BUSINESS
American Hoechst Putting More Emphasis on Profitability Business divestitures, employment cutbacks, and realignment of operations plus economic upswing are improving earnings outlook American Hoechst is joining the rest of the U.S. chemical industry in the general recovery. Sales will rise substantially this year and earnings probably will be up almost sevenfold from 1982, bringing profitability up to a level that, though not anywhere equal to the rest of the chemical industry, is still respectable by historical standards for the U.S. arm of West Germany's Hoechst A.G. And in the process, there may be a new corporate philosophy emerging at American Hoechst—one that emphasizes profitability more than has been the case in the past. Although this shift may not be a 180° turn for the firm, it is a substantial divergence from past practice when low profitability was explained by saying that American Hoechst was "investing for the future/' Two years ago when C&EN interviewed officers at American Hoechst, the attitude was bullish (C&EN, Oct. 19, 1981, page 13). The company had just come off of a $10 million loss in 1980 and was headed toward earnings of $24 million in 1981, accomplished partly through an improving business scene. But the better times also were brought about by an earnings improvement program of which the company was very proud. This included a hiring freeze that reduced employment at American Hoechst about 1% and costcutting measures that included improved housekeeping and worker productivity.
Dieter zur Loye, president and chief executive officer of American Hoechst, was then senior executive vice president and chief operating officer. He said, at that time, "We tried to concentrate on areas where everybody could save a little. . . . If everybody saves a little—and we tried to let each employee set his own target—suddenly it's a major change involving substantial amounts." However, as 1982 hit the U.S. economy hard, the savings generated seemed not to be enough. Sales at the company declined 6.4% from 1981 to $1.51 billion, and earnings plummeted 87.5% to $3 million. About the only consolation was that the company did not go back into the red as did some firms that are h e a v i l y i n v o l v e d in fibers a n d petrochemicals. Thus, the company had to do more. And it did, cutting back on employment, streamlining its operations, and divesting itself of some businesses that it had acquired along with acquisitions that it never would have started by itself, zur Loye told C&EN earlier this month.
In fact, according to zur Loye, American Hoechst's rapid growth via acquisition brought about a number of the problems that it had to solve last year. Besides the plants that did not fit into the company's business plans, acquisitions had caused a lot of duplication of effort among the various divisions. Thus, American Hoechst was reorganized into four operating groups—fibers and film, petrochemicals and plastics, specialty products, and health care and agricultural chemicals. This way, the company was able to combine a number of staff functions that were common to the various segments. The reorganization also let American Hoechst cut down on management levels. According to zur Loye, before the reorganization, there were the chief executive, the executive committee, group vice presidents, division presidents, and division vice presidents. The new organization had division general managers r e p o r t i n g directly to t h e executive committee. American Hoechst also knew that
American Hoechst sales, earnings to recover well in 1983 Sales, $ billions
1978
79
Earnings, $ millions
80
81
82
1978
79
80
81
82
83 a
a Projected.
November 28, 1983 C&EN
9
Business
Zur Loye: fewer management levels it had to reduce employment and this brought about a paradox, according to zur Loye. The company had been fostering group loyalty and job security for years, but it knew that it had to reduce organizational levels and overall employment. "We found that we had built up very useful and convenient functions that had become expensive. In a tough year, though, we could live without these services/' zur Loye says. "We had to eliminate them to save money." The company felt that it had to reduce the number of employees by about 300 out of a total of 9300. The first step was to institute a voluntary retirement plan for employees who were more than 58 years old and had at least 10 years of service. Along with this program, the company did have to lay off some workers. It hired an outplacement service and picked as those to be laid off people who were too specialized to be placed in other functions. Although it may have been humanitarian in the way that it helped employees to find new jobs (zur Loye says that in spite of the recession all of them very soon found jobs and some at higher pay), the company was brutal in identifying areas to be cut. The company saw no need to have a corporate market research department since much of this function 10
November 28, 1983 C&EN
INTERNATIONAL BUSINESS was duplicated at the division level. So the department went. There was no corporate advertising budget, so there was no need for a corporate advertising department. American Hoechst decided that it could buy all the economics information that it needed from outside economics consultants. So the chief economist was let go. Further, he says, the company found itself in businesses, as a result of acquisitions, that it never would have built itself. These included a nylon plant and a plant for processing polystyrene into containers. Both of these plants were sold, and a dated styrene unit at Baton Rouge was closed. All of these actions, instead of cutting employment by 300, actually reduced the number of employees at the company to 8600 from 9300 before the program started. As a result of the general reorganization and streamlining, plus persuading everyone in the company to cut costs wherever possible, expenses for 1983 will be lower than they were in 1982. Normally, zur Loye says, they would have increased about 6%. And, as a result, earnings growth this year will be extremely good. Although they may not yet be back to 1981 levels, earnings for the year will be more than $20 million, according to zur Loye. This will bring profit margins back to 1.3%, not good by U.S. industry standards, but adequate for American Hoechst, where the greatest return on sales that the company has had in the past six years has been just twice that at 2.6% in 1979. Zur Loye admits that there are still problems. Specifically he points to the petrochemicals and plastics businesses. There is still overcapacity in the U.S., he says, starting with basic petrochemicals and going right through plastics. The result is that price levels are quite depressed. Most companies in these areas have profitability problems. "While our petrochemical and plastics business is a little bit better than last year," zur Loye says, "it is still not where it should be. To be more specific, we still have a substantial loss in the petrochemical and plastics area." William Storck, New York I
Labor costs hurt U.S. foreign trade It's no secret that the U.S. trade balance in chemicals and other basic manufactures, many of which are important chemical markets, has been socked hard since the late 1970s by a powerful combination of forces. These include the strong dollar, the U.S. economy's surprisingly rapid recovery in 1983, slower recovery abroad, and the demise of the former U.S. advantage in energy costs. The picture could get much worse, warns a widely followed economist, Michael K. Evans of Evans Economics (in a report for the American Production & Inventory Control Society), because of a fundamental U.S. disadvantage largely independent of cyclical influences—labor costs. "The U.S. will find that it has in large part priced itself out of world markets," he concludes after sifting through a welter of unpublished Labor Department data for 1980 on hourly production labor costs in the U.S. and all major trading partners. Calculating a weighted world average for labor costs, Evans finds U.S. costs range above the average from 19% for textiles to 94% for autos. The margin in chemicals is 40%, close to the all-industry average of 43%. Corresponding percentages in other industries are 38%, both in fabricated rubber and plastics and in paper, 30%
U.S. chemical labor costs well above other nations' % margin over other nations, 1980a
Chemicals HNHj Textiles H |
Steel l l l l
.. ι
Autos fÊÊÊ Instruments WKÊÊ All industry!
i " i, 20 40
60
80 100
a Margin of hourly U.S. production wages over weighted average for Canada, Mexico, Japan, Austria, Belgium, Denmark, France, West Ger many, Italy, Netherlands, Spain, Sweden, U.K., Hong Kong, Korea, Singapore, and Taiwan. Source: Evans Economics calculations based on unpublished data from Labor Department
