europe ic biotech companies offering important key technologies applicable to the field of nutraceuticals"—the world market for such food additives is roughly $7 billion annually, SKW says. The size of companies like BASF, Bayer, and SKW is unusual in the German biotech industry, but their funding support will contribute to the eventual sustainability of the sector, some industry observers believe. Concern remains, however, about the long-term viability of the small companies that make up most of the German biotech industry. As the Ernst & Young report puts it, "Many believe the German industry is heading for a fallout in a few years' time as these companies have to stand on their own feet. Many of the German companies are very small, and the product pipeline is currently limited. The German model is certainly a novel approach, and it remains to be seen whether encouraging start-up companies in this manner will generate a sustainable industry." That model involves, among other things, generous matching funding from various government levels. For example, according to one biotech entrepreneur, "it is now easier to form a company in Germany than in the U.S.— that is why some U.S. companies are coming to Germany. In the beginning, you have to raise venture capital, but then you can get matching no-interest loans from the German federal and state governments. Say you raise $5 million in venture capital, you get $15 million total." In fact, Ernst & Young's Crocker says, "the German government has, in a sense, bought a biotechnology industry. In the U.K., like the U.S., there is an effort to eliminate barriers, but there is still a hurdle. If the company gets over that, it will be reasonably strong. "In Germany, the barriers are so low, anybody can get in. So when the second round of funding—in the $5 million to $10 million range—comes, what will happen? If hundreds of companies are looking for that, there will be a crunch. Now, there are so many professors operating with government funding, they can just keep ticking along. But venturecapital providers will want their money back eventually." Venture capitalists will look to either an initial public offering or a sale of the business, Crocker adds. "Unless there is actually a company there that has developed a business, can you sell it to a large company? It is difficult to do—you are in 24
JUNE 12,2000 C&EN
the same position as with a university. A company can license more cheaply than buy, and if it is buying, it will want something more than just a technology." VO's Romanowski adds: 'There will be a time when the industry becomes saturated—it is not possible to have this number of newly founded companies
continue. There has to be a certain limit when we all will be confronted with companies dying, not succeeding in the market. Therefore, it is important that funding—whether public or private— goes to companies with sound business plans, based on careful thinking, goodquality patents, and so on."^
asia-pacific
Globalization Reaches Petrochemicals Asian industries join world trend toward bigger, multinational producers optimal size and sell their products at lower margins than in other parts of the world. Moreover, companies often don't he wave of consolidation that has run integrated upstream and downaffected the petrochemical indus- stream operations. Polyethylene plants, try in the U.S. and Europe is wash- for example, may be located far away ing up on Asian shores. In coming from a source of ethylene, a material years, local producers will merge and that is costly to transport. large multinational companies will Since 1997, there have been far fewer achieve a higher profile in the Asia- of these homegrown projects. Some Pacific petrochemical industry. These have folded, others have been shelved changes have been precipitated by the indefinitely. One example is Indonesia's Asianfinancialcrisis that began in July Trans-Pacific project. This integrated petrochemical complex, which was un1997. The region's petrochemical industry der construction in east Java, saw all has several unique characteristics. It construction work halted in late 1997 as has been dominated by local companies the Indonesian rupiah plummeted in that operate manufacturing sites of sub- value. The project's main sponsor was the Tirtamas group, Indonesia's leading cement producer. Now, Germany's BASF is concluding negotiations aimed at acquiring, from contractor Stone & Webster, the $1.7 billion in production equipment that the American engineeringfirmwas in the process of supplying to Trans-Pacific. BASF plans to install the equipment at a petrochemical complex of comparable size that it expects to build in Nanjing, China, before 2005. In Korea, debt-burdened Hyundai Petrochemical has been claiming that it hopes to sell its production assets to a foreign company. Samsung General Chemicals has been selling to foreign companies various parts of a petrochemical complex located near Hyundai's site in Daesan. Montell has acquired a 50% stake in the polypropylene operations of Daelim Industrial, which Sasano: Asian firms need common sense had merged with those of Hanwha in
Jean-François Tremblay C&EN Hong Kong
T
"^lii^^^^^i^^^P Mitsubishi Chemical is by far Japan's largest ethylene producer. • " Capacity
Thousands of metric tons
Idemitsu Petrochemical 911 Keiyo Ethylene 768 525 Maruzen Petrochemical Mitsubishi Chemical 1,698 Osaka Petrochemical Industries 500 504 Sanyo Petrochemical 785 Showa Denko Sumitomo Chemical 415 Tonen Chemical 515 Tosoh 527 Ukishima Petrochemicals 1,055 Source: Japan Petrochemical Industry Association
. . . but it doesn't make the global top 10 list Thousands of metric tons
Capacity 3
Dow-Union Carbide ExxonMobil Shell Equistar Chevron-Phillips Sabic BP Amoco Nova Chemicals TotalfinaElf EniChem
8,872 7,642 5,172 5,169 3,733 3,689 3,413 2,588 2,358 2,325
a Merger pending. Source: SRI Consulting
1999. In a consolidation move, LG Chemical sold its carbon black business to Degussa in 1998. And in India—although this is not a consequence of the Asian economic crisis—management of state-owned Indian Petrochemicals Corp. Ltd. (IPCL) will likely go to a Western company once negotiations over the sale of a 25% stake in IPCL are concluded. India's petrochemical industry is otherwise dominated by Reliance Industries, which runs integrated and world-scale complexes. For a number of reasons, the projects now going ahead in Asia mostly have a multinational oil or chemical company in the driver's seat In Singapore, ExxonMobil is completing construction of a $2 billion world-scale petrochemical complex centered on an ethylene facility with a capacity of 800,000 metric tons per year. ExxonMobil also recently completed construction in Thailand of a p-xylene unit with an annual capacity of 350,000 metric tons per year. The latter plant is making life difficult for the country's other aromatics producer, Aromatics (Thai-
land) pic, which reported a loss for the first three months of this year. In Korea, Dow is a 50% partner in a $250 million polycarbonate venture with LG Chemical. Malaysia provides another example. There, state-owned Petroliam Nasional (Petronas) is large enough to rank as a respectably sized oil and petrochemical company. But in the largest petrochemical projects in Malaysia, Petronas is a partner with foreign firms. Petronas has formed joint ventures with Union Carbide for an ethylene complex, with BASF for an acrylic and oxo-alcohol complex, with BP Amoco for an acetic acid project, and with Mitsubishi Corp. for an aromatics unit, among other firms. All projects are world scale. The central role that multinational petrochemical companies intend to play in the Asia-Pacific region is most obvious in the region's most promising market, which is China. There, *he six integrated petrochemical projects being negotiated all feature a large multinational petrochemical producer with a 50% stake. The foreign companies will see their bargaining position strengthen compared with that of their Chinese partner in future months. This comes because China has limited financial resources but is forced to shoulder a heavyfiscalburden as it restructures its state-owned sector. The larger role that foreign firms will have to play to get the projects moving forward will translate into more influence in the management of the ventures. Still in the process of arduous negotiations, both Shell and BASF are confident that their projects will be built before 2005. In Japan, the world's second largest economy and by far Asia's largest chemical market, the role of multinational chemical companies has been limited. However, change has taken place in the petrochemical industry in the form of numerous mergers. Companies have been either merging outright, or they have spun off and merged their downstream operations with those of their competitors. An effort to achieve critical mass is one of the reasons behind the mergers that have been taking place in Japan. None of the world's 10 largest producers of ethylene is Asian, according to Paul Bjacek, director of the World Petrochemicals Program at SRI Consulting, Menlo Park, Calif. Speaking at the Asia Petrochemical Industry Conference in Yokohama, Japan, in May, Bjacek showed that recent mergers
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asia-pacifïc have made the global market leaders even bigger. The combination of Dow and Union Carbide, when complete, will run nearly 8.9 million metric tons of global ethylene capacity. ExxonMobil operates 7.6 million metric tons of capacity. Both companies plan significant expansions in coming years. These planned expansions alone are larger than the entire ethylene production capacity of Japan's largest petrochemical producer, Mitsubishi Chemical. No significant ethylene expansion has taken place in Japan since 1992, but Sumitomo Chemical's partly owned subsidiary Petrochemical Corp. of Singapore added 515,000 metric tons of capacity in 1997. Asian firms will be forced to restructure their operations in coming years because of competitive pressurefrom"big and global" petrochemical companies, Tadahisa Sasano said at the conference. Sasano, senior adviser at SRI Consulting's Chemical Business Research Division in Asia, pointed out that there are precious few examples of Asian petrochemicalfirmsthat either are global lead-
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ers in their market segments or run world-scale operations. He singled out Taiwan's Formosa Plastics for the worldclass status of its plants in Taiwan and the U.S. and Shin-Etsu for its leading share of the global market for polyvinyl chloride. Among the changes that Asian chemical firms will have to address in their management, Sasano said, are needs for more mergers and acquisitions and for more regional cooperation between Asian producers. Sasano added that Asian producers should sell petrochemical products at higher than the cost of production. "It's common sense," he said, but he added that this was often not the situation in Asia. The Asian economic crisis has been the call to action that Asian petrochemical producers needed. But problems such as low prices, and therefore low profitability, had been plaguing the industry for years. Some of the largest Asian producers have been turning away from the petrochemical business, seeing little prospect for profit improvement in the future. Taiwan's Chimei, which is the world's largest producer of
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the engineering plastic acrylonitrilebutadiene-styrene (ABS), plans to stop investing in Taiwan's petrochemical industry. Within three years, Chimei's electronic component business will be larger than its ABS business. The deterioratingfinancialcondition of Japanese trading companies is another factor behind the fading act of Asian petrochemical producers. In past years, trading companies—soga shosha—played a significant role in helping projects sponsored by local firms go forward. Since 1997, sogo shosha have been much less active, even as multinational chemical corporations were expanding their clout in Asia (C&EN, April 3, page 23). Multinational companies make no secret of their eagerness to expand their market shares in Asia. At a recent press briefing in Hong Kong, BASF stated that it hoped to double its share of the total Asian chemical market to 2% within the next decade. This eagerness by Westernfirmsis not lost on some members of thefinancialcommunity. France's Société Générale has been expanding the staffing of its project finance team since 1998. Robert A Johnson, director of projectfinance,says the Hong Kong projectfinanceteam has increased from four employees to 10, and the group will double in size within two to three years. Asked whether he expects business to increase, he replies, "Absolutely." But he points out that there is less competition in the projectfinancesector in Asia since the 1997 crisis. Johnson says his firm specializes in serving the needs of multinational corporations. The financial crisis of 1997 slowed down the growth in petrochemical demand in Asia. Nowadays, although prices are still depressed and profitability remains low, economic recovery is firmly under way and petrochemical demand is growing rapidly. Now is the time to build for companies that want to benefit from the next upswing in prices. But many Asian companies have seen theirfinancialposition savaged in the last three years. The multinational petrochemical companies are by default filling the vacuum, building and acquiring assets throughout the region. Some Asian companies, such as Taiwan's Formosa Plastics, India's Reliance Industries, and Japan's Shin-Etsu, remain formidable players as they continue to grow rapidly. They confirm the rule that, in the global petrochemical industry these days, the big are getting bigger, and Asia is no exception.^
