BASF
BUSINESS
posted increases in 2009 were helped technicians review in large part by a fermentation their purchase of experiment. research-intensive businesses: Dow Chemical bought Rohm and Haas, and BASF bought Ciba. R&D and capital spending don’t guarantee better sales and earnings, William F. Banholzer, Dow’s chief technology officer, tells C&EN. “There’s no one road to Mecca,” he says. But as the economy improves this year, chemical industry executives expect to enjoy a payoff on their future-oriented gambles. In a recent conference call with investors, Andrew N. Liveris, Dow’s chief executive officer, noted fourth-quarter sales volumes in China were up nearly 60% compared with the year-ago quarter. Volumes were up 30% in India and Russia and 20% in Brazil. Confident in the long-term business outlook, Dow will boost its R&D budget this year by more than $100 million to $1.6 billion. If all the projects under way are successful, Dow could realize an additional $28 billion in revenues, Liveris says. Stronger economic activity in developing countries also figured into other executives’ decisions to boost capital investments abroad. “In Asia—and in China in particular—the capital spending increases are to meet demand,” Charles E. Bunch, CEO of chemical and paint maker PPG Industries, said in his fourth-quarter conference call with investors. The single biggest capital project in PPG’s $300 million budget this year, Bunch noted, is a 60,000-m2 auto primer resins NEW THINGS BREWING BASF lab
PLANNING A COMEBACK Chemical firms slate a 9.4% HIKE in capital spending and a step-up in R&D spending of 2.1% MARC S. REISCH, C&EN NORTHEAST NEWS BUREAU
LAST YEAR at this time, the economic
$8.3 billion. The improvement marks a turnaround from last year, when the group cut capital expenditures by 27.5% to $7.6 billion, ending a string of double-digit increases that began in 2005. Seven companies plan a modest 2.1% boost to their research budgets in 2010 to a combined $5.4 billion. And although the increase follows a 3.8% spending rise in 2009, four firms actually cut R&D last year. Two of the three companies that
outlook was dire. Chemical firms were slashing capital spending plans, and most pruned research spending as well. But now, as the global economic outlook brightens, so too have chemical firms’ future-oriented spending plans, according to C&EN’s annual survey. Fifteen U.S.-based firms say they will ratchet up spending on new plants and equipment by 9.4% this year to a combined
RESEARCH OUTLAYS
On average, seven international chemical firms plan to increase spending by 2.1% this year
BASFg Cytec Industries Dow Chemical DuPont Eastman Chemical Lubrizol NewMarket
$ MILLIONS
2004
2005
2006
2007
2008
$1,374 40 1,022 1,333 154 190 33
$1,483 69 1,073 1,336 162 205 65
$1,779 74 1,164 1,302 167 206 70
$1,923 76 1,305 1,338 156 219 77
$1,888 82 1,310 1,393 158 221 82
TOTAL ANNUAL CHANGE
$4,146 -1.3%
$4,393 6.0%
$4,762 8.4%
$5,094 7.0%
$5,134 0.8%
PLANNED 2009a
na na na na 150 214 na
ACTUAL 2009b
PLANNED 2010c
CHANGE 2008–09d 2009–10e
R&D SPENDING AS % OF SALES 2008 2009f
$1,951 75 1,492 1,378 137 212 86
$1,923 75 1,600 1,400 142 212 90
3.3% -8.5 13.9 -1.1 -13.3 -4.1 4.9
-1.4% 0.0 7.2 1.6 3.6 0.0 4.7
2.2% 2.3 2.3 4.6 2.3 4.4 5.1
na 2.7% 3.3 5.3 2.7 4.6 5.7
$5,331 3.8%
$5,442 2.1%
3.8%
2.1%
2.7%
4.0%
a February 2009 estimate. b February 2010 estimate. c Budget for 2010. d Actual 2008 to February 2010 estimate. e February 2010 estimate to 2010 budget. f February 2010 estimate as a percentage of estimated 2009 sales. g Monetary data for all years converted at the 2009 average exchange rate of $1.00 U.S. = 0.718 euros. na = not available. SOURCE: C&EN surveys
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FEBRUARY 15, 2010
the business of chemistry is increasingly global in nature, chemical firms On average, 15 chemical firms plan for a 9.4% rebound in worldwide spending this year have also internationalCHANGE PLANNED ACTUAL PLANNED ized their research. At $ MILLIONS 2004 2005 2006 2007 2008 2009a 2009b 2010c 2008–09d 2009–10e a press conference late Air Productsf $706 $930 $1,261 $1,055 $1,085 $1,085 $1,179 $1,100 8.7% -6.7% last month, Andreas Albemarle 58 70 100 99 100 na 101 100 1.0 -1.0 Kreimeyer, BASF’s reCytec 89 105 103 115 196 na 194 150 -1.0 -22.7 search executive direcDow Chemicalg 1,333 1,597 1,775 2,075 2,276 1,100 1,410 1,600 -38.0 13.5 tor, said that in 1988 only DuPont 1,232 1,340 1,532 1,585 1,978 1,600 1,308 1,600 -33.9 22.3 20% of BASF researchEastman Chemical 248 343 389 518 634 375 310 263 -51.1 -15.2 ers worked outside of FMC 85 94 116 115 175 170 161 125 -8.0 -22.4 the firm’s headquarters H.B. Fuller 31 25 20 21 20 30 23 25 15.0 8.7 in Ludwigshafen, GerW.R. Grace 63 81 119 137 132 150 94 135 -28.8 43.6 many. Today, 40% do, Lubrizolh 133 137 131 183 203 165 140 280 -31.0 100.0 including 1,600 in the Nalco 92 75 93 115 133 123 102 145 -23.3 42.2 U.S. and 300 in Asia. NewMarket 