Long-term opportunities and risks
Long-term demand development
- Annual average growth of nearly 4% expected for global chemical production
In our “We create chemistry” strategy, we assume that chemical production (excluding pharmaceuticals) will grow by nearly 4% each year through 2020. Chemical production would therefore grow considerably faster than global gross domestic product 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 capacity, 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, these goals 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 the competitive and customer landscape
- Opportunities from active portfolio management and focus on innovative business areas
We expect competitors from emerging markets to gain considerable significance in the years ahead. Furthermore, we predict 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 long-term opportunities to stand out from our competitors.
In order to remain competitive, we continuously improve our operational excellence. Our new 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 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. In the long term, we aim to continue significantly increasing sales of new and improved products.
To achieve this goal, we continue to aim to invest around 3% of our sales (excluding Oil & Gas) in research and development. At the beginning of 2015, we pooled the central research areas Process Research & Chemical Engineering, Advanced Materials & Systems Research and Bioscience Research into three global platforms headquartered in one of the regions particularly 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 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, 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
- 2016–2020: More than a quarter 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 a quarter of our investment volume will be spent in emerging markets over the next five years. 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 constructing 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 actual developments deviate from our assumptions.
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. 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
- Risk of retirement-related loss of expertise
BASF, too, is adjusting to a medium to long-term shortage of 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.
- Identification of upcoming opportunities and risks
- Risk management established for material aspect “energy and climate”
BASF uses sustainability management tools to identify upcoming opportunities and risks that arise in connection with the topic areas 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, along with our experiences from continuous dialog with our stakeholders. We have established global monitoring systems which also include our suppliers – these enable us to check adherence to laws and our voluntary commitments in the areas of environment, safety, security, society, and governance.
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.
The material aspect “energy and climate” is analyzed as part of our risk management process in order to allow us to identify, assess and direct climate-related risks and opportunities.
For BASF as an energy-intensive company, opportunities and risks arise particularly from regulatory changes in carbon prices through emissions trading systems, taxes or energy legislation.