Dr. Sabine Philipp Tel.: +49 (6 21) 60-4 33 48 Fax: +49 (6 21) 60-4 94 97 E-Mail: Sabine.Philipp@basf-ag.de Trade press conference K 2004 on June 22 and 23, 2004, in Ludwigshafen Plastics Materials of the 21 st Century Report by Dr. John Feldmann, Member of the Board of Executive Directors BASF, Responsible for Plastics, Oil and Gas BASF Aktiengesellschaft 67056 Ludwigshafen Phone: +49 621 60 0 Germany http://www.basf.de Communication plastics www.basf.de/plastics
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Ladies and Gentlemen, It is hard to imagine what life would be like without plastics. The least of you ought still to remember the days when ladies wore nylons or when food did not come wrapped in cling film. It was in the sixth decade of the last century the 1950s that plastics started to creep into our lives. FIGURE 1: Plastics in the sixties The sixties was the decade when plastics finally made their breakthrough. Because they are so easy to form and offer almost unbeatable price/performance, no other type of material has experienced so much growth in its usage as plastic. Thanks to plastics, many things in day life took on a new form. And many would never have existed in the first place without the special properties of these materials. It was through all these everyday objects that plastics became tangible to us in the truest sense of the word. The totally new design opportunities that plastics offered found expression in the design and styles of that era. On the other hand such designs have also shaped to some extent are our perception of plastic materials. Plastic the stuff might bring back a bit of swinging-sixties nostalgia, but also a whiff of the cheap n nasty. Did the Plastics Age start to become part of history at the end of the 20 th century? Have the opportunities and the innovative potential of plastics already been exhausted? FIGURE 2: Plastics in today s cars No, on the contrary. While plastics continue to spread around the world in their established applications, more and more uses are appearing all the time. Our slide shows complex, high-value, high-performance automotive systems, in which plastics are now an integral part. Plastics make a significant contribution to the performance, safety and comfort of modern motor vehicles. Let us turn from our look at the very interesting uses of plastics for a moment and consider the business environment. We all know that plastics suppliers and converters are far from satisfied with the current economic climate. Weak margins, plant closures, divestitures and fusions characterize today s business environment. 2
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FIGURE 3: BASF s strategy for plastics In response to this development, three years ago I presented to you BASF s plan for its plastics segment. Our strategy in this business involves three main goals: Firstly: We want our customers to share in our success. We will expand in areas in which we are able to offer our customers clear advantages and at the same time grow profitably. On the other hand, plants and businesses that are no longer competitive be it due to their capacity, technology or location and so can no longer serve customers, will be closed or divested. Secondly: We are developing new business models We are realigning our businesses with standard polymers on the one hand and specialties on the other to the changed market and customer demands and building new business models. Thirdly: We are optimizing our regional portfolio While we are improving our processes and cost structures in Europe, our North American business is currently going through a phase of strong consolidation. The aim behind all this is to increase our efficiency significantly. We want to continue expanding our position as the leading global producer in the burgeoning markets of Asia. FIGURE 4: Important measures 2001-2004 The most important aim of the measures we introduced in the previous years is to be and to remain our customers preferred business partner. In the past years we have made further improvements around the world to our successful polyurethanes business. Production of basic products has been enhanced through new plants or the expansion of existing ones. At the same time we have extended mainly through acquisition our network of system houses. We were able to strengthen our attractive engineering plastics business significantly through the acquisition of Honeywell s engineer plastics activities in particular. The acquisition by Honeywell of our fibres business, completed our withdrawal from what for us had become an unattractive part of the market. At the end of 2003, we acquired the nylon 6.6 business of Ticona and so further strengthen our position in engineering plastics Obsolescent plants for producing styrenic plastics have been shut down in recent years and only partly replaced. We have responded to changes in the styrenic polymers market with new products, particularly standard grades. I will explain more about this later, using our ABS business as an example. 4
