Lost Opportunity For China Venture

Just four years after Germany’s Evonik Industries bought a controlling stake in Lynchem, the Chinese firm faces a most uncertain future. Once a highly regarded producer of intermediates and active ingredients for the pharmaceutical and agrochemical industries, Dalian-based Lynchem is now shuttering its manufacturing facilities. From a peak of about 1,250, headcount has dwindled to 450 and is still shrinking.

Evonik Lynchem, as the company is now called, halted manufacturing after an explosion on June 30, 2009, that killed two contractors. According to Evonik, Lynchem would have resumed production months ago were it not for a decision by local environmental authorities to no longer approve the Lynchem site for chemical production. But former and current employees, former customers, and local competitors assert that Lynchem’s problems under Evonik’s management run deeper. The company, they say, became dysfunctional long before last summer’s accident.

It’s too early to claim that Evonik’s investment in Lynchem has been a failure, counters Hans-Josef Ritzert, a senior vice president who heads Evonik’s exclusive synthesis and amino acids businesses. “We’ve been ordered to relocate, but we’re still getting new orders in China,” he says. He points out that Evonik is successfully running a second custom manufacturing facility in Nanning, in southern China, where in April the company inaugurated a new production facility. And in Dalian, the company continues to conduct some R&D.

Custom synthesis for the pharmaceutical industry is a core business for Evonik, Ritzert notes, and one that it operates around the world. In addition to Nanning, Evonik owns custom synthesis plants in Germany and France, and last September, it bought a U.S. plant from Eli Lilly & Co. Running facilities in China enhances the company’s competitiveness from a cost and geographical perspective, he says.

Ritzert says that Evonik will perhaps agree to relocate the Lynchem facilities within Dalian, make additional investments in Nanning, or decide to build and acquire facilities elsewhere in China. “We are very confident that we will resolve the situation for Evonik Lynchem in Dalian in due time,” he says.

For former and current employees of Lynchem, however, it’s clear that the company is closing down permanently. One Chinese manufacturing manager still employed at the Lynchem site tells C&EN that many key people have left and that he himself will join a new employer shortly. Technical managers from Germany are overseeing the mothballing of production facilities. Among the 450 people that Lynchem still employs, most have only a few months of employment left, he says. But Ritzert insists that the level of employment at the site depends on the outcome of negotiations with Dalian.

When Evonik acquired a 51% stake in Lynchem early in the summer of 2006, it was a case of one of Germany’s most prominent chemical companies teaming up with a Chinese producer of intermediates and active ingredients known for its excellence. “Customers have been waiting for the opportunity to get the best of both regions from a single supplier,” said Rudolf Hanko, Evonik’s head of exclusive synthesis at the time. He called Lynchem a “leading force in the Chinese custom manufacturing industry.”

One of Lynchem’s former customers agrees. He asked not to be identified to avoid jeopardizing his dealings with Evonik. “Lynchem was probably the most impressive company I ever visited in China—and I have been to many,” he says. According to this Europe-based manager, Lynchem was superbly managed by its founder, Yuncai Wang.

Another former Lynchem customer, a China-based executive who does not have his company’s approval to talk to the media, says Lynchem’s sales tactics changed shortly after Evonik bought the 51% stake.

“Evonik had kept Wang to look after existing customers, but they also paired him with a German sales guy, and it was strange,” he says. “Whenever you asked, they would talk about sourcing from their other global sites.” This former customer says he and other buyers clearly sought a Chinese supplier, not a higher cost European one. Ritzert says that Wang was a member of Lynchem’s board of directors during that time, not a salesperson. Evonik, he says, was leaving it to customers to choose whether they wanted to buy materials made in China or elsewhere.

Beyond the change in sales techniques, the work atmosphere within Lynchem took a turn for the worse with the arrival of Evonik, customers and employees say. A manager at the site tells C&EN that from July to September 2007, more than 1,000 employees were not paid their salaries, although they were eventually paid in full. This manager believes that dysfunction in the management of Lynchem stemmed from its status as a nearly equally owned joint venture. “The Evonik people were trying to manage Lynchem in the way that was best for Evonik, whereas the Chinese side wanted what was best for Lynchem,” he says.

