Reunification boosts German chemical industry Patricia L. Layman, C&EN London
The past year has been an eventful one for the German chemical industry. There was the reunification of Germany, which led at one point to a hassle with the government over pharmaceuticals pricing. There was the Persian Gulf War, which disrupted the industry's costs and prices and which led to unfounded charges of supplying raw materials for chemical weapons. And there was new environmental legislation to cope with, as well as continuing efforts by the industry to improve its image with the public and legislators. All of these have proved particularly significant for this German industry. Even before reunification, the German chemical industry was by far the largest in Western Europe. It is the third largest behind the U.S. and Japan, with sales of just over $100 billion and 592,000 employees in 1990. And the industry has the three biggest chemical companies in the world—BASF, Hoechst, and Bayer. Moreover, thanks to the spillover demand from eastern Germany, the industry grew 1.4% in 1990 over 1989, in a year marked by slowdowns throughout the Western European industry. Some 56% of the industry's sales are within Germany, and last year they rose 4.5% over 1989. In contrast, its sales outside Germany were down 2.3% from the year-earlier level. Similarly, chemical imports into Germany—$32.7 billion—were up 3.5%, while exports—$51.8 billion—slipped slightly, 1.8%, from 1989. Hermann J. Strenger has been chairman of the board of management of Bayer, one of the German big-three chemical companies, since June 1984. He was elected president of the German Chemical Industry Association, the Verband der Chemischen Industrie (VCI), in October 1989, taking the helm on Jan. 1, 1990. A year and a half into his term gives him an excellent vantage point to look back not just at what has happened to Bayer, but to the entire industry during that time.
" T h e German chemical industry over 1990, and production up 2%. did somewhat better than the other Points out Strenger, "If this hapcountries' [industries]," Strenger pens, it will be a good year. I am not says, "because of the reunification of convinced it will happen, because of Germany. That led to a positive im- the negative factors. My concern: pact in our overall economic situa- F i r s t - t h r e e - m o n t h figures s h o w tion, and the chemical industry did profit margin erosion is continuing; participate. Those companies that 1991 will be a difficult developbenefited the most were primarily ment." those in consumer-oriented prodNonetheless, the year has started ucts and specialties." well enough that at a VCI press conHowever, he adds, the overall sit- ference in Hannover, Germany, in uation in 1990 was worse than in April, Carl H. Krauch, one of the as1989. He cites currency problems, sociation's directors, could say that with the strong deutsche mark lead- in the first quarter of 1991, chemical ing to fiercer competition from com- sales grew about 3%, and that prices panies whose goods were priced in were up 2%. Chemical production weaker, cheaper dollars. The eco- held about the same level as last nomic situation was bad in the U.S., year. the U.K., and throughout the ScanOne weak spot in Germany's dinavian countries, and, toward the chemical industry, however, is in end of 1990, the economies of some the former East German states. Proother Western European countries, duction there dropped 33% in 1990. such as Italy, France, and Spain, also Part of the falloff was the result of weakened. p l a n t s h u t d o w n s . According to The industry also had to cope Krauch, the three major chemical with considerable cost increases, es- combines of eastern Germany— pecially in the fourth quarter, as the Chemie A.G. Bitterfeld-Wolfen, LeuPersian Gulf conflict led to drastic na Werke, and Buna—have shut increases in prices of raw materials, down approximately 80 to 100 proparticularly naphtha. "All these fac- duction units. Production at Buna, tors led to profit erosion, even though we had production growth of 2%," he says. Looking to 1991, he sees the main conditions shaping the year as unchanging or worsening. The economies of the U.S., the U.K., and Scandinavian countries are unc h a n g e d , w h i l e t h o s e in Spain, Italy, and France are worsening. "On the other hand, from our standpoint, there are two positive trends which may help us," he adds. First, the weakening of the deutsche mark in comparison with the U.S. dollar and the Japanese yen makes G e r m a n - m a d e products more price competitive. Second, there is a positive trend in raw material prices—a sharp drop since February. In fact, the chemical industry in Germany is forecasting a rise in sales of 4% this year Strenger: goals of VCI must approach CEFIC's June 3, 1991 C&EN