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The introduction of e-commerce has been a thorough success. Customers throughout the world are now able to do business with us around the clock, 365 days a year, from our internet portal (PlasticsPortal). Last year online sales amounted to more than 1 billion; we want to increase this in 2004 to over 1.5 billion. FIGURE 5: Structure of BASF s plastics business As you can see in this slide, our plastics business comprises three main value chains. This structure emerged three years ago as a result of BASF s Fit for the Future project. Looking back, it has led to great improvements in efficiency and enabled us to better engage in the market. Nevertheless, because of the extraordinarily difficult business climate over the last year, our earnings still remain unsatisfactory. FIGURE 6: Key financial data plastics (2002 2003) If sales growth in styrenic plastics and polyurethanes was regarded as being good, the overall results from our plastics business were, in my view, disappointing. This performance was characterized in particular by our loss-making fibre intermediates activities, but also by much higher raw material costs, which could only be partially offset through higher prices. Worthy of note is the smooth integration of the former Honeywell engineering plastics business. The decision to hand over our fibres business to Honeywell and to keep it in the portfolio only until May, has already proven to be correct. 6
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FIGURE 7: Impacts on plastics sales The weakness of the dollar against the euro is of course also having a negative impact on sales; price increases were not able to compensate fully for this effect. Important for turnover and earnings growth was the fact we were able to increase sales volumes and with it the capacity utilization of our plants. The rise in demand is largely thanks to new applications and projects undertaken jointly with customers. FIGURE 8: Key financial data plastics (Q1 2004) In the first quarter of this year, we were able in increase sales volumes further and improved earnings significantly. Internal cost-cutting measures made a big contribution to this. For example, we closed our Styrolux plant in Ludwigshafen and instead brought on-stream a modern world-scale facility in Mexico, which will enable us the supply the Northern American market more cheaply. Last year in Korea, we brought on-stream a new, large-scale TDI plant, which will cover hitherto bought-in product as well as exports from our US facility in Geismar. We shut down our ABS plant at Geleen in the Netherlands and will in future supply the European market from our new facility in Antwerp, which is now coming on stream. European ABS imports from plants in Korea and Altamira will then be stopped. As you can see, we still find ourselves very much in a restructuring process. Accordingly, we will cease production of Styropor at South Brunswick, USA, by the end of the year, and in future serve the NAFTA area from our expanded production at Altamira, Mexico. It is our goal always to earn a premium on our cost of capital. At the same time will we strengthen our efforts to help our worldwide customers to be more successful. FIGURE 9 (next page): Per captia consumption of plastic materials The figures show the level of importance of plastics and corresponding growth in sales in the individual regions. World annual growth in plastics consumption is expected to average about 5 percent until 2015 clear evidence of our industry s impressive dynamism. This has partly to do with rising living standards in many parts of the world. But it is also thanks to our efforts to develop new applications for plastics. 8
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FIGURE 10: World consumption of plastic materials Asia is a special case: despite the comparatively low per capita consumption, the Asian market for plastics is already the biggest in the world. Given the expected growth in Asia economies, the region will therefore continue to become more and more important to makers of plastic. FIGURE 11 (next page): World production of plastic materials The following picture of world plastics production is emerging: Asia excluding Japan not only consumes the most plastic, in recent years production in that region has also overtaken that of Europe and the NAFTA countries. What has brought about such a far-reaching development? The decision to build new plants depends on many factors, but primarily it is the cost of raw materials, energy and logistics as well as government policy and economic conditions. For many business models, geographic proximity to the customer is also of great importance. Many manufacturing industries are moving their production out of Europe and North America and heading mainly for Asia. For the makers of plastics both standard products and specialties that is an important factor in the choice of a new production location. Our figures for 2015 are based on our current expectations and assessments on where future plastics production is likely to be found. Whether those predictions turn out to be correct, depends on the prevailing conditions in the individual regions. A few years ago the European Union set itself the goal of becoming the most competitive, most dynamic knowledge-based region in the world by 2010. Well, in my view, it is more urgent than ever to start turning such a vision into reality. If Europe ever wants to achieve this aim, a great many government rules and regulations need to be done away with. New ones must certainly not be introduced. As you know, the rules governing the testing of chemicals in the European Union are currently under review. We support this. Regrettably, the current draft will lead to excessive bureaucracy that will do nothing whatsoever to achieve the intended benefits, namely to improve safety in the handling and production of these substances. We therefore reject the European Commission s current draft and are working to develop practical and sensible alternatives. We must not allow rules and regulations that are based on ideology to drive manufacturing out of Europe and strengthen the current trend towards de-industrialization. 10
