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'The Chemical Company'

Riding on record profits, BASF fits recent acquisitions into its expansive 'Verbund' business model

by Jean-François Tremblay
March 19, 2007 | A version of this story appeared in Volume 85, Issue 12

Mother Ship
Credit: BASF
Ludwigshafen, where BASF began operations in 1865, is still the company's main production site and the location of its headquarters.
Credit: BASF
Ludwigshafen, where BASF began operations in 1865, is still the company's main production site and the location of its headquarters.

LIKE SANTA CLAUSES dressed in business suits, the lively chairman of BASF, Jürgen Hambrecht, and the company's restrained and very tall head of finance, Kurt W. Bock, appeared in front of about 100 journalists at a press conference in Ludwigshafen, Germany, a few weeks ago to deliver a load of goodies.

The Future
Credit: BASF
Workers sit down for a safety training session at BASF's joint venture in Nanjing, China.
Credit: BASF
Workers sit down for a safety training session at BASF's joint venture in Nanjing, China.

BASF, self-styled as "The Chemical Company," had achieved record profits in 2006, and everyone involved was getting something. The company was raising its dividend to shareholders, paying employees a record bonus, and buying back more of its shares. In this festive atmosphere, even the reporters got a gift. The firm gave each journalist a blow-up rubber pony, made with a BASF plasticizer, that soon became a hit at home among those with young children.

The results that Hambrecht and Bock doled out were impressive. BASF had managed to increase its sales by 23% in 2006, more than half through internal growth and the rest through acquisitions. "Our business developed dynamically in 2006, and we have carried the impetus through into 2007," Hambrecht said. "Demand for our products is strong, and capacity utilization for our plants is high." He announced that BASF would pay more than $300 million in bonuses to employees working in Ludwigshafen.

Hambrecht, a man of legendary stamina, insists that the success of the company is more than the result of his leadership. "What I feel is not important," he tells C&EN. "The BASF team last year did an outstanding job."

At the press conference, Bock delivered a steady stream of good news. The company generated a cash flow of $7.8 billion, its best result yet, and its assets grew by 27% to $60 billion last year.

There were some missteps. Sales in the agricultural business were down 6.5%, largely due to weather patterns and produce prices, BASF said. The company had to write off a $200 million facility in Shanghai that was making polytetrahydrofuran. The new technology behind the year-old plant had problems, Hambrecht acknowledged.

And the company's business in lysine, an animal-feed additive produced at a South Korean plant the company bought for $600 million in 1998, is suffering because of the high price of sugar, its key raw material. Wolfgang Hapke, president of market and business development for BASF in the Asia-Pacific region, tells C&EN that its lysine business will be "restructured."

The few problems aside, BASF is generally in great shape, confirms Themis Themistocleous, a chemical and pharmaceutical industry analyst at UBS in London. He says financial analysts lately have been asking questions about its crop protection business. But weather and general business conditions made strong performance nearly impossible, he says. Similarly, Themistocleous argues, lysine is a great business for the long term even if it's struggling at present.

Founded in 1865 as a producer of magenta dye and aniline, BASF has had several exciting periods in its long history. During World War II, its main site in Ludwigshafen was bombed to a standstill. And in 1923, during a period of hyperinflation, the firm issued its own "aniline dollar" as a more practical means of exchange than the plummeting national currency.

But last year was eventful as well. It was in 2006 that BASF completed its first-ever hostile takeover, the drawn-out $4.8 billion acquisition of catalyst maker Engelhard. The New Jersey-based company agreed to the deal only when it became clear that BASF would succeed in convincing Engelhard shareholders to elect merger-backing directors to their board.

BASF also made some friendly deals in 2006. In March, it acquired Degussa's construction chemicals business for $3.3 billion. And in May, it paid $470 million for Johnson Polymer, a unit of JohnsonDiversey that makes water-based coatings.