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Business for example, fell from 41,000 metric tons in 1989 to about 8600 metric tons last year. Prior to reunification, the chemical industry in former East Germany was that area's largest employer, Strenger says, with nearly 330,000 workers. "The whole structure there has to be changed, restructured," he says. "We must be realistic. This will be a long lasting, and for employees, a painful and expensive process. Many production process [plants]— especially those based on lignite chemistry—must be closed, modernized, and all. They have to become internationally competitive. "Many plants are or will be taken over by western companies, mainly from [former] West Germany, or in cooperation with others. To give an idea of the scale of the restructuring and shrinking, according to our knowledge, 220,000 are employed n o w . After r e s t r u c t u r i n g , only 80,000 to 100,000 will be employed." Still, he adds, "I am optimistic. After five years, eastern Germany ought to have a smaller, restructured, effective, and internationally competitive chemical industry." VCI has established an eastern section, located in Berlin, to coordinate activities with companies in the eastern states. This has been a major benefit for the chemical industry there, with companies automatically benefiting from the association's infrastructure. For example, the association is conducting seminars for managers from eastern Germany. The seminars focus on teaching these managers marketing, corporate planning, administration, environmental protection methods, and similar skills that they currently lack. And although VCI has no official contact with the Treuhandanstalt, the .German government agency charged with privatizing industry in the eastern states, it is encouraging its members to establish links with their eastern counterparts. According to Strenger, Chancellor Helmut Kohl last autumn appealed to the western German chemical industry to help the Treuhandanstalt overcome its difficulties by lending top managers for stints with the agency. "Reaction was absolutely positive," he says, and probably 50 14
June 3, 1991 C&EN
to 60 people have been sent on temporary assignment to the agency. Bayer alone sent seven top people— board-level executives, Strenger says, emphasizing the senior level of the individuals involved. Of c o u r s e , r e u n i f i c a t i o n has caused some hitches and problems for the chemical industry. The most publicized problem has been the industry's fight with the government over the pricing of pharmaceuticals to be sold in the eastern states. As part of the reunification agreement, pharmaceuticals manufactured in western Germany during the next three years would be discounted 55% to cover the anticipated deficit of health care costs. At one p o i n t , pharmaceutical companies were refusing to sell drugs in eastern Germany in a delivery boycott. As a result, eastern Germans were complaining about being treated as second-class citizens, and the Christian Democratic Party's social services committee called the boycotters "the robber barons of German unity." "We did oppose it: 55% from our costs, we can't afford," argues
There are two positive trends: the weakening deutsche mark and falling raw material costs Strenger. The industry was also concerned the agreement would have had disruptive effects on other pharmaceutical markets in Europe because of the big price differentials. The impasse was finally ended by a negotiated settlement of a complex solution. Under the settlement, the pharmaceutical industry, including drug wholesalers and pharmacists, over the next three years will help the government, at least partly, cover the deficit in health care funding in eastern Germany. During the three years, the pharmaceutical industry will fully fund the health care funding deficit up to a certain level and split 50-50 the costs over that level with the government. For the first year, the level is 500
million deutsche marks—about $300 million; for the second year, the level is 1 billion marks, and for the third year, 700 million marks. "After that, we hope things will be back to normal," Strenger says. "It is a sacrifice, but better than the 55% discount." At the same time the chemical industry was working out a settlement of the pharmaceuticals imbroglio, it found itself d e f e n d i n g against charges of helping Iraq build its chemical w e a p o n s arsenal. The charges were particularly galling for the association, which two years ago took the unprecedented step of expelling a member, Imhausen Chemie, accused and later convicted of supplying Libya with chemical weapons materials. Since that time, VCI has further strengthened its internal guidelines, and has begun working with international law enforcement authorities to prevent misuse of chemicals for weapons and illegal drugs. "We feel the responsibility for our products," says Strenger. "We know many can be misused for chemical weapons and drugs." Among other actions, the association adopted its own strict measures earlier than German legislation. These voluntary measures even now go beyond the official laws. "We are supplying these chemicals only to customers in Germany or abroad who are absolutely reliable, with whom we have had business contacts for years," Strenger explains. "And those customers must sign an end-user's certificate pledging they will use the chemicals only for normal applications." And, as a result of this system, he adds, no chemical company in VCI, for the time being, is under suspicion or is accused of misusing products. "We are cooperating with government legislation, but on the other hand, we are saying: We can only have success if there is an international approach. There have to be laws to handle these products, to ban misuse of these products, that will be recognized by all countries." The association is working not only with the German federal government, but also with United Nations authorities in Geneva. The work with the UN has included a
