At the Mercedes-Benz factory in Rastatt, Germany, chemist Christina Spitzer makes sure the A-Class and B-Class models get coated four times as a protection against scratches and bird droppings. Spitzer isn’t an employee of the carmaker. She works for chemical company BASF SE. (BAS)
Spitzer, along with seven other full-time BASF employees at Daimler AG (DAI)’s Mercedes-Benz assembly line, are on the front line of the drive to sell new services instead of just barrels of chemicals. The strategy has won BASF market share in automotive coatings, even as the European car market plummeted, said Alexander Haunschild, BASF’s head of that business in Europe.
The Mercedes-Benz service is part of an effort by BASF, the world’s largest chemical company, to counter declining profits at the specialty units that it expanded to diversify away from commodity chemicals. While BASF is preparing to also work closer with construction, packaging, water and wind-energy clients, those specialized services force the Ludwigshafen, Germany-based company to learn more about the intricacies of those businesses.
“At automotive, we were the pioneers of the new focus,” Haunschild said in Muenster, where the coatings division is based, in a joint interview with Thomas Fritzsche, the global account manager for Daimler. “It took years of effort and occasional pain to develop it. We hope that with the other industries, we can shorten the steep learning curve.”
Employees sent to work at client sites are handpicked and BASF only gets paid for defect-free coating jobs, he said.
The auto side of the coatings unit is growing at a single-digit percentage rate, Haunschild said. As a result, BASF is winning market share in the $97 billion market for car-related chemicals at a time when European car demand is at a 20-year low.
Coatings, which includes industrial products and decorative paints, was one of only three of BASF’s eight specialty chemical units which increased profit last year. Specialties, which BASF bundles into units called performance products and functional materials and solutions, made up 45 percent of BASF’s sales.
The partnership has also generated business in areas such as lightweight plastic parts, and provided valuable lessons for other businesses, Haunschild said.
While more complex services can help chemical companies to boost profits, it can also backfire if companies fail to understand their clients’ business model, according to Boston Consulting Group.
“You suddenly have to understand customer requirements much better,” said Andreas Gocke in an interview along with Yves-Pierre Willers, both senior partners at Boston Consulting Group, while declining to comment on individual companies. “And the more downstream you go, the more active you are in very different markets. It’s a tricky issue.”
Since 2009, BASF has expanded its performance products division with the acquisitions of Cognis and Ciba for $8.7 billion to boost the paper and cosmetic ingredients business. Still, profit at BASF’s performance products unit has fallen for six straight quarters year on year, prompting questions how successful BASF’s downstream strategy is.
Most of the company’s acquisitions in the past decade have proved disappointing, according to Nomura analysts Jean de Watteville and Patrick Lambert.
“Under-performance versus peers in care chemicals, construction chemicals and weak performance in additives and paper chemicals” have dogged the specialty units, the analysts said. “This raises questions about BASF’s capacity to manage complexity and/or manage specialty chemicals businesses.”
The transformation of BASF, founded 147 years ago, into a service provider only works well with the involvement of top management, Haunschild and Fritzsche said. Board members from both BASF and Daimler attend quarterly meetings to discuss topics from fuel cells to plastic parts, Fritzsche said. The get-togethers generate concrete proposals, with BASF privy to Daimler’s needs from the start.
“BASF is involved very early in the development process for very different business areas, which wasn’t always the case,” Haunschild said. “Previously BASF came with a new idea and the automaker, for example Daimler, said whether they wanted it or not. Or they asked for something, but asked five companies and then chose the best at the end.”
BASF, which developed a car seat made entirely from its plastics and foams, set up a global steering committee to coordinate all offerings for equipment manufacturers such as Daimler and Bayerische Motoren Werke AG. Similar committees have been set up for construction, packaging, water and wind energy, where BASF could be a one-stop shop for windmill blades, Haunschild said.
The strategy needs to pay off. Without a 28 percent gain from agricultural products, such as herbicides and fungicides, and a 94 percent jump at the oil-and-gas unit, BASF would have posted a decline in profit last year.
BASF stock rose as much as 1.1 percent to 71.69 euros in Frankfurt trading and was up 0.3 percent at 71.17 euros as of 9:36 a.m. local time. The shares have barely budged this year, compared with a 4.6 percent increase in Germany’s benchmark DAX index. Dow Chemical Co. (DOW:US) has risen 3 percent and DuPont Co. has gained 17 percent in the same period.
BASF is also seeking cost improvements at some specialty units. Additional job cuts at the performance-products division, on top of 500 already announced, are being assessed, Chief Financial Officer Hans-Ulrich Engel said in April. That’s in addition to 400 construction chemicals unit job losses.
Still, Spitzer’s job of checking the quality of the coatings and troubleshooting at the so-called paint-shop at the end of Daimler’s assembly line shows every sign of being secure. Every car gets an electric-current bath for corrosion protection, a primer to smooth the surface, a color base-coat and finally a gloss to resist scratches and bird droppings.
While Spitzer’s blue-gray BASF overalls contrast to the Daimler’s workforce decked out in green, her presence is more seamless on the factory floor, she said.
“We aren’t Daimler employees, so of course we only get the information we need for our work,” the former laboratory technician said. “Nevertheless, if a problem occurs on the line we work together to find the best solution. After all, we have the same goals.”
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