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Industry continues to be the backbone of our economy. It is the source of our prosperity and, through its innovative potential, a way of securing sustainable development for the future. Without a sound economic foundation, there can be no lasting ecological progress or social stability. FIGURE 12: Plastics in passenger vehicles We see part of this economic foundation in the enormous innovation potential of plastics and their applications. For example, the weight of plastic in a medium-sized car has increased from 6 percent in 1975 to 13 percent now. That share will continue to rise; we reckon on an 18% share by 2007. This strong growth is in large part thanks to the use of plastic materials in large, highly integrated component assemblies, which often contain other materials. Often the introduction of new technologies in cars to provide extra safety or comfort for example is only made possible through the use of plastics. Instrument panels then and now Think of the instrument panel, together with the trim levels, in a Volkswagen car thirty years ago and compare it with a modern vehicle. Compare a car seat from then with one from now, and then try to imagine a modern car without plastic. FIGURE 14 (next page): Plastics help conserve natural resources The substitution of conventional materials by plastics reduces vehicle weight and with it fuel consumption and CO2 emissions. According to experts, the use of plastics in cars in Germany saves more than 400 million litres of fuel and reduces CO2 emissions by about 1.2 million tonnes. I believe the new concept for the thermal encapsulation of engines with polyurethane foam that we heard about yesterday will make a further substantial contribution to the conservation of natural resources. The use of heat insulating foams in buildings is another good example of how plastics help save fossil fuels and reduce CO2 emissions. 12
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The insulation properties of BASF s new Neopor foam are far superior to those of our wellknown Styropor. Apart from its application as thermal insulation in old and new buildings, Neopor is also being used as a structural foam in innovative pre-fabricated houses as can be seen in this photograph. Neopor can also be used in composite insulation systems. Together with LUWOGE, BASF s housing company, we developed a cost-effective system that can reduce the energy consumption in older housing by over 70 percent. Poorly insulated older types of building annually use between 20 and 30 litres of heating oil per square metre of floor area. An experimental housing development/project we built here in Ludwigshafen known as the three-litre house requires just three litres of heating oil per square metre. The property was renovated with Neopor and other BASF products for the window insulation and interior plaster. The thermal insulation measures carried out will cut annual CO2 emissions from 6000 kilograms to just 900 kilograms. That is a remarkable contribution to environmental protection given that private households are responsible for a not insignificant share 14% in 2002 of CO2 emissions. Experts reckon there are about 24 million housing units in Germany in need of renovation. If these properties were insulated so as to reduce heating oil usage from 25 to around 7 litres per square metre, CO2 emissions could be cut by 84 million tonnes annually. That corresponds to about a third of Germany s Kyoto commitment to cut annual CO2 emissions by 255 million tonnes. FIGURE 15: Innovative material composites In our presentations yesterday, we showed you numerous other new uses for plastics. Aside from further advances to existing applications, there are also ideas and projects involving totally new areas. Some are truly astonishing at first sight. One example is our steel/polyurethane/steel sandwich system used in ship-building and - repair, or in bridge construction. Ships and bridges made partly of foam? Who would have thought that possible? Other potential SPS applications such as sports stadiums, containment vessels and railway tankers could become a reality in the near future. 14
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FIGURE 16: Innovation the engine of growth Innovative plastics also contribute to solving problems that have plagued us for centuries. For example in sea defences to prevent coastal flooding. As someone who grew up on Germany s North Sea coast, I am only too aware of the havoc that storm tides can bring. Working with hydraulic engineers from the University of Hamburg-Harburg, we have developed an adhesive for stabilizing sea defences. This innovative polyurethane system is technically, ecologically and economically superior to existing solutions the employ concrete, mortar or metal bracing. Our aim is to commercialize this system by the beginning of 2005. Ladies and Gentlemen, the list of examples illustrating the versatility of plastics is a lengthy one. Plastics are genuine all-round materials. They help us to shape our world. They help us to save costs and energy in production processes. And they help us to make big cuts in the energy consumption of household appliances, motor vehicles and many other consumer goods. The