Strategic Opportunities and Risks
Long-term demand development
We assume that growth in chemical production (excluding pharmaceuticals) will be higher than that of the global gross domestic product over the next five years and about as strong as the five-year average prior to the coronavirus pandemic. Through our market-oriented and broad portfolio, which we will continue to strengthen in the years ahead, for example, through investments in new production capacities, research and development activities or acquisitions, we aim to achieve volume growth that slightly exceeds this market growth. Should global economic growth see unexpected, considerable deceleration, for example, because of prolonged restrictions due to the coronavirus pandemic, an ongoing weak period in the emerging markets, protectionist tendencies, geopolitical conflicts or bottlenecks in the energy markets leading to permanently elevated energy prices (particularly for natural gas in Europe), the expected growth rates could prove too ambitious.
Moreover, the ambitions of global climate policy and its implementation will significantly impact the structure of demand from our customer industries. This is shown by a comparison of a climate policy scenario (global warming of no more than two degrees celsius in 2100 compared with pre-industrial times) with an alternative scenario that allows for more warming. In an ambitious climate policy scenario, the structure of demand changes due to the use of alternative energy sources and raw materials, high investment in resource-conserving technologies, and changing customer preferences. By contrast, macroeconomic growth rates typically vary little compared with a scenario with a higher warming path.
Market opportunities in such a scenario include, for example, additives that make plastics easier to recycle, alternative surface coatings for wind and solar modules, stronger demand for insulation materials for buildings, increased electromobility with changed demand for plastics, insulation materials, coolants and battery materials, and more alternative proteins in agriculture. By contrast, fossil feedstocks and the production technologies and product segments based on fossil feedstocks will become less important.
Development of competitive and customer landscape
We expect competitors from Asia, North America and the Middle East in particular to gain increasing significance in the years ahead, especially as a result of advantageous raw materials and energy prices. Furthermore, we predict that many producers in countries rich in raw materials will expand their value chains in consumer-oriented sectors. In addition, the proliferation of large-scale digital marketplaces for chemicals could impact existing customer and supplier relationships.
We expect a continuous rise in customer demand for sustainable solutions, for example, products with a low carbon footprint, made from recycled, circular, or bio-based raw materials that are bio-degradable, or products with other measurable sustainability benefits. However, an increase in customer demand for sustainable solutions is also highly dependent on regulation. Companies with a proven track record of providing more sustainable solutions will be able to achieve higher growth and profitability as a result. The expansion of sharing economy business models could have a long-term impact on demand in individual customer industries. At the same time, higher demands on product features can also create opportunities for innovation. We are therefore addressing these topics in research and investment programs for the sustainable transformation of BASF.
To strengthen our competitiveness, we are continuously improving our production processes, streamlining our administration and simplifying workflows and processes. Our research and business focus is on highly innovative businesses and differentiation through sustainability advantages to make our customers and BASF more successful.
We expect continued regulatory and societal pressure to achieve climate-neutral energy production, climate-neutral energy consumption, and a climate-neutral resource and raw material base. The political approaches to address these issues will vary greatly from region to region. However, particularly in Europe, we expect measures with a continuously high level of detailed regulation, including changes to chemical and industry-related regulations, that have the potential to significantly impact the competitiveness of BASF’s operations and product portfolio as well as that of our customers.
We see the risk of the current geopolitical shift in balance of power leading to the establishment of uncoordinated or divergent global legislative standards and regulatory systems, not just in relation to chemicals or the regulatory framework for digitalization, but also to environmental, social and corporate governance criteria. We also see risks, but also opportunities, in the setting of international standards for specific product categories or technologies.
We explain our strategy in meetings with political decision-makers and social stakeholders. In doing so, we also inform ourselves of the changes we must undergo and advocate for a favorable and stable regulatory framework at both the national and international levels. We consider BASF to be in a strong position to contribute solutions toward achieving U.N. development goals, particularly regarding climate neutrality, through new technologies, innovative products and processes and our broad product portfolio.
We expect the trend toward increased sustainability requirements in our customer industries to continue. Our aim is to leverage the resulting opportunities in a growing market with even more sustainable innovations. The key areas are products with a lower carbon footprint or even a carbon footprint of net zero, circular economy solutions, and safe and sustainable products. To be successful in these fields, we have launched specific research and investment programs for the sustainable transformation of BASF. Furthermore, in order to steer our innovation portfolio toward increased sustainability, we began applying the Sustainable Solution Steering method to the evaluation of innovation projects and integrated it at an early stage of our research and development processes.
There are technical and commercial risks of failure associated with every single research and development project. We also address this by maintaining a balanced and comprehensive project portfolio as well as through professional, milestone-based project management.
Further risks may arise from increasing state protectionism and the demand for localization of intellectual property in order to achieve technological independence. Through our Know-how Verbund in research and development, we ensure that critical intellectual property is generated and protected in countries with high intellectual property standards.
We expect that the digital disruption of established processes will lead to a sharp increase in efficiency and effectiveness in some fields. BASF is therefore committed to taking a leading role in the digital transformation of the chemical industry. Possible applications of digital technologies and solutions are evaluated along the entire value chain and implemented throughout the company, for example, in production, logistics, research and development, business models and corporate governance.
Procurement and supply chain
Supply security for raw materials, energy and services is increasingly affected by trade disputes, protectionism, sanctions and geopolitical conflict. As far as the current energy price level in Europe is concerned, we expect the supply situation to ease in the mid- to long term. Furthermore, our accelerated transformation toward renewable energy will make the company less dependent on fossil energy sources. In addition, supply chains are increasingly threatened by disruptions such as suppliers’ production bottlenecks, interrupted logistics chains, extreme weather events and longer-lasting effects from the coronavirus pandemic. Climate change and extreme weather events are impacting the availability of renewable resources.
