Long-term opportunities and risks
Long-term demand development
- Annual average growth of around 4% expected in global chemical production
- BASF aims for above-average growth
In our “We create chemistry” strategy, we continue to operate under the assumption that chemical production (excluding pharmaceuticals) will grow worldwide by an average of around 4% annually until 2020, faster than global gross domestic product. Although the worldwide chemical industry has grown more vigorously than the global economy over the last few years, growth rates in both gross domestic product and in chemical production have nevertheless been slower than the “We create chemistry” strategy had predicted. We continue to strive for sales growth 2 percentage points above the market through our broad, market-oriented portfolio, which we will keep strengthening in the years ahead through investments in new production capacity, R&D activities and acquisitions.
If the continuing sovereign debt crises and other political 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
- Opportunities from active portfolio management and focus on innovative business areas
We expect competitors from emerging markets to become increasingly important in the coming years. Furthermore, we anticipate that many raw material suppliers will broaden 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 sold our 50% share in the Styrolution Group, which produces styrenic plastics.
In order to remain competitive, we continuously improve our operational excellence. Our strategic excellence program, STEP, is also contributing to this. Starting at the end of 2015, we now expect the more than 100 individual projects to contribute around €1.3 billion to our earnings each year, compared with baseline 2011.
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.
- Chances of success in research and development increased by Know-How Verbund
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 want to continue investing around 3% of our sales (excluding Oil & Gas) in research and development. An important success factor is the continuous development of our research organization in order to further enhance our connectivity around the globe. Starting January 2015, we are pooling our research expertise into three global platforms, each headquartered in a region significant for us: Europe, Asia Pacific and North America. 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 diversiﬁed project portfolio, as well as through professional, milestone-based 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.
Portfolio development through investments
- 2011–2020: More than one-third of our investing volume to go into emerging markets
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. We also want to intensify investment in North America in light of the attractive growth prospects and low raw material prices: For example, we are planning the construction of an ammonia production plant with Yara in Freeport, Texas. In addition, we are exploring an investment in a world-scale methane-to-propylene complex on the U.S. Gulf Coast.
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 competition intensity.
In the implementation phase, we use our experience in project management and controlling to minimize short-term technical risks as well as risks from cost overruns or missed deadlines.
- Detailed assessment of opportunities and risks as part of due diligence
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. 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
- Intensified competition for highly-qualified specialists and leaders
- Risk of loss of expertise from retirements
Global competition for highly qualified specialists 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 cannot 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 as a result of our targeted growth. We address these risks with our Best Team Strategy and the global initiatives derived from it, covering topics such as 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.
- Identifying opportunities and risks through materiality analysis
- Global monitoring for compliance with standards
BASF is committed to integrating environmental protection and socially responsible conduct into its business activities. Infringements of our voluntary commitments and legal violations also 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. Based on our materiality analysis, we 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 of BASF is an example. Ultimately, however, residual risks remain in all entrepreneurial activities which even comprehensive risk management cannot exclude.