Long-term opportunities and risks

Long-term demand development

We assume that chemical production (excluding pharmaceuticals) will grow slightly faster than global gross domestic product over the next five years and be slightly below 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 – especially in Asia and the Middle East – to gain increasing significance in the years ahead. Furthermore, we predict that many producers in countries rich in raw materials will expand their value chains. We counter this risk through active portfolio management. We exit markets in which we see only limited possibilities to stand out from competitors in the long term.

We continuously improve our processes in order to remain competitive through 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.

Innovation

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.

The central research areas Process Research & Chemical Engineering, Advanced Materials & Systems Research and Bioscience Research serve as global platforms headquartered in our key regions: 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 optimize the effectiveness and efficiency of our research activities through our global Know-How Verbund.

Research activities funded by the BASF Group promote the targeted development and enhancement of key technologies as well as the establishment of new business areas. Focus areas in research are determined based on their strategic relevance for BASF, above and beyond existing business areas.

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.

The opportunities of digitalization – especially in production, for new business models and in research and development – are being assessed in specific project organizations. To take advantage of these, measures are being implemented together with the divisions and the functional and research units. The risks of digitalization are managed in the divisions and functional units.

The trust of customers and consumers is essential for the successful introduction of new technologies. That is why we enter into dialog with our stakeholders at an early stage of development.

Portfolio development through investments

Our decisions on the type, size and locations of our investment projects are based on assumptions related to the longterm 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.

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.

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, taking into account raw materials prices and the relevant market conditions.

Acquisitions

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 is conducted as part of due diligence. Examples of risks include increased staff turnover, delayed realization of synergies, or 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 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 with measures to integrate diversity, employee and leadership development, and intensified employer branding. At local level, demographic management includes succession planning, knowledge management and offerings to improve the balance between personal and professional life and promote healthy living. This increases BASF’s appeal as an employer and retains our employees in the long term.

Sustainability

As part of our sustainability management, we also assess the opportunities and risks associated with the topics we have identified as material. These also include the increasing internalization of external effects, through which positive and negative earnings contributions from companies’ activities that were previously borne by the community are attributed to these companies.

For example, the material topic “energy and climate” is analyzed to enable us to identify, assess and manage climaterelated risks and opportunities. For BASF as an energy-intensive company, these arise particularly from regulatory changes, such as in carbon prices through emissions trading systems, taxes or energy legislation.