PITTSBURGH (July 2, 11:10 a.m. EDT) — Growing plastics in the