Star Treatment
Credit: Jean-François Tremblay/C&EN
Taking his place for the 2006 earnings announcement in Ludwigshafen last month, Hambrecht faces a gaggle of photographers.
Credit: Jean-François Tremblay/C&EN
Taking his place for the 2006 earnings announcement in Ludwigshafen last month, Hambrecht faces a gaggle of photographers.

THE DEALS have delivered pleasant surprises, the company says. Consider Engelhard. Only now that BASF actually owns the firm does it fully appreciate the catalyst maker's value, executives claim. "In Asia, at least, it exceeds our expectations," Hapke says.

Engelhard's portfolio of catalysts used in the automotive and refining industries gives BASF deeper access to customers in those areas, Hapke says. To reach customers, Engelhard was using a mostly U.S.-based sales force. "You cannot do this," Hapke says. Engelhard products are now marketed by BASF representatives based around the world, he says, and sales are already responding.

The purchase of a trio of fairly specialized businesses and various other measures taken by the company, Hambrecht says, have helped make BASF "more resilient to cyclicality." Yet even with the new operations, two-thirds of BASF's sales come from businesses such as plastics, oil, and basic chemicals, all of which suffer from notorious cyclical ups and downs. Hambrecht does not pretend that BASF is suddenly immune to these cycles.

"The general manufacturing index has a rather high correlation to our performance," he acknowledges. But the cyclicality of the company's performance has been lessened, he says, through increased linkages to customers that require more customized products. "We are less directly tied to the basic commodities,"says Hambrecht.

BASF At A Glance

Headquarters: Ludwigshafen, Germany

Sales: $66.1 billion

Net income: $4.0 billion

R&D spending: $1.6 billion

Capital spending: $3.0 billion

Employees: 95,247

BUSINESSES (% of total sales):

Plastics (24%): styrenics, polyurethane, performance polymers

Chemicals (22%): inorganic and organic basic chemicals, catalysts, petrochemicals

Oil and gas (20%): exploration and production

Performance products (19%): used in making coatings, paper, construction materials, personal care products, products in other industries

Agricultural products and nutrition (10%): pesticides, vitamins, amino acids

Other (5%): fertilizers, miscellaneous businesses, foreign currency gains

NOTE: Figures are for 2006, converted at the Federal Reserve Bank average rate for the year of U.S. $1.00 = 0.796 euro.

Furthermore, the internationalization of BASF's business in recent years has helped smooth out profit performance because booms and recessions do not usually happen at the same time all over the world.

"We are less cyclical, but it doesn't mean that we are not cyclical," Hambrecht says. "If we were not cyclical, we would not need a board of directors, we could just have a computer in charge."

Although BASF portrays the acquisitions in only positive terms, these moves raise questions about the extent to which the German company's basic nature is changing.

To those familiar with the chemical industry, BASF conjures up "Verbund," a German term conveying the idea of complete manufacturing integration. BASF firmly believes that chemicals are most efficiently manufactured at large sites making hundreds of different products and where the waste from one plant serves as the raw material for another. BASF operates such Verbund sites in Germany, Belgium, the U.S., Malaysia, and China.

For a chemical engineer, BASF's main site in Ludwigshafen is a wonder. It produces thousands of products as disparate as plastics, polyurethanes, dyes, agrochemicals, and materials used by the electronics industry. Workers spend their days in the proximity of scorching steam and volatile materials. Yet the Ludwigshafen site has no particular smell, and there is hardly any smoke coming out of the complex's many chimneys. The safety record is superb.

Run in a manner quite different from the Verbund manufacturing concept, the operations BASF gained from the Engelhard and Degussa deals are not highly integrated. The Engelhard acquisition brought BASF 50 new production sites and 22 R&D centers. The Degussa operations also are highly decentralized; products are warehoused at hundreds of locations, and final mixing and blending operations often take place in proximity to customers.

Hambrecht sees no conflict between the relatively large number of small sites acquired and his company's traditional mode of operation. BASF has "always been" decentralized in the way it provides customer service, he says. "Look at our car paints business or our polyurethane systems house business; they are very decentralized." He adds that BASF environment, health, and safety standards will be inculcated at the acquired sites with training programs and enforced with unannounced inspections.

