"Mr Hambrecht was confident BASF could shoulder the financial and operational burden of integrating three companies at the same time... reflect a quaint pride in the strength of BASF’s organisation. There is a “way of doing things” – detailed planning, rigorous practice, careful execution – that suffuses the 141-year-old group.
The preparations for meeting Mr Hambrecht, who took the reins in May 2003, speak volumes about BASF’s culture. Two months in advance, a date is booked. With a month to go, a spokesman is pressing for decisions on the interview’s structure. Days later, he is asking for the interviewer’s curriculum vitae.
The source of this detailed competence becomes clear when you step outside the head office building. Northwards and eastwards towards the Rhine, mile after mile of factories – 250 in total – turn oil and gas into a long list of their chemical derivatives...BASF’s name for its vast, interconnected production complex (for which there is no adequate English translation) is the Verbund. It has built similar sites elsewhere, but none as big. Successive generations of managers have seen mastery of the network as the key to the company’s success...A chemical reaction produces a predictable series of products and by-products. BASF has therefore constructed the Verbund to squeeze every ounce of value out of those reactions. Instead of shipping everything to the next user, it looks for new ways of reusing and recombining them.
This has spawned a vast cascade of products from oil-based ethylene to food additives, and miles of pipes that bring chemicals from different parts of the site. The resulting savings in transport costs mean that BASF’s production costs are up to one-fifth less than those of its rivals – even in high- cost Germany. Protecting this advantage is Mr Hambrecht’s overarching aim.
Despite the emphasis on tradition and continuity, BASF does change, he insists...For example, the Verbund used to buy the oil and gas that are the raw materials for its products, which have included cassette tapes and drugs. In the 1960s, though, it moved into energy trading, as a way of insulating it from the ups and downs of raw material and chemical prices...Thirty years later, Mr Hambrecht’s predecessor Jürgen Strube sold off tapes and pills. But he expanded into crop protection, a “downstream” business less volatile than core chemicals, and started selling gas in a German joint venture with Russia’s Gazprom...With the purchase of Engelhard’s catalysts and Degussa’s construction chemicals business, Mr Hambrecht again extended BASF’s reach towards markets blessed by steadily rising consumer demand and predictable prices.
...As economic crisis swept Asia, Mr Hambrecht, then BASF’s regional head, stuck with the tough and often confusing talks. “We planned years ahead. We didn’t let the crisis chase us out of the country. Other companies weren’t as steadfast...."The Chinese saw that we were prepared to stand firm with the partnership we were seeking. We gained their confidence,” he says. “In the same way, many companies came to question their plans to enter Russia. We never did that.”
It is one of the rare times that Mr Hambrecht uses the first person. “You can’t really associate anything BASF has done in the past three years solely with my person,” ....It is as convincing a demonstration as any of the power of “the BASF way” to subsume even the man at the top of the company.
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The guardian of BASF’s secret formula
By Gerrit Wiesmann in Ludwigshafen
Published: August 27 2006 17:30 | Last updated: August 27 2006 17:30
Jürgen Hambrecht has spent as much money buying companies in the past six months as he and his predecessor at the helm of the world’s biggest chemical group have in the six preceding years.
In doing so, Mr Hambrecht has increased sales of Germany’s BASF from about €42bn to more than €50bn ($64bn) and made it a world player in the fast-growing markets for catalytic converters for cars and chemicals used in construction.
Yet he is remarkably keen to play down the move, as he sips from a cup of jasmine tea in BASF’s head office in Ludwigshafen. “I couldn’t have told you 18 months ago that those deals would happen. But we were looking at those sectors,” he says matter-of-factly.
He claims it is as much by accident as by design that the group has spent €7bn in the space of a few months.
Last year, just as it was preparing a €4bn bid for Engelhard, a US catalyst manufacturer, and making a €400m offer for US plastics maker Johnson Polymer, Germany’s Degussa put its building chemicals up for sale at €2.2bn.
Cash rich after three years of strong chemicals demand, Mr Hambrecht was confident BASF could shoulder the financial and operational burden of integrating three companies at the same time.
Some might take his insouciance as a sign of arrogance. In fact, it appears to reflect a quaint pride in the strength of BASF’s organisation. There is a “way of doing things” – detailed planning, rigorous practice, careful execution – that suffuses the 141-year-old group.
The preparations for meeting Mr Hambrecht, who took the reins in May 2003, speak volumes about BASF’s culture. Two months in advance, a date is booked. With a month to go, a spokesman is pressing for decisions on the interview’s structure. Days later, he is asking for the interviewer’s curriculum vitae.
The source of this detailed competence becomes clear when you step outside the head office building. Northwards and eastwards towards the Rhine, mile after mile of factories – 250 in total – turn oil and gas into a long list of their chemical derivatives.
BASF’s name for its vast, interconnected production complex (for which there is no adequate English translation) is the Verbund. It has built similar sites elsewhere, but none as big. Successive generations of managers have seen mastery of the network as the key to the company’s success.
A chemical reaction produces a predictable series of products and by-products. BASF has therefore constructed the Verbund to squeeze every ounce of value out of those reactions. Instead of shipping everything to the next user, it looks for new ways of reusing and recombining them.
