Long-term opportunities and risks

Long-term development

  • Annual average growth of 4% in global chemical production expected; growth risks if long-lasting stagnation results from sovereign debt crises
  • BASF aims for above-average growth
  • Active portfolio management: taking advantage of opportunities with targeted investments in production capacity, R&D activities and acquisitions; minimizing risks with divestitures

Long-term demand development: In our “We create chemistry” strategy, we operate under the assumption that chemical production (excluding pharmaceuticals) will grow worldwide by an average of 4% annually until 2020, faster than global gross domestic product and also somewhat more rapidly than in the previous 10 years. We want our sales to increase significantly faster, by an average of 6% annually. We plan to accomplish this with our broad, market-oriented portfolio, which we will further strengthen in coming years through investments in new production capacity, R&D activities and acquisitions. Our ambitious goal for 2020 is thus to reach sales of €110 billion and we strive to increase income from operations before depreciation and amortization (EBITDA) to €22 billion.

If the continuing sovereign debt crises result in a slackening of global economic growth, these goals could prove to be 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 the competitive and customer landscape: We expect competitors from emerging markets to become increasingly important in the years ahead. Furthermore, we anticipate that many raw material suppliers will expand their value chains. We are addressing this risk through active portfolio management. We exit markets where risks outweigh opportunities, and in which we do not see satisfactory opportunities to stand out from our competitors in the long term. For example, we will complete the divestiture of our natural gas trading and storage business as part of an asset swap with Gazprom, which will take retroactive financial effect as of April 1, 2013.

In order to remain competitive, we continuously improve our operational excellence. Our strategic excellence program, STEP, also contributes to this. Starting at the end of 2015, we expect the more than 100 individual projects to contribute around €1 billion to our earnings each year.

In order to achieve long-term profitable growth, our research and business focus is on highly innovative business areas, which we sometimes enter into through strategic cooperative partnerships.

Innovation

  • Major component of our growth strategy
  • Risks minimized through Know-How Verbund as well as continuous review of efficiency, chances of success and operating environment of research projects
  • Ongoing dialog with partners and customers to improve chances of success

Innovation: We are observing a trend toward more sustainability in our customer industries. We want to take advantage of the resulting opportunities with innovations – particularly in the growth fields we have identified. These include Batteries for Mobility, Functional Crop Care to improve agricultural efficiency, solutions for water treatment and technologies for the use of renewable energy sources, such as wind, solar thermal and photovoltaic power.

New products launched on the market between 2011 and 2020 are expected to contribute €30 billion to sales in 2020. To achieve this goal, we also aim to invest around 3% of our sales (excluding Oil & Gas) in research and development. We also address the risk of the technical or economic failure of research and development projects by maintaining a balanced and diversified project portfolio, as well as through professional project management (R&D controlling).

We optimize the effectiveness and efficiency of our research activities through our global Know-How Verbund as well as through collaboration with partners and customers. Furthermore, in a program and project management process, we continuously review the chances of success and the underlying assumptions 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.

Investments

  • Investment decisions on the basis of assumptions regarding development of markets, margins and costs, as well as raw material availability and country, currency and technology risks
  • Opportunities and risks arising from deviating development
  • Risks in project implementation minimized by making use of experience in project management and controlling

Portfolio development through investments: We expect the increase in chemical production in emerging markets in the coming years to be significantly above the global average. This will create opportunities that we want to exploit by expanding our presence in these economies; therefore, more than one-third of our investment volume between 2011 and 2020 will be spent in emerging markets.

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 when real developments deviate from our assumptions, particularly with respect to demand development and intensity of competition.

In the implementation phase, we make use of our experience in project management and controlling in order to minimize technical risks as well as the risk of cost overruns or missed deadlines.

Acquisitions: In the future, we will continue to refine our portfolio through acquisitions that promise above-average profitable growth, are innovation-driven and offer added value for our customers while reducing the cyclicality of our earnings.

The evaluation of opportunities and risks already plays a significant role during the assessment of potential 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.

Personnel

  • Intensified global competition for highly qualified specialist and management candidates
  • Risk of loss of expertise from numerous retirements
  • More effective personnel recruitment and retention with the help of various measures

Recruitment and long-term retention of qualified employees: Global competition for highly qualified employees and leaders has grown in recent years; in the medium to long term, this will likely be further intensified by demographic change. As a result, there is an increased risk that job vacancies could not be filled with suitable applicants, or only after a delay.

Business could be negatively affected in the medium and long term by the loss of expertise in North America and Europe due to disproportionately high retirement numbers, as well as by the challenge arising from additional recruitment demand in Asia arising from the growth we strive to achieve. We address these risks with our global programs Generations@Work and Diversity + Inclusion, the Employee Development project, employer branding and a greater emphasis on further developing our employees as well as additional regional initiatives. With these measures, we increase BASF’s attractiveness as an employer and retain our employees in the long term. Information relevant to the principles of the Global Compact

Sustainability: BASF is committed to integrating environmental protection and socially responsible conduct into its business activities. Infringements of our voluntary commitments and legal violations represent a reputational risk and could lead to operational or strategic risks. Before acquiring a company, we take into account its focus on sustainability and we consider this in the acquisition process. We use the results of our global issue management for sustainability to initiate change processes in the company in order to be prepared for any potential risks and to exploit opportunities. We have established global monitoring systems which also include our supply chain – these enable us to ensure adherence to laws and our voluntary commitments in the areas of environment, safety, security and health as well as to labor and social standards. In order to assure society’s acceptance of our business activities, we engage in ongoing dialog with relevant stakeholders. The Nano Dialog Forum is an example. Ultimately, however, residual risks remain in all entrepreneurial activities which even comprehensive risk management cannot exclude. Information relevant to the principles of the Global Compact