In March 2008, Evonik acquired the other 49% of Lynchem. The German company said it was expanding the exclusive-synthesis business in line with the concept of “horizontal integration,” under which China would supply intermediates and starting materials, and Europe would produce refined intermediates and patent-protected active ingredients. Ritzert, the current head of Evonik’s exclusive-synthesis business, insists there wasn’t any rift in the management of Lynchem. He tells C&EN that Wang and Evonik always shared a clear vision for the company, as documented in a mutually agreed-upon business plan.

By some accounts, the work atmosphere got even worse after Evonik took full control of Lynchem. Not long after, several Chinese managers applied for jobs at competitors, both foreign and local. A more pragmatic longtime employee who still works for Lynchem tells C&EN that the Evonik takeover was not entirely bad. “We got a nice increase in salary, but our responsibilities lessened because all decisions were taken by German managers,” he says.

This Lynchem employee estimates that Evonik brought about 15 foreign managers and technical experts into the Dalian operation. “We stopped being consulted on big decisions, as if they didn’t trust the Chinese,” he says. Evonik’s Ritzert says salary scales at Lynchem were adjusted in line with Chinese and global norms. He says that the 15 foreigners were brought in over a three-year period, and in most cases for a limited period of time. Most of the decisionmakers at Lynchem did not change when Evonik took over, he says. The responsibilities of Chinese staffers did not diminish, he insists, and local employees participated in decisions.

In June 2009, contractors started updating a gas-flaring system that had been installed to reduce a noxious smell that nearby villagers had been complaining about for some time. On June 30, while the contractors were working on the flare, a waste liquid tank exploded. Two contractors died, and 10 other people were injured, none seriously.

Ritzert points out that Evonik spent more than $13 million on Lynchem since 2006 to bring its operations in line with Evonik’s global standards, particularly in the area of environment, health, and safety. He says the operation the contractors were performing at the time of the explosion had not been approved by Evonik managers, a contention endorsed by local authorities. Evonik nonetheless had to pay a $30,000 fine.

The Lynchem facilities are not located in an industrial park but rather amid farmland and near a small village. The June 30 blast was huge, breaking glass and damaging homes in the village. One year later, residents still vividly remember the date and time it occurred. They say the compensation they received from Lynchem after the blast was not enough to repair the damage to their houses. Ritzert says the total compensation paid to villagers was more than three times the assessment made by a government-approved company that inspected the damage.

Even before the accident, tensions were high between Lynchem and some of its neighbors. One farmer, surnamed Ying, keeps a photo of dead fish in his pond that he says were killed by Lynchem emissions. “Of course it’s Lynchem; there’s no one else around that could do this,” he says. Ritzert says the Dalian Environmental Bureau investigated the dead fish claim and found it groundless. Another villager says a chemical plant should not be located in what is clearly an agricultural region.

Although the explosion stemmed from work that was not approved by Evonik, local authorities told the German company that it couldn’t resume operations at its site in Dalian’s Jinzhou district. According to a longtime former customer of Lynchem, Wang, the company’s founder, offered to plead with the officials to allow the company to restart, even if he had no official role in Lynchem anymore; Evonik turned down the offer of assistance. Ritzert says that Wang never made such an offer.

Evonik executives apparently expected to prevail, because they kept announcing—and then pushing back—an estimate of when they would be able to resume production, a former Lynchem customer tells C&EN. Ritzert says Lynchem still has a business license and has passed a safety audit, but the environmental protection bureau has ordered that operations be relocated. “The development plan for the region where Evonik Lynchem is located does not foresee chemical industry on a long-term basis,” he says.

Many companies, foreign and local, have been forced to shut down or relocate their manufacturing operations in China in the face of official decisions that can appear arbitrary. In Lynchem’s case, however, the style of management that Evonik brought to Dalian may have contributed to its current predicament. Says a former Lynchem customer who still interacts with Evonik, “This is a story of how a Western company was able to wreck such an amazing company in a couple of years.”