efficient and environmentally sound disposal methods we have available today ensure that plastics also serve the environment at the end of their useful lives. In other words, for many applications, plastics are the most eco-efficient material available to us today and in the future. The plastics applications I have shown are just a few examples from an enormous spectrum of possibilities. The properties of plastics are relatively easy to tailor to our requirements. That s what makes them so versatile, even though they are all based on a few familiar chemical building blocks. FIGURE 17: Retrodesign polymer design of the future In the past we have learnt how to create and develop products having the properties we desire. In future, through an even better understanding of the complex relationships between a polymer's structure and its properties, we will be able to exploit the vast innovative potential of polymer engineering to open up new fields of application using just a small number of common, well-understood monomers our prime goal being the ability to tailor the properties of our products to the requirements of our customers. 16
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FIGURE 18: BASF business model Decisive for success in this attractive market is that each of our businesses is based on a clear and consistent business model. Business models describe the form of cooperation with our customers and what products and services we offer. To be able to develop precisely the right solutions for our customers, it is essential to view the market through their eyes. Only when our customers are successful with our products, can we ourselves be successful or put the other way round, only a BASF that is successful will be in a position to develop, make and market products that help are customers to be more successful. BASF's plastics business is based on various business models, each reflecting the needs of a particular market. FIGURE 19: Structure of BASF s plastics business Here you see again the three main value chains in BASF's plastics business. Using our polyurethane systems and ABS polymers as examples, I would now like to illustrate to you how the basic business model strengthens our cooperation with our customers and with it our business success. After my talk, Herr Jahn will take up this theme from the viewpoint of the Performance Polymers division. Changing the business model ABS is a plastic that is mostly used in conspicuous applications toys and housings for consumer goods for example. In the past, as was the tradition in European industry, our ABS portfolio was vast, comprising some 1,500 products. They were all produced here in Ludwigshafen and shipped to many, many customers all over the world. This resulted in extremely differing requirements when it came to logistics and packaging. This business model, although complex, served us well in the past. Today, however, many applications use standard products, which thanks to ever-increasing quality offer the same or better performance as specialties, but at lower cost. This development was a direct assault on our business model, whose costs were also rising continually. In addition, we found that our customers European ones in particular were being exposed to increased competition from imported goods made from standard grades of ABS. 18
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It was obvious to us that a new business model was needed. Our goal is to limit our worldwide product range to less than ten products products whose broad spectrum of properties, good colorability and consistent quality, can best meet the numerous requirements demanded by our customers, and that can be supplied from local production to customers in all the main regions Europe, Asia, NAFTA quickly, reliably and at reasonable prices. Specific ABS production costs To complement our ABS business model, we developed a new production technology for the low-cost production of ABS in world-scale plants. Such plants can only be operated really efficiently if the new business model is implemented successfully. That means a radical reduction in the complexity of the existing business. As said earlier, only a small range of products will be offered in future, managed by a sales team that can respond quickly and flexibly. Focussed production and highly efficient logistics are the basis on which to supply quality products quickly and reliably to customers throughout the world. FIGURE 22: ABS BASF production sites We are in the process of transforming our ABS business to fit this business model. Once our new ABS plant in Antwerp is fully up and running, we will have three facilities from which to supplier our customers in each of the regions. In future, a customer anywhere in the world will merely have to decide which of BASF's maximum of ten ABS grades best suits his requirements. He can then buy the chosen product anywhere in the world from us or our trade partners, or he can order via the internet from our PlasticsPortal, which I mentioned earlier. FIGURE 23: Colorflexx an innovative colouring concept At the same time we are offering our customers a means of colouring their resin in-house using masterbatches bought from selected suppliers. This concept is called Colorflexx. It offers the customer cost advantages in production and logistics that stem from the business model just described. 20
