Long-term opportunities and risks
Long-term demand development
We assume that chemical production (excluding pharmaceuticals) will grow considerably faster than global gross domestic product over the next five years and at about the same level as the previous ﬁve-year average. Through our market-oriented and broad portfolio, which we will continue to strengthen in the years ahead through investments in new production capacities, research and development activities and acquisitions, we aim to achieve sales growth that slightly exceeds this market growth.
Should global economic growth see unexpected, considerable deceleration, due for example to an ongoing weak period in the emerging markets or to geopolitical crises, the expected growth rates could prove too ambitious. As a result of our high degree of diversiﬁcation across various customer industries and regions, we would still expect our growth to be above the market average, even under these conditions.
Development of competitive and customer landscape
We expect competitors from emerging markets to gain increasing signiﬁcance in the years ahead. Furthermore, we predict that many raw material suppliers will expand their value chains.
We counter this risk through active portfolio management. We exit markets where risks outweigh opportunities, and in which we see limited possibilities to stand out from our competitors in the long term.
In order to remain competitive, we continuously improve our operational excellence. Our strategic excellence program, DrivE, also contributes to this aim. Starting at the end of 2018, we expect this program to contribute around €1 billion in earnings each year compared with baseline 2015.
In order to achieve lasting proﬁtable growth, tap into new market segments and customers, and make our customers more successful, our research and business focus is on highly innovative business areas, some of which we enter into through strategic cooperative partnerships.
The trend toward more sustainability in our customer industries continues. We want to use innovations to take advantage of the resulting opportunities. In the long term, we aim to continue increasing sales and earnings with new and improved products.
BASF’s enhanced innovation approach helps the company increase its power of innovation and ensure competitive ability through targeted enhancement and innovative application of specific key technologies. This is achieved by honing the focus of research on topics with long-term strategic business relevance, enhancing existing scientific processes and methods and introducing new ones, and optimizing our organizational structures. The central research areas Process Research & Chemical Engineering, Advanced Materials & Systems Research and Bioscience Research serve as global platforms headquartered in one of the regions particularly signiﬁcant for us: Europe, Asia Paciﬁc and North America. Together with the development units in our operating divisions, they form the core of the global Know-How Verbund. Stronger regional presence opens up new opportunities to participate in local innovation processes and gain access to local talent. We also address the risk of the technical or economic failure of research and development projects by maintaining a balanced and comprehensive project portfolio, as well as through professional, milestone-based project management.
We optimize the efﬁciency and effectiveness of our research activities through our global Know-How Verbund as well as through collaboration with partners and customers. Furthermore, we continuously review the chances of success and the underlying conditions of research projects; this review includes all phases from idea generation to product launch. The trust of customers and consumers is essential for the successful introduction of new technologies. That is why we enter into dialog with stakeholders at an early stage of development.
Portfolio development through investments
We expect the increase in chemical production in emerging markets in the coming years to remain above the global average. This will create opportunities that we want to exploit by expanding our local presence; therefore, more than a quarter of our investment budget will be spent in emerging markets over the next ﬁve years. In North America, investments in new production facilities form the basis of future growth. For example, we are constructing an ammonia production plant in Freeport, Texas, with Yara International ASA (based in Oslo, Norway). In addition, we are continuing to evaluate an investment in a world-scale methane-to-propylene complex on the U.S. Gulf Coast and conduct regular assessments with a view to developments in raw material prices and the relevant market conditions.
Our decisions on the type, size and locations of our investment projects are based on assumptions related to the long-term development of markets, margins and costs, as well as raw material availability and country, currency and technology risks. Opportunities and risks arise from potential deviations in actual developments from our assumptions.
In the future, we will continue to reﬁne our portfolio through acquisitions that promise above-average proﬁtable growth, are innovation-driven, offer added value for our customers and reduce the cyclicality of our earnings.
The evaluation of opportunities and risks plays a signiﬁcant role during the assessment of acquisition targets. A detailed analysis and quantiﬁcation are conducted as part of due diligence. Examples of risks include increased staff turnover, delayed realization of synergies, and the assumption of obligations that were not precisely quantiﬁable in advance. If our expectations in this regard are not fulﬁlled, risks could arise, such as the need to impair intangible assets; however, there could also be opportunities, for example, from additional synergies.
Recruitment and long-term retention of qualified employees
BASF, too, is adjusting in the medium and long term to the rising challenge of gaining skilled employees due to demographic changes, especially in North America and Europe. As a result, there is an increased risk that job vacancies may not be ﬁlled with suitable applicants, or only after a delay. We address these risks through our Best Team Strategy and the global initiatives derived from it, covering demographic and knowledge management, Diversity + Inclusion, employee and leadership development, intensiﬁed employer branding, and supplementary regional initiatives. With these measures, we increase BASF’s attractiveness as an employer and retain our employees in the long term.
BASF uses sustainability management tools to identify upcoming opportunities and risks that arise in connection with the topics of environment, society and governance. Their long-term effect on our business activities and their associated relevance are assessed through such instruments as our materiality analysis, and take into account our experiences from constant stakeholder dialog. We have established global monitoring systems to check adherence to laws and our voluntary commitments in the areas of environment, society and governance. These also incorporate our suppliers.
In terms of upcoming opportunities and risks, material aspects identiﬁed included: energy and climate, water, resources and ecosystems, responsible production, and employment and employability. In addition to speciﬁc requirements for these aspects, discussion is growing surrounding the internalization of external effects.
In order to identify, assess and direct climate-related risks and opportunities, our risk management process includes analyzing the material aspect “energy and climate.” For BASF as an energy-intensive company, opportunities and risks arise particularly from regulatory changes, such as in carbon prices through emissions trading systems, taxes or energy legislation.