novel experiment in opening plant facilities for inspection. In March, Hoechst volunteered to let its Frankfurt-based complex be "raided" by chemical weapons experts and German government officials to test proposed verification procedures outlined in the UN's Geneva convention on chemical weapons. Essentially, the purpose of the experiment was to answer the question of whether such inspections would be effective at large sites. Although the industry appears to be working well and voluntarily with officials on the issue of chemical misuse, the picture is not quite the same on environmental issues, an area that can give industrialists a major headache. As Strenger points out, during the past year Germany—on both federal and state levels—has seen a rapid increase in environmental laws and regulations. In fact, the industry is now governed by more than 2000 such laws and regulations, a figure that has led some to call this overkill in respect to environmental protection. "The legislation is more and more dogmatic in character, not aimed at realistic needs," he believes. "Environmental legislation does affect our cost structure," he points out. "About 15 to 20% of our investments go to environmental protection. These investments create running costs. To run these environmental controls and so on takes about 7% of sales—that is equivalent to the amount of spending on research and development at Bayer, for example." The association is continually pressing the government to ensure their efforts harmonize with international rules, especially those for the European Community. "We are convinced that many of these laws—for example, reducing sulfur dioxide or nitrogen oxides—should be not only in Germany, but international. We n e e d i n t e r n a t i o n a l legislation," Strenger notes. Additionally, the industry needs legislation based on science, not on political ideas. Year after year, the industry has invested billions of deutsche marks in environment protection and safety. In 1989, for example, about 7 bil-
lion marks were spent for investment and operating costs, with the result that many in the industry consider the German standards global models. In fact, the German chemical industry sees the Chemical Manufacturers Association's Responsible Care program for environmental protection as almost an upstart. However, notes Strenger, "We welcome the Responsible Care program initiative. On the other hand, since 1986 we in Germany have had envi-
Preventing chemical misuse needs an international approach, with laws that are recognized by all ronmental protection guidelines. A comparison of both concepts shows a more or less overlapping of the two programs. At our last VCI meeting, we decided to check how the two concepts can be harmonized. I don't see any difficulties. "I'm realistic—the term responsible care will be accepted worldwide by the public, and not only in English-speaking countries. However, I doubt if the content of the program will be exactly the same in every country." Waste disposal, wastewater, and carbon dioxide reduction are the subjects of three sets of laws looming in Germany that will have an impact on the chemical industry. " W e ' v e m a d e calculations; t h e chemical industry in Germany will spend 1.5 to 2 billion deutsche marks per year [up to $1.25 billion]. We are still in discussions with the government and we hope they will listen to us." Until the middle of 1990, there was no German federal law covering genetic engineering, and various states either passed series of conflicting legislation or refused to pass any legislation at all, choosing to wait for federal action. The result was that some of the major German companies decided to establish biotech laboratories outside the country. Last year, however, after long and
emotional discussions about genetic engineering, a federal genetic engineering law was passed. With passage of the law, Germany joins Denmark as the only countries in the world with special biotechnology and genetic engineering laws. "We are happy we have the law and regulation," Strenger says. "We can live with this law. It results in Germany becoming again more attractive for research and production of biotechnological products. This is a very promising, important field, and we can't ignore it. We can't afford to miss this opportunity." And since the genetic engineering law was passed, at least four of VCI's member companies have obtained approval to build production sites for biotechnology. Lobbying on environmental legislation and presenting the industry's case on various subjects before the federal and state governments, for example, are continuing processes. Similarly, each VCI president must work to bring the association's goals nearer to those of the European C h e m i c a l I n d u s t r y C o u n c i l (CEFIC), the European federation. "Let's be realistic," Strenger says. "With the coming European Community single market, the role of CEFIC is already growing—dealing with the EC parliament, the commission, and other European governmental bodies. Our expression in German is, That's where the music plays.' The special role for CEFIC there is to represent the chemical industry throughout Western Europe. There must be more communication, more coordination from country associations." Also, there must be coordination with the public. "It is my firm belief that we can only make progress in our work if we can convince the population that we feel and exercise our responsibility toward our products," Strenger adds. "We have to convince the population that the advantages, by far, are far higher than certain risks that do exist. It would be wrong, however, to ignore those risks. There are many, many problems still to be solved—but they can only be solved by the help and with the cooperation of the chemical industry." D June 3, 1991 C&EN
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