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BASF polyurethanes Our polyurethane business is based on a completely different model, a model that brings us particularly close to the customer. Throughout the world we operate 27 system houses responsible for formulating tailor-made polyurethane systems for local customers. The starting point for all this is polyurethane pre-cursors or basic products that we make in modern, backward integrated world-scale plants at our major chemical production sites. The business model draws on two decisive BASF strengths: firstly, our integrated production facilities with all its economies of scale, and secondly, our network of system houses and development centres that enable use to respond flexibly to develop products that meet the exact requirements of the customer. FIGURE 25: BASF s polyurethane systems The main market segments in which polyurethane systems are found are construction, upholstered furniture, automobiles, electrical and electronic goods, textiles and footwear, as well as sports and leisure articles. The service life of these polyurethane systems corresponds to the product life-cycles about two years on average found in most of these segments. We are continually improving these systems and our product offerings jointly with our customers. Today, we can offer around 8,000 systems. BASF Performance Polymers Joint development with customers is also a significant factor for the success of our engineering plastics business. We prefer to work very closely with our customers or their clients for example OEMs in the automotive and electronics sectors right at the start of the development phase of new applications. By doing so we can contribute our development expertise into selecting a product that best meets the specific engineering requirements. Herr Jahn will explain this business model to you in more detail in his presentation. I would now like to briefly summarize what I have said so far: 22
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We are continuing the process of repositioning our plastics business in the market. Following the disposal of our fibres business, we have a portfolio of plastics that we want to grow profitably, and with which we can earn a premium on our cost of capital. Each of our product lines is based on a business model that meets current market needs and that takes into account expected developments. In doing so, we are pursuing three fundamental strategic lines: Firstly: cooperation with customers in the development phase of new products is an important part of our objective of making a decisive contribution to their success. Secondly: standard products will be produced and marketed globally as part of a clear, commodity-based business model. Thirdly: Specialties will be produced close to their intended markets. Their main starting products will be sourced from either main BASF locations or from plants operated jointly with partners at central chemical sites. We will continue to pursue this course rigorously. Our current results are evidence that these efforts are starting to pay off. BASF plastics in Asia 2004 Finally, I would like to return to the special role of Asia. As a supplier of important chemical intermediates, we took an early decision to build a strong position in Asia so that we could be present in this region as the preferred business partner of our customers. Where are we today? We have been present either alone or with partners in all of Asia's main markets for many years. In the coming years we want to use the strong market growth to further widen our presence and in doing so strengthen our position as the world's leading plastics producer. Major steps forward in the near future are the MDI and TDI plants in Caojing, China, which we are building jointly with Chinese partners and Huntsman. We will be concluding negotiations with BAYER shortly regarding the supply of isocyanates from these plants. On the other hand, we are building jointly with Toray at our integrated site [Verbund site] at Kuantan, Malaysia, a facility to produce PBT base resin, which will be turned into finished products in our local compounding plant. 24
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Our Asian expansion strategy will be twin-tracked. In basic products and commodities, we will build up new and highly efficient production capacity closely aligned to regional growth. In specialties, we will use our expertise to drive forward new developments with our customers, while falling back on expanded local production. We will do all this while focussing on those areas in which we can offer our customers clear advantages, and which allow us to grow profitably. FIGURE 28: Paths are made by people treading on them Ladies and Gentlemen, Three years ago I presented to you the main steps along the path of reorganization of our plastics business. As you have seen today, we have advanced successfully along part of that path. We have clearly defined our business models of the future and realigned our operations accordingly. By year's end we will achieve in this important BASF segment savings on global fixed costs by up to 500 million compared with 2001. At the same time we have invested in new plants as well as successfully improved our global structures. We will continue along this difficult yet promising path. Together with our employees and our customers we will exploit the opportunities that plastic materials present tomorrow and the day after that. Plastics are the materials of the 21 st. century. As the preferred partner of our customers, we will play our part in making sure this remains so. 26