Transportation is significantly affected by structural capacity constraints (for example, a lack of truck drivers, traffic jams due to inadequate logistics infrastructure, worker shortages at ports) and increased transportation costs.
We are seeing an ongoing expansion of the regulatory framework affecting us and our suppliers (for example, the German Supply Chain Due Diligence Act). Potential non-compliance by our suppliers may lead to a reduced supplier base. Moreover, the use of renewable energies depends largely on favorable prices and framework conditions.
All risks are continuously analyzed and appropriate strategies and measures developed to avert risks or minimize the impact on BASF.
We expect growth in chemical production in emerging markets to remain above the global average in the years to come. This will create opportunities that we want to exploit by expanding our local presence. In addition, regional value chains help mitigate risks from trade conflicts and barriers that pose a challenge to global markets and supply chains.
Decisions on the type, scope and location of our investment projects are made on the basis of established comprehensive assessment processes. They take into account long-term forecasts for the market, margin and cost development, and raw materials availability, as well as country, currency, sustainability and technology risks. Opportunities and risks arise from potential deviations in actual developments from our assumptions. Mitigation plans are in place where risks are substantial.
Investments in more sustainable technologies represent a long-term opportunity, even though they may not be competitive or profitable in the short term, depending on the market and the prevailing regulatory framework.
To assess the changing risks for our sites from climate change, climate data based on the latest scenarios of the Intergovernmental Panel on Climate Change (IPCC) were compiled for our sites in cooperation with an external partner. This enables the sites to assess the potential impact of climate change in the coming decades. Here, we focus on a climate protection scenario, supplemented by two scenarios with medium and high levels of global warming.1 The most common potential impact is an increase in heat and drought. The sites are supported by this information in the development of their strategies.
The availability of our production plants and infrastructure can be negatively affected by system downtime, confidentiality breaches or manipulation of data in critical IT systems and applications. The threat environment has changed in recent years, as attackers have become better organized, use more sophisticated technology and have far more resources available.
In the future, we will continue to expand and refine our portfolio through smaller, bolt-on acquisitions that promise above-average profitable growth, are innovation-driven or offer a technological differentiation and help achieve a relevant market position, and make new, sustainable business models possible.
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 met, risks could arise, such as a need for impairment. Opportunities could also arise, for example, from additional synergies. Furthermore, business carve-outs and divestitures play a key role in the development and optimization of our portfolio. In this context, risks could arise as a result of potential warranty claims or other contractual obligations, such as long-term supply agreements.
BASF anticipates growing challenges in attracting qualified employees in the medium and long term due to demographic change, especially in North America and Europe. As a result, there is an increased risk that job vacancies may not be filled 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.
The positive contributions and negative impacts of our business activities on sustainability topics along the value chain, and the impact of sustainability topics on our business were assessed in a new materiality analysis carried out in 2022. Opportunities and risks for our business activities that could arise from material sustainability topics, or for sustainability topics that could arise from our business activities, can only rarely be measured in specific financial terms and mainly have a medium to long-term impact. We are already seizing business opportunities, for example, through products with specific sustainability attributes (such as raw materials based on biomass or recycled content) or intensified customer relations based on common sustainability ambitions. Relevant sustainability topics are systematically integrated into our strategic risk management.
We reduce potential risks in the areas of environmental protection, safety and security, health protection, product stewardship, compliance, supplier relationships and human rights (including labor, social and quality standards) by setting ourselves globally uniform requirements. These sometimes go beyond local legal requirements. Our globally applicable Code of Conduct defines a binding framework for the activities of all BASF employees, leaders and members of the Board of Executive Directors. To ensure compliance with our internal and external standards, we have global management systems in place and monitor their implementation internally by means such as global surveys and audits. These also cover human rights topics in line with statutory regulations such as the German Supply Chain Due Diligence Act. Our measures are regularly reviewed and adapted as necessary to ensure the protection of human rights in our value chains and consequently, the continuity of our business relationships.
Expectations of suppliers are laid down in our global Supplier Code of Conduct. We have suppliers with a high potential sustainability risk evaluated by third parties, either through sustainability evaluations or on-site audits. The monitoring systems are complemented by grievance mechanisms that are open to all stakeholders, such as our compliance hotlines.
Ongoing climate change also poses opportunities and risks for BASF. As an energy-intensive company, climate-related risks arise particularly from regulatory changes, such as in carbon prices through emissions trading systems, taxes or energy legislation. In addition, BASF’s emissions footprint and intensity could lead to a negative perception and reduced appeal among external stakeholders such as customers or investors. We counter these risks with our carbon management measures and by transparently disclosing our positions on and contributions to climate protection, for example, in the form of political demands or through progress in the implementation of our climate strategy, in publicly accessible sources such as this annual report or on the BASF website, and in direct dialog with external stakeholders.
In addition to climate-related risks, there are also opportunities. Our broad product portfolio includes solutions for the circular economy and climate protection (such as insulation foams for buildings, materials for electromobility and bio-based products). Increased social awareness offers additional market opportunities for these products. We are working with numerous scientific and public organizations and initiatives on solutions for sustainable agriculture that meet economic, environmental and social demands over the long term.
Our decentralized specialists use a central decision tree to document reportable sustainability risks within the meaning of section 289b et seq. of the German Commercial Code. No reportable residual net risks within the meaning of section 289b et seq. of the German Commercial Code were identified for 2022.
1 The assessment model was based on the IPCC climate change scenario SSP1-2.6, supplemented by SSP2-4.5 (medium global warming scenario) and SSP5-8.5 (high global warming scenario).