15 18 26 31 32 na 39 40 21.9 2.6 Like BASF, most U.S.PPG Industries 244 288 372 353 383 na 240 300 -37.3 25.0 based chemical firms Praxair 668 877 1,100 1,376 1,611 1,450 1,352 1,400 -16.1 3.6 have globalized their 3M 937 943 1,168 1,422 1,471 1,030 903 1,000 -38.6 10.7 R&D efforts. Dow, for instance, conducts R&D TOTAL $5,934 $6,923 $8,305 $9,200 $10,429 $7,556 $8,263 -27.5% 9.4% at 41 sites worldwide, ANNUAL CHANGE -2.4% 16.7% 20.0% 10.8% 13.4% -27.5% 9.4% including ones in China a February 2009 estimates. b February 2010 estimates. c Budget for 2010. d Actual 2008 to February 2010 estimate. e February 2010 estimate to 2010 budget. f Fiscal year ends Sept. 30. g Acquired Rohm and Haas in 2009. h Acquired Noveon in 2004. na = not available. and India. DuPont SOURCE: C&EN surveys has more than 75 R&D locations worldwide, plant in Zhangjiagang, China, scheduled spending rises, a smaller share of futureabout half of which are outside the U.S. So to open in 2011. Capital spending in North oriented budgets tends to go to R&D. This it makes sense to add BASF, the world’s America and Europe are tied more to cost year, 47.2% of future-oriented spending will largest chemical firm and largest corporate reduction, productivity, and maintenance likely go to research, down from 49.8% in funder of R&D, to C&EN’s annual survey. projects, he said. 2009, the decade high. The decade low was Budgets often change over the course 37.9% in 2008. of a year. Companies surveyed last FebruACCORDING TO C&EN’S survey, the The number of firms ready to provide ary expected to cut 2009 capital spending overall trend for future-oriented spendinvestors and the press some insight into by 25.1%. However, firms participating in ing is much brighter than it was a year ago. future-oriented spending varies from year C&EN’s survey this year say that as they For the six firms—Cytec Industries, Dow, to year. Last year, as economic circumdealt with a bruising recession they ended DuPont, Eastman Chemical, Lubrizol, and stances deteriorated, 13 U.S. firms provided up slashing capital spending by 27.5%. In NewMarket—that supplied both R&D and insights into their 2009 capital spending contrast, last year’s group expected to whitcapital spending data, combined budgets plans and six firms provided them for R&D. tle R&D spending by 1.8%. This year’s group increased 9.9% to $7.5 billion. This year, 15 U.S. firms provided forecasts says they actually increased R&D by 3.8%. Although that figure is up from 2009, it for capital expenditures and six revealed Of the 15 firms surveyed for their 2010 is down from the levels of 2007–08. The their R&D plans. capital spending plans, 10 plan to increase six firms’ combined spending on R&D and New to this year’s R&D table is BASF. As spending on new plants and equipment, capital projects hit their decade high of $8.6 billion in 2008. The group’s futureoriented spending hit a decade low of $5.8 CAPITAL NOTIONS billion in 2004. After falling last year, spending rises in 2010 and stays the same as percentage of Despite the increase in capital spending sales this year, the ratio of investment in new $ Billions % of sales 8 12 equipment to investment in research is lower than it has been in some recent years. 7 10 Budgets for 2010 direct 52.8% of funds to 6 capital projects, well off the decade high of 8 62.1% in 2008. The decade low was in 2009, 5 6 when 50.2% of future-oriented funds were 4 4 directed to capital improvements. 2000 01 02 03 04 05 06 07 08 09 10 2000 01 02 03 04 05 06 07 08 09 10 Funding devoted to R&D does not flucNOTE: Values are for 14 chemical firms listed in the table above. Excludes Nalco because 10 years of data are not tuate as much from year to year. So when available. SOURCES: C&EN surveys and estimates the economic outlook improves and capital
CAPITAL INVESTMENTS
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BUSINESS
and five plan to reduce it. This compares with just four that increased spending in 2009 and 11 that cut it. Lubrizol, which plans to double capital outlays to $280 million, says the centerpiece of its plan is a new lubricant additives plant in South China within the Zhuhai Gaolan Port Economic Zone. The Zhuhai plant, announced in 2008, is part of a 10year plan to increase global additives capacity that Lubrizol placed on hold in 2009. Many other firms are restoring projects that were postponed because of economic conditions. After cutting its capital spending by 33.9% in 2009, DuPont says it plans to increase it by 22.3% this year to support growth opportunities it believes are now available. C&EN predicts that the survey group’s capital spending as a percentage of sales will be 5.1% this year, the same as in 2009. The estimate assumes group sales will increase 8.0% in 2010. The ratio hit a 10-year high in 2000, when spending on capital projects reached 6.9% of sales. The decade low occurred in 2004, when the group spent only 4.5% of sales.