This has spawned a vast cascade of products from oil-based ethylene to food additives, and miles of pipes that bring chemicals from different parts of the site. The resulting savings in transport costs mean that BASF’s production costs are up to one-fifth less than those of its rivals – even in high- cost Germany. Protecting this advantage is Mr Hambrecht’s overarching aim.
“The big difference with other companies is that BASF has a long-term strategy. It’s based on the Verbund and has a long tradition,” he says. “You take charge of a company that is well run. The challenge is to keep it running well.”
The man in charge has to know the machine – Mr Hambrecht has worked at the company for nearly 30 years – and its constraints. While BASF can absorb the recent medium-sized acquisitions, for example, the Verbund precludes a mega-merger as the need to transport goods conventionally would be likely to raise, not lower, production costs.
Mr Hambrecht describes his role as that of a “conductor” who makes existing parts and players cohere, not a composer who makes and sells something new. “A chemical company doesn’t need a pop star boss,” he says.
Indeed, there is no apparent flamboyance to Mr Hambrecht, who turned 60 last week. With a gaunt runner’s physique, he is used to straight talking.
But his job is far from artless. Though the laws of chemistry impose their constraints on the range and volume of its products, each BASF boss has drawn the limits of his Verbund differently.
Despite the emphasis on tradition and continuity, BASF does change, he insists. “Our portfolio changes have been quite substantial in past years. In the last decade, we’ve sold businesses worth €11bn and have spent more than €13bn.”
For example, the Verbund used to buy the oil and gas that are the raw materials for its products, which have included cassette tapes and drugs. In the 1960s, though, it moved into energy trading, as a way of insulating it from the ups and downs of raw material and chemical prices.
Thirty years later, Mr Hambrecht’s predecessor Jürgen Strube sold off tapes and pills. But he expanded into crop protection, a “downstream” business less volatile than core chemicals, and started selling gas in a German joint venture with Russia’s Gazprom.
Extending that end of the Verbund, Mr Hambrecht last year forged a ground-breaking alliance with the energy giant, which gave BASF a one-quarter stake in a Siberian gas development.
With the purchase of Engelhard’s catalysts and Degussa’s construction chemicals business, Mr Hambrecht again extended BASF’s reach towards markets blessed by steadily rising consumer demand and predictable prices.
“You always have to adapt things here and there in a strategy to account for economic, cultural or even political changes,” he says. “It’s not about revolution, it’s about managing constant change – of company and strategy.”
Its habit of thinking in long time spans and adopting a gradualist approach have been the greatest boon for the company in the past decade, says Mr Hambrecht.
In the mid-1990s, BASF started talks to invest €1.5bn in a Verbund site near Beijing, akin to more mature projects in Antwerp or Geismar, Texas. The project – the biggest foreign investment in China – started production last year.
As economic crisis swept Asia, Mr Hambrecht, then BASF’s regional head, stuck with the tough and often confusing talks. “We planned years ahead. We didn’t let the crisis chase us out of the country. Other companies weren’t as steadfast.
“The Chinese saw that we were prepared to stand firm with the partnership we were seeking. We gained their confidence,” he says. “In the same way, many companies came to question their plans to enter Russia. We never did that.”
He takes a final sip of tea. Mr Hambrecht’s travels in China have obviously left their mark. He says they calmed his irascible side. “I learnt to be more patient – that’s something that stood me in good stead with the Russians.”
It is one of the rare times that Mr Hambrecht uses the first person. “You can’t really associate anything BASF has done in the past three years solely with my person,” he says.
It is as convincing a demonstration as any of the power of “the BASF way” to subsume even the man at the top of the company.
A LAMENT FOR THE ‘GERMANY DISCOUNT’
When Jürgen Hambrecht took over as chief executive of BASF in spring 2003, he said the chemicals company had “to get closer to the customer” and “become more profitable” to boost its valuation and guard against being taken over.
To this end, he encouraged his marketing people to think in terms of providing solutions, not simply products. As a result, the Mercedes A-class car is not simply coated in BASF paint – BASF people do the painting.
He also bought companies such as the US catalyst maker Engelhard in order to move BASF into markets that are closer to consumers – and subject to more stable pricing levels. Prices of industrial chemicals, by contrast, are tied to the ups and downs of the business cycle.
Moves such as these and cost cuts in Germany and overseas helped to boost the group’s results. Return on capital employed more than doubled from 8.4 per cent in 2002, the year before Mr Hambrecht took over, to 17.7 per cent 2005.
Yet this bounce in performance does not appear to have roused investors to a similar degree. BASF’s share price has risen by a relatively disappointing 75 per cent since he took over and is currently trading at about the €62-a-share level.
The chief executive is not happy. He thinks German companies still suffer from a “Germany discount” because investors are “gloomy about the parameters for doing business here” – such as high taxes, red tape and thrifty consumers.
On top of that, Mr Hambrecht feels investors have not yet recognised the potential of BASF’s expanding oil and gas business or that of its forays into biotechnology. The chances are that these “haven’t yet been priced into the stock”, he says.
But he is meek enough to concede that investor ignorance might go hand in hand with bad corporate communication.
“It’s our responsibility to relay things so the financial markets understand what we’re doing,” he says.
Copyright The Financial Times Limited 2006
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