Putting Value First in the Heart of Basf

In January, BASF's intermediates division commissioned a new butanediol plant in Kuantan, Malaysia. Just two months later, the company announced that, in response to poor market conditions, it would partially idle the plant, using its capacity "only to a limited extent."

The decision to ratchet down output at a new facility in the face of oversupply might seem obvious, but according to Walter Gramlich, head of the intermediates division, it was actually a fairly revolutionary step for a company that prides itself on running well-built plants at full throttle.

Gramlich, who has been in his job since April 2003, says his team made the decision as part of a new "value before volume" approach that he instituted late last year. That strategy, in turn, was his division's response to a corporate strategy program called BASF 2015 that Jürgen Hambrecht launched soon after he took over as chief executive officer in May of last year.

The intermediates division is at the heart of BASF, converting basic raw materials--mostly made by BASF--into intermediates sold to third parties and other BASF units. The division has 2,850 employees and had sales last year of about $3 billion, including sales within BASF of $900 million. Its external customers include most of the world's major chemical companies, including Akzo Nobel, Degussa, Clariant, DuPont, and DSM.

According to Gramlich, the new value-based strategy calls for the division to carefully analyze which of these customers to continue to serve directly, which to transfer to distributors, and which to pass altogether to competitors willing to sell at prices that BASF considers unacceptable. The strategy also means increasing the scope of the division beyond the commodity diols and amines for which it is best known.

Polyalcohols and diols like butanediol are the intermediate division's largest product area, representing 45% of sales. BASF is, in fact, the world's largest producer of butanediol. Amines, including alkylamines, alkanolamines, and alkylalkanolamines, are 33% of sales, while acids like formic and propionic make up the balance of the division, at 22% of sales.

Gramlich isn't ignoring these basic products under the new strategy. Indeed, the division is in the midst of a big expansion push that includes the new butanediol plant in Malaysia and plants under construction in Caojing, China, for the spandex intermediates tetrahydrofuran (THF) and polyTHF and in Nanjing, China, for formic acid, propionic acid, dimethylamine, and dimethylformamide.

The division, however, is increasing its focus on smaller volume products--such as dimethylaminopropylamine, an amine used to produce mild amphoteric surfactants--that can be made profitably through BASF's strong backward integration. And the division is putting a big development effort behind new products such as its Basil ionic liquids and ChiPros chiral intermediates.

Since taking the helm, Gramlich has almost doubled, to 21, the size of the division's new business development team. Between 2003 and 2005, the division's R&D spending, already close to $100 million a year, will have increased 9%, and research spending dedicated to new products will have increased a sharp 81%.

GRAMLICH IS particularly proud of the division's work in imidazole-based ionic liquids--efforts that were acknowledged with recent internal and external innovation awards.

One commercial use aside, ionic liquids are largely still under development (C&EN, Nov. 8, page 44). However, they have numerous potential industrial applications that, according to Gramlich, are being pursued with other firms. "We have 15 projects with customers, and I strongly expect that in the next six months we will see major breakthroughs by several of them," he says.

Like most of BASF's science breakthroughs, the ionic liquid technology comes from the company's central R&D labs in Ludwigshafen, Germany, which are arranged in three competence centers of plastics, chemicals, and life sciences--all of which are available to the intermediates division. "If we establish a project with a customer, we can be working with specialists from all three centers in under an hour," Gramlich says.

BASF scientists developed new technology, now being installed at the Caojing site, that makes THF directly from butane, eliminating an intermediate butanediol production step. At the same time, the division is reaching out to external development partners such as Diversa and Solvias, two technology-based companies that recently agreed to provide new chiral intermediate chemistry.

Gramlich maintains that the value before volume strategy is working. The division's earnings before interest and taxes in the first nine months of 2004 were "significantly higher" than in the same period last year. The start-up of seven new facilities, including the Chinese plants, will make 2005 challenging, but Gramlich predicts breakaway results in 2006.

He and 250 other BASF executives from around the world recently spent two nights in tents in Germany's Limburgerhof woods as part of a corporate retreat to assess the progress of Hambrecht's 2015 effort. Although the tents were heated to ward off near-freezing temperatures, Gramlich says the Spartan lodgings still conveyed the difficulty that managers face in meeting the program's goals--particularly earning a premium on the company's cost of capital.

Gramlich believes that the intermediates division is doing its part. "In the past, we were strongly driven by volume growth," he says. "Today, the focus is on value."