Settle into a seat at one of the sidewalk cafés in central Paris this spring and you will find the clipped horse-chestnut trees coming into blossom and the imperious buildings gleaming as brightly as ever. But take a look at France’s economic figures—especially ones for its chemical sector—and you might just lose your appetite.
In financially challenged Europe, only the Netherlands and the shrinking economies of Spain, Italy, Portugal, and Greece fall short of France’s 0.3% economic growth in 2013. Analysts expect the economy to grow by less than 1% annually through 2017. Even against this anemic backdrop, leaders of French chemical firms say they could still prosper if it weren’t for France’s bureaucracy, its high energy and feedstock prices, and the combative labor unions that hold them back.
France’s chemical industry is big, but struggling
◾ Sales: $113.5 billion in 2013, down 0.7% from 2012
◾ Production: Up 1.3% in 2013, including pharmaceuticals
◾ Position: Second largest in Europe and sixth largest in the world by sales
◾ R&D: About $2.0 billion in 2013
◾ Employees: 158,000 in 2013
◾ Key challenges: Bureaucracy, high taxes, high energy costs, high feedstock costs, strong unions
◾ Key advantages: R&D tax credit, growing R&D investment, growing biotechnology sector, opportunities for smaller technology firms
Data published earlier this month by UIC, the leading French chemical industry association, show the country’s chemical production, including pharmaceuticals, increased by just 1.3% in 2013 compared with 2012. Prices, meanwhile, were down 2%. The result is that sales in 2013 fell 0.7% compared with 2012 to about $113.5 billion, UIC says. The longer-term trajectory is down as well. In 2008, before the recession, French chemical sales hit $116.0 billion.
But even in the face of a tough operating climate there is optimism. Some chemical industry executives are confident that a government policy providing a generous tax credit for R&D investment will spur a wave of new chemical products and technology-focused start-ups. The policy provides that 30% of R&D spending of up to $140 million can be applied to tax bills. The credit drops to 5% for R&D spending above $140 million.
For some, future growth from R&D cannot come soon enough. “The fact that we are not improving our profit is clearly related to the France situation,” says Frédéric Gauchet, president of the fine chemicals company Minafin and a member of UIC’s board. By “France situation” Gauchet means the government policies that he feels hold the industry back. For the past three years, Minafin, one of France’s largest producers of pharmaceutical ingredients, has not been able to push its sales much above $150 million. Making a profit is even “less sustainable,” Gauchet says.
He is not the only leading industrialist blaming the French government for the sector’s woes. “The government in France is horrible and is against the chemical industry,” declares Robert Moor, chief executive officer and owner of Protex International, a specialty chemical firm near Paris with annual sales of more than $200 million.
Responding to business concerns, last fall French President François Hollande unveiled sweeping plans as part of a 10-year industrial policy. His goal is to make the country more business friendly by reducing oppressive taxes, cutting government spending, and easing stifling regulations.
Less easy to fix will be the problem of energy and feedstock costs—they are high and challenging for chemical companies across Europe, but especially so for firms in France, where executives complain they don’t enjoy the rebates received in other countries.
“Seven to 10 years ago we benefited from more nuclear energy and had a real advantage in France. Now this advantage has disappeared, and electricity is significantly more expensive than in Germany,” says Thierry Le Hénaff, CEO of specialty chemical maker Arkema, one of France’s largest chemical companies.
Not surprisingly, one of the worst-performing chemical sectors in France last year was the energy-intensive field of plastics production. The basic chemicals sector, including plastics, is facing overcapacity as well as high energy and feedstock costs, says François Quédiniac, a partner at the consulting firm KPMG in France.
Extracting natural gas through the hydraulic fracturing of shale could give the French chemical industry access to cheaper feedstocks and energy. But whereas countries such as the U.K. and Poland are keen to exploit shale gas, Hollande has asserted that because of environmental concerns there will be no shale gas exploration on French soil as long as he is in charge. Hollande will hold office for the next three years
In a bid to cut costs in an energy-intensive business, Solvay and Ineos are placing their European polyvinyl chloride and bleach assets, which have a large presence in France, into a joint-venture company. Consolidation measures are likely to follow.
As a symbol of France’s basic chemicals malaise, the chlorine and PVC maker Kem One is a standout. The firm was formerly part of Arkema, which in 2012 paid Swiss investment firm Klesch Group $135 million to take the business off its hands.
Despite that low-cost start, the company filed for bankruptcy in March 2013, afflicted by overcapacity in its markets and high energy and raw material costs. Kem One, which has several facilities and 1,300 employees in France, was then hit by a strike by the CGT union, which blockaded plants across France in a bid to protect jobs.
In December of last year Kem One was saved from closure, at least temporarily, by private investors OpenGate Capital and Alain de Krassny, a 71-year-old industry veteran who is now chairman. According to reports in the French press, the deal was made only after loans and grants from the French government.
Conversely, divesting Kem One was a main reason Arkema managed to improve its financial position in 2013. Arkema, which produces a broad range of specialty chemicals, expects to grow fastest not in France but in emerging markets such as Asia.
Even after shedding Kem One, Arkema continues to manufacture about 50% of its products in France. So although the firm now generates just 11% of its sales in the country, competitiveness with other global producers is critical, Le Hénaff emphasizes.
Global competitiveness is also crucial for Solvay, which bought the iconic French company Rhodia in 2011 and finds itself in a similar situation: Two-thirds of its French production is exported out of France. Solvay, a Belgian firm, continues to spend 40% of its R&D budget in France, attracted by the quality of the research and now the tax credit for R&D spending.
Although producers of basic chemicals are struggling to grow their businesses in France, specialty and fine chemicals segments of the French industry are “quite resilient,” KPMG’s Quédiniac says. Here, energy costs are less important, and the level of innovation is higher.
Quédiniac’s positive outlook for fine and specialty chemicals is not shared by Minafin’s Gauchet. “There is no indication that we will stop the erosion of the French chemical industry,” Gauchet says. Tellingly, only three new active pharmaceutical ingredients were made in France in 2013, with Minafin making one of them, he says.
Gauchet estimates that his firm pays $4.4 million in various taxes every year over and above what it would cost it to make the same products in the U.S., where it also has operations. Minafin is paying an additional $1.4 million for energy by operating in France rather than in the U.S. or Middle East, Gauchet says. But Minafin has customers in France that demand local supply. “It’s more complicated than just investing in the U.S.,” he acknowledges.
The strength of the unions is another burden on industry, Gauchet says. “Unions today are against any change, against extending working hours, flexibility of work, or reduction of any cost of labor,” he contends. Unions such as CGT “don’t believe we are really in global competition,” he says. CGT declined to respond to Gauchet’s accusations or comment about its relationship with France’s chemical industry.
Labor regulation also poses a challenge for Protex but so too does an unsympathetic tax regime for manufacturers, according to Moor. “Taxes are going higher every second week. This is causing uncertainty,” he says.
Thanks to the positive effects of the tax rebate, R&D is one aspect of France’s chemical industry that seems to be buoyant. “We have good people and highly qualified chemists in France,” says Gauchet, whose firm undertakes about 70% of its R&D in France. “The policy means that investing in R&D in the country is highly cost-effective.”
Air Liquide is another leading French chemical company encouraged by the country’s positive research environment. The firm recently disclosed it will invest nearly $140 million across three R&D projects in France, including the replacement of several R&D buildings with a single new one at its largest R&D site, Paris-Saclay, near Versailles and not far from central Paris’s bustling cafés. The new building will house 350 scientists. Paris-Saclay is on track to be one of the 10 biggest innovation hubs in the world by 2020, the firm says.
“France is a key country in terms of innovation for Air Liquide as it has a critical mass of talent,” says board member François Darchis. The investment will enable the firm to “sustain our innovation activity in France,” he says.
France’s tough chemical market conditions and high taxes also are not hampering the emergence of a new wave of biotech firms. There are 446 biotech firms in France, including eight new ones that listed on the stock exchange in 2012, according to a report published earlier this month by Ernst & Young and EuropaBio, one of Europe’s leading biotech associations. Sales for the French biotech sector increased from $249 million in 2010 to $338 million in 2011, the latest year for which data are available.
Deinove, a Paris-based biotech with a chemical production platform based on engineered Deinococcus bacteria, is benefiting from French government support. “The setup is now becoming easier, and financial incentives are real,” CEO Emmanuel Petiot says. The tough times that many traditional chemical firms are feeling in France from high energy prices are “not an issue at all” for Deinove, Petiot says.
With its strong capability in technology development, the French chemical industry has a bright future ahead of it, Petiot argues. “France benefits from an excellent academic background, knows how to create breakthroughs, and probably has some of the most innovative smaller companies in the world,” he says. Partnering smaller, innovative companies with the major industrial groups could create a renewed dynamic for the chemical industry, Petiot suggests.
Marc Delcourt, CEO and cofounder of start-up Global Bioenergies, also thinks France is a good place to start a biotech firm. “Here in France we found all that we needed, and at the right time,” he says. Since 2008, the firm has been developing processes to make isobutene, butadiene, and propylene from biomass.
Global Bioenergies now hopes to demonstrate its technologies in a pilot facility in Pomacle, France, for which it received about $7 million in subsidies and public funding. But the fledgling firm has been tempted by German subsidies and grants totaling about $8 million to set up a second pilot facility in Leuna, Germany. It also plans to have a commercial presence in the U.S., where fracking could lead to a shortage of propylene and C4 olefins—something that Global Bioenergies’ technologies could address.
“France is not so bad for pioneers. But it becomes less attractive when it is time for large-scale deployment, in part because of the rigidity in the social laws,” Delcourt says.
Arkema’s Le Hénaff is among those confident that industry’s concerns are being heard by the French government. “There is awareness now by the government that industry needs to be competitive and that clear actions must be taken if France is not to lose ground against other countries,” Le Hénaff says. He is also hopeful that chemical firms and unions can work together. Both parties “are in favor of better employment. There is a need to reduce social charges, not wages,” he says.
Protex’s Moor finds it harder to find something positive to say about the French government, although he begrudgingly acknowledges the wisdom of the R&D tax credit. Yet, like others in the chemical industry, he wonders how committed the government is to supporting manufacturers and their R&D. “I keep asking, how long will they keep it?” Moor says.
Don’t expect to see Moor or many other chemical industry leaders enjoying a coffee and a croissant with French legislators anytime soon.