“You can’t jerk R&D around during up-and-down cycles.” group’s R&D spending as a percentage of sales will be 3.8%. The 10-year high was 5.0% in 2000, and the low point for the decade was 3.1% in 2008. BASF is not included in these estimates because 10-year data are not available. Because inflation inevitably wears away the purchasing power of dollars devoted to research, the $3.5 billion devoted to R&D by the six U.S. firms represents just $2.8 billion in constant 2000 dollars. The inflation-adjusted R&D spending high for the decade was $3.0 billion in 2000, and the low was $2.5 billion in 2003. MAINTAINING a commitment to R&D
during the economic downturn was a challenge for most chemical firms. Uma Chowdry, chief science and technology officer at DuPont, tells C&EN that “when the economic tsunami hit us in the fourth quarter of 2008 and sales volumes were dropping
RESEARCH COMMITMENT
R&D spending is slated to increase this year but may slip as a percentage of sales $ Billions
% of sales
4.0 3.5
6
$ Current
3.0
5 4
2.5 3 $ Constant 2000 2.0 2 2000 01 02 03 04 05 06 07 08 09 10 2000 01 02 03 04 05 06 07 08 09 10 NOTE: For six chemical firms listed in the table on page 30. Excludes BASF because 10 years of data are not available. SOURCES: C&EN surveys and estimates, White House Office of Management & Budget
Of the seven firms surveyed for their R&D spending forecast, four plan to increase spending in 2010, two plan no change, and one plans a modest budget cut. This compares with four that cut expenditures in 2009 and three that increased it. Dow plans the largest R&D boost among the group in 2010. Banholzer says the firm has reallocated “a ton of money” from research tied to businesses that don’t have good growth opportunities, such as styrene-butadiene lattices used in carpet backing, to seed and crop protection research. Agriculture is getting additional R&D funding that had been going to nowdivested businesses, Banholzer notes. In 2010, C&EN estimates, the survey
like a rock, our CEO, Ellen Kullman, made a clear commitment to innovation.” Despite temptations to scuttle longterm programs as the firm hemorrhaged cash during the downturn, “we stayed the course,” Chowdry says. “You can’t jerk R&D around during up-and-down cycles.” Owing to cost-containment measures such as freezing travel and dropping the use of consultants, DuPont’s 2009 R&D budget was down 1.1% to $1.4 billion compared with the year before. Like Dow, the firm shifted funding away from its less promising businesses, such as coatings, to agricultural and nutrition businesses, where the growth potential is greater, Chowdry says. In 2010, DuPont plans a slight increase WWW.CEN-ONLINE.ORG
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in R&D spending. Right now, the firm is assessing its R&D portfolio for projects with the greatest potential. “The capital is there,” Chowdry points out. But especially when money is tight, DuPont research managers need to show their projects can be expected to make a tidy profit to continue to receive funding, she notes. For Dow, the economic challenges for R&D were no less daunting in 2009 than for DuPont, but they were complicated by the addition of Rohm and Haas’s more than $300 million-per-year research organization to Dow’s. Combined, the R&D budgets of Rohm and Haas and Dow were $1.6 billion in 2008. Dow reported that the enlarged company spent $1.5 billion on R&D in 2009. Banholzer points out that despite the economic downturn, “R&D was actually pretty well protected.” The 2009 budget took into account the elimination of redundant overhead and included some repositioning of the combined organization. For instance, Dow moved electronicsrelated research from the U.S. to Asia to be closer to customers. The move led to some “temporary” spending reductions because R&D costs are lower in Asia, Banholzer says. Dow also consolidated Rohm and Haas researchers in Shanghai at a new Dow facility there and sold the nearby Rohm and Haas facility to Dow Corning. The majority of Rohm and Haas scientists remained with Dow, Banholzer notes, adding that “there was no reduction of scientists or repositioning of labs that Rohm and Haas wasn’t doing anyway.” The combined R&D organization, he says, is down about 200 employees, mostly from attrition, and now has about 7,000 full-time scientists. Dow’s planned $1.6 billion research budget this year is second only to that of BASF. But Banholzer emphasizes that he’s not in a spending race. “My objective is not to spend more money than anyone else but to make sure I’m more effective than anyone else,” he says. The recession forced everyone to think differently about future-oriented spending. “If there ever was a year to be shortsighted—and we weren’t—2009 was it,” Banholzer says. The objective in 2010 and beyond, he says, is “to create value for ourselves and our customers.” ■