The company is like a tree, Hambrecht explains, and another big branch has appeared on the trunk. "If you look at catalysts, we had catalysts already before. But now, we can branch them out into a new direction," he says. "And if you look at construction materials, most of the raw materials can be made from our Verbund production facilities. We're just adding a more decentralized way of delivering to the customer."

Verbund and decentralized thinking also coexist in BASF's R&D operations, Hambrecht notes. The company maintains basic research in Ludwigshafen but carries out applications development at dozens of locations around the world. Fundamental research into new industrial manufacturing processes is expensive and best done in Ludwigshafen, he says. Similarly, breakthrough research on new seeds and crop protection products is carried out in Limburgerhof in the German countryside.

Although the company has the means, it probably will refrain from further acquisitions for the time being. Hambrecht told reporters during the press event that other firms are asking too much for their assets. "We are still seeking assets that will sustain our profitable growth, but at current prices, we need to be careful with shareholders' money," he said.

Shortly after addressing the reporters, Hambrecht told analysts that it's time for a pause. "For the time being, there is a little bit of a break, because we have to digest," he said. "If you have eaten too much, and you eat constantly, you don't feel well."

Japan, the world's second largest national market for BASF products after the U.S., has been largely spared in the company's recent acquisition spree. Hambrecht tells C&EN he has been looking to make a major acquisition in Japan since 1998, but he has not found a way to break through the closely knit business culture prevailing there.

Hambrecht headed BASF's Asian operations from 1995 to 1999 and seems slightly nostalgic about his time there. "Germany has been in a much better mood lately, but it's not like Asia, where for people there the sky's the limit," he says. During the 1998 financial crisis, he recalls, people he knew nearly went bankrupt and yet did not ask for government help.

LAST YEAR was a good one for BASF in Asia, even if the company had to write off that $200 million plant in Shanghai. BASF enjoyed the first full year of operations in Nanjing, China, where it built its largest complex outside Germany. In Shanghai, plants producing polyurethane came on-line. And in Malaysia, a polybutylene terephthalate joint venture with Toray Industries began production.

According to Hapke, the Asia business development head, BASF derived 19% of its global chemical sales in 2006 from Asia, and nearly two-thirds of the associated products were supplied from local facilities. The region is the world's largest market for chemicals, and demand is growing more than 4% annually, he says. With Asian plants and offices already employing 12,800 people, BASF is well-positioned to take advantage of the region's growth, he adds.

When C&EN ranks the world's top 50 chemical companies this summer, BASF likely will overtake Dow Chemical as the world's largest. Being the biggest chemical player is a role the company will not shy away from. Given its sizable oil business, its plastics portfolio, and its heavy research commitments in biotechnology, BASF could claim it is something other than a chemical company. Instead, the firm sticks to the tagline "The Chemical Company" it unveiled in 2003.

BASF is trying to engage in a dialogue with the public about the benefits of chemistry, Hambrecht says. "Chemistry is part of our lives, an element of our lives. It's a contribution, an invisible success," he says. "This is chemistry, and it's not explosive or stinking." This is the BASF message, he stresses, and the aim is that it reaches the public.

Sloppy practices at other companies could undercut this message and even put a spotlight on BASF. Might environmental activists also try to derail such a message? To prevent this scenario, the company wants to raise safety standards by working with international industry associations. "Accidents at other companies—they're part of the overall image, and we cannot escape," Hambrecht says. Good and safe practices are like the traffic rules on a highway, he says. All the cars must go in the same direction or there will be crashes.

The road ahead for BASF is clear at present. For now, at least, its gleaming performance and swift movement are turning heads. And it now carries a burden of sorts: It has become a chemical company from which exciting news is expected.

Read More

  • 'The Chemical Company'
  • Riding on record profits, BASF fits recent acquisitions into its expansive 'Verbund' business model
  • Global Warming
  • Hambrecht, Holliday See Chemical Industry As Offering Solutions


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