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Altana Seeks Growth Niches

German firm looks for specialty chemical markets in which it can be the 'clear number one'

January 17, 2005 | A version of this story appeared in Volume 83, Issue 3

Researcher Margret Gilsbach tests performance of paint additives at an Altana Chemie technical service lab.
Researcher Margret Gilsbach tests performance of paint additives at an Altana Chemie technical service lab.

For Altana Chemie, the chemical arm of German drug and chemical company Altana AG, profitability has very little to do with size.

With sales promising to be just above $1 billion in 2004--its full-year results will be reported later this month--Altana Chemie is a minnow compared with specialties giants such as Europe's Ciba Specialty Chemicals, Clariant, and Degussa, or U.S. producers such as Rohm and Haas and Eastman Chemical.

Despite its relatively small size, Altana considers itself the world market leader in a variety of applications. For example, it claims it is the world leader in high-quality paint additives, has a strong position in plastics additives, is the world leader in closure compounds, and is the world market leader for wire enamels and impregnating resins for electrical insulation.

The goal for Altana Chemie is to be a market-leading specialty player in growing niche markets, says Matthias L. Wolfgruber, president and chief executive officer. Market leading, he adds, means "a clear number one. In this respect, we are very simpleminded--we only want to be number one."


That focus establishes certain limits to the company's activities, Wolfgruber acknowledges. "Each business must truly be specialty," with sales based on the value, performance, and innovation of products and an after-sales service component. Altana Chemie's chance "has to be in a niche market," he says. "We are small; we couldn't be number one in a $5 billion market."

However, that focus also translates into what he sees as sustainable profitability: "As a fast-growing, strategically focused, pure specialty player, our level of profitability is at the top end of the chemical industry."

The company, formed just in 1977, has certainly been performing well recently. Altana Chemie's sales for the first nine months of 2004 were $820 million, an increase of 16% over the comparable period in 2003. Operating earnings for the nine months were $157 million, an increase of 20%. Some 54% of sales came from Europe, up 15%; of those, three-quarters were from outside Germany. Some 15% of sales came from North America, up 7%--but up 18% in local currencies; and 22% from Asia, up 28%. In all, 86% of the company's sales in the first three quarters were international business.

Altana Chemie, Wolfgruber stresses, is a truly global specialty chemical company. "We are global in how our sales are distributed and our assets and employees, too," he says.


Altana Group
Headquarters:Bad Homburg, Germany
Total Sales:$3.40 billion

Altana Pharma
Headquarters:Konstanz, Germany
Sales:$2.46 billion

Altana Chemie
Headquarters:Wesel, Germany
Sales:$939 million
Operating profits:$168 million
R&D spending:$45 million
Employees: 2,634


Byk-Chemie Additives & Instruments (41%)–paint additives, plastics additives, and testing and measuring instrumentationon Altana Coatings & Sealants (25%)–coatings, compounds, and sealants for packaging; industrial coatings

Altana Electrical Insulation (34%)–wire enamels, impregnating resins, and casting compounds


Note: Figures are based on 2003 results. All figures were converted using the U.S. Federal Reserve average for 2004: U.S. $1.00 = 0.804 euro.

AND BUCKING the trend of employee layoffs and job losses, chemical employment at Altana in 2003 rose 15% to 2,634 people.

Wolfgruber himself has a particularly international outlook. After receiving his Ph.D. in chemistry from the Technical University of Munich, he did a postdoc at the University of California, Berkeley. Then, he spent 17 years at Wacker-Chemie in a career that included heading Wacker Chemical Corp. in the U.S. He joined Altana Chemie as managing director in July 2002 and was named president and CEO that October. He is a member of the management board of Altana AG, a German firm whose stock is considered blue chip.

"At one point, I had thought I'd never work for another company--I was living and breathing Wacker culture," Wolfgruber recalls. But the opportunity at Altana came. "I liked the development of the company, the willingness to grow the chemicals, the culture of the company. I've never looked back, and have enjoyed it tremendously. It is open, fast moving, and enthusiastic and has a flat, decentralized structure," he says.

To some extent, perhaps, the relative youth of the company has kept it from being too inward looking.

In 1977, Herbert Quandt, the third-generation head of a German entrepreneurial family that owned a large conglomerate--with holdings that included a large stake in the automaker BMW--restructured his multifarious holdings. The pharmaceutical and chemical businesses were shaped into Altana AG, in which he retained a 50.1% stake with the remainder trading on the stock market.

Following Quandt's death in 1982, his daughter, Susanne Klatten, took over his stake in Altana AG. She is currently deputy chair of the group's supervisory board.

As the company's statement of guiding principles puts it, "We view our shareholder structure as a guarantee for entrepreneurial independence. It offers employees and customers security and continuity as a basis for long-term and stable business relationships. History is a good foundation on which to build the future."

Moreover, in common with compatriot German firms Merck KGaA, most of which is held by the founding family, and family-owned Boehringer Ingelheim, Altana AG is cushioned from the fashionable sniping by security analysts who urge the breakup of hybrid pharmaceutical-chemical companies like the former Hoechst and Rhône-Poulenc.

In fact, rather than acceding to such demands, the group's managers--supported by majority shareholder Klatten--are on record as looking for "chunky" specialty chemical acquisitions of up to $600 million.

ALTHOUGH ALTANA AG officially dates only to 1977, its roots go back much further. Chemicals, for example, have been produced in Wesel, Germany--now Altana Chemie's headquarters--since 1962, when precursor company Byk-Chemie began manufacturing there. And Byk itself was founded as a pharmaceutical chemical company in Berlin in 1873.

Today, the Byk-Chemie logo is used by Altana Chemie's additives and instruments business, whose sales in the first nine months of 2004 accounted for just over 40% of the chemical company's total. And like its sibling business units, the additives and instruments unit is a classic specialty manufacturer: More than 80% of its production is in batches of 50 to 200 metric tons per year.

According to Wolfgruber, Altana Chemie's business model is focused on a clear, value-added specialty strategy: high margins, a significant share of sales from new products, high spending for R&D and service capabilities, and low capital intensity. His goal is to move all businesses toward those targets and to expand beyond existing business units.

"Portfolio management is important," he observes. "Last year, for example, we decided to get out of all nonpackaging coatings in the coatings and sealants business unit. By early 2005, we will be out completely." Meanwhile, a host of acquisitions since 1988 have rounded out selected product areas. Buys in the past two years include GE Bayer Silicones' urethane foam additives business; ANI Can Coatings of Denmark; and the U.S. electrical insulation specialties lines of Viking, Schenectady, and Ranbar.

The company has done a lot of work to analyze possible investment and acquisition areas, Wolfgruber says, explaining some of the process. By Altana's definition, the chemical market has about 60 segments. Of those, he says, "we've sorted out what wouldn't be right for us. That has left us with about 20 segments. But measured against our business models, we go down to maybe 20 subsegments of those--not necessarily the same chemicals, but requiring the same set of skills and competences."

The next consideration, he continues, is working out which segments are structured so that a new entrant could be number one. Those considerations all come down to a "road map" leading, "most likely, into a fragmented and consolidating market" growing between 5 and 8% per year. One possibility is the highly fragmented--and consolidating--segment of chemical specialties for flexible packaging.

Any acquisitions, he emphasizes, must meet the same key objectives that Altana's existing businesses must meet: sustainable sales growth of more than 10% per year and operating profits of 20%, plus or minus 2%. Every business unit also must earn its cost of capital, meaning a return on capital employed of at least 8% after tax.

"We believe this is realistic, from the growth of our existing businesses," Wolfgruber says. "Through a cycle, we expect 7 to 8% organic growth. That's why we invest more in R&D and new markets." For example, Byk-Chemie last year saw the completion of a $60 million, three-year expansion of its Wesel production facilities.

"The rest of the targeted growth would be from acquisitions," he observes. "We feel we can double our sales [from those of 2003]. That is our perspective for the year 200X. I don't want to specify by when, but there will be a 00 before the X."

ACQUISITIONS, he adds, could be made to enable Altana to enter new or related markets, either by product or by region. "We can leverage what we are doing today to acquire supplemental products and technologies and drive consolidation of industry segments. Altana AG has the financing power."

However, there is also an innovation component to Altana Chemie's growth, Wolfgruber says. In 2003, his researchers spent $45 million, more than double the amount spent a decade earlier. Last year, the company spent 5% of sales on R&D, and it has a medium-term target of boosting that investment to about 6% of sales. Moreover, more than 20% of Altana Chemie's employees worldwide are employed in laboratories, he notes.

In the company's additives business, some 30 to 40% of sales are now being generated from products introduced in the past 10 years. "I can't say that overall for the company," Wolfgruber concedes, "because the company's businesses are so diverse. But additives is an example. We have a strict focus on market needs" and on the company's chosen technology platforms: urethane, urea, polyester, and nylon; block, graft, and gradient polymers; silicones; and waxes.

All that, in turn, supports the company's regional expansion ambitions, particularly in Asia. Altana Chemie already has a surprisingly strong presence in China, for example, with four wholly owned businesses. Changes in Chinese law have encouraged the company to buy out its joint-venture partners.

Wolfgruber says: "All are fast-growing and profitable, and all generate cash--more than we invest. Every business unit has production facilities in China, with only local staff. That is part of our philosophy--we will have an exchange of know-how, short-term assignments, and so on, but not people from Germany running the operations." In fact, he predicts that Altana will ring up more than $120 million in sales in China this year.

The company's newest plant in Zhuhai, on the Pearl River Delta across from Hong Kong, went from an empty field to operational in 15 months. The facility supports Altana's electrical insulation business unit.

R&D is also opening another area where Wolfgruber and his colleagues see promise: nanotechnology, which Altana has already begun exploiting in its product development. Nanocomposites will be the basis for a new range of innovative products in coatings, plastics, and insulating products, he muses. And Altana "has competence in nanotechnology and promising approaches in the development of nanomaterial-based products."

To further that capability, Altana last year arranged an eight-year exclusive technology deal with Nanophase Technologies Corp. To support that deal, Altana invested $10 million in Nanophase. The point of the deal, according to Wolfgruber, is the long-term commitment to the technology. "We took a small equity position in order to show our commitment to them. We will jointly develop with them--we're trying to make the most of this technology."

And in November at K2004, the plastics industry show in Düsseldorf, Altana debuted a line of nano-engineered additives for coatings that are used on wood and polyvinyl chloride. One aim of the additives is to improve scratch resistance of ultraviolet-cured coatings. These alumina nanoparticles, produced by vapor-phase synthesis, beat competitive technology in efficiency and performance, the company proclaimed.

Altana Chemie is clearly counting on R&D to be the means to take on the giants in the chemical specialties industry.


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