraid to make decisions and more willing to take risks. "Innovation is made up of microdecisions, and people at all levels have to understand that they are part of it," he says. "It is a cultural evolution that we are starting to implement."

Despite his qualms, Le Hénaff has no plans to alter the basic methodology that guides R&D at Arkema. He explains that 90% of R&D takes place at the business unit level and has relatively short-term business- or customer-support goals. The other 10%, managed on the corporate level, is oriented to longer term, breakthrough technology.

For example, Arkema scientists are working on a long-term project to develop conductive fluoropolymer membranes that can help make hydrogen fuel cells a commercial reality. The project is corporate-level today but will transfer to the technical polymers business when it comes closer to completion in a few years.

Some projects, such as one aimed at using nanotechnology to develop novel styrene-butadiene-methyl methacrylate block copolymers, are pursued by teams made up of both corporate and business unit researchers. Others, such as an effort to come up with new marine paint antifoulants that don't require tin-based chemistry, are funded almost entirely by the business unit.

Although Le Hénaff believes that Arkema's R&D effort can be more decisive and entrepreneurial--and that more productivity can be eked out of the company's plants and production sites--he has no doubts about the commitment of the people who will work for the company when it sets out on its own. "The culture of our people is a culture of loyalty and expertise that has been developed over the years," he says. "These people are ready to commit themselves to the new project."

Between the commitment of its people, the quality of its businesses, and the desire of its parent company for a clean break, Le Hénaff is confident that Arkema will not become another name on the list of troubled chemical industry spin-offs. "It is very important for Total that the spin-off is a total success," he says.

"In a big group, there is always more bureaucracy, and more procedures, than if you stand alone."