BASF Chief Spreads Development Risks to Avoid ‘Betting the Farm’Andrew Noel
BASF SE, which crippled itself financially with a foray into indigo in the early 20th century, now invests a large part of its development budget in eight to 10 growth areas to spread risk.
The projects -- spanning battery materials to enzymes -- soak up a large part of development spending, Chief Executive Officer Kurt Bock told reporters in London. The world’s largest chemicals maker is taking a more defensive approach to investment than DuPont Co., which has placed a larger bet on bio-based industry, he said.
“Is there any single product today where you would bet the farm?” Bock said. “I don’t see it. But this is a heavy load financially, it’s a good piece of our R&D budget that we spend on these growth fields where you could say realistically that in the next five to 10 years there will be very little tangible sales or profits.”
BASF’s research and development budget is about 1.8 billion euros ($2.4 billion) a year. The company, based in Ludwigshafen, Germany, has set milestones to assess progress of the projects and Bock said he’s prepared to pull the plug on any that aren’t viable. If he did, it would be an instant boost to profit.
“There’s an attrition rate,” Bock said. “You have to define the milestones correctly so you make the decisions at the right point of time. There’s always a tendency to do it too late and say ‘let’s try again.’ But if you do it too early you may miss out.”
The CEO said BASF won’t follow the pattern of DuPont, which has spent billions of dollars to expand in the nascent bio-based industry that uses fermentation, bacteria and enzymes instead of oil to make chemicals. The Wilmington, U.S.-based company is separating its performance chemicals division to focus on areas such as nutrition.
BASF has a target for sales of about 30 billion euros in 2020 with new and improved products or applications that will have been on the market for less than 10 years, according to its last annual report.
Rather than extend an acquisition spree in which the company made about $20 billion of purchases in the five years through 2010, it’s putting more emphasis on investing for organic growth to tap growing demand for products such as catalysts in Asia.
In the 1980s and 1990s, BASF created a gas-trading arm to reduce the dominance of Ruhrgas and built a chemical complex in China amid skepticism among U.S. peers, and Bock said he’s looking for more pioneering successes like these.
BASF’s entrepreneurial areas include water-treatment membranes and enzymes, a market dominated by Novozymes A/S and DuPont, which purchased food-ingredients and enzyme-maker Danisco in 2011 in a transaction valued at about $7 billion.
BASF is also putting funds into materials for organic light emitting diodes, or OLEDs, which use polymers for mobile-phone displays. Other companies in this field include PPG Industries Inc., which entered an accord with Universal Display Corp. to supply phosphorescent OLED materials.
BASF’s tempered expansion into new markets harks back to a strategic decision taken 20 years ago to remain an integrated chemical company with exposure to oil and gas production. That choice was “hotly contested” at the time because of low crude prices, Bock said.
“I think it’s still very helpful to have this backbone in big products,” the CEO said. “We believe you have to stand on several legs and the integration of chemicals pays off. Some companies do it differently.”
In the U.S., Bock is tweaking strategy to take account of shale gas, which has prompted a renaissance in the chemical industry there and created a manufacturing industry with energy costs similar to those enjoyed by peers in the Middle East.
Energy prices running at half those in Germany have lured BASF investment to the Gulf Coast region, with potential plans to build an ammonia plant in partnership with Norwegian fertilizer maker Yara International ASA. A Port Arthur cracker has been expanded and updated to use lighter feedstock such as gas and ethane, and BASF may look at producing propane- and butane-based materials in the U.S., Bock said.
Within enzymes, the German chemical maker has so far been tentative compared with DuPont and Royal DSM NV. It bought San Diego-based Verenium Corp. for about $62 million this year to gain a gene pool that can be combined with its existing enzymes.
BASF is taking a defensive approach in this field, where the jury is still out on its potential to replace traditional oil-based chemicals, Bock said. Rather than seek to topple market leader Novozymes, BASF will make inroads into bio-based chemicals in a more selective way, targeting the most complex products and molecules, such as vitamin B12 as well as acrylic acid.
“We never had this dramatic push to shift the entire company now into that direction,” Bock said. “It’s the way we see the world. There are the die-hard petrochemical folks who will say it’s stupid to even spend money there. I don’t think that is the case, but you have to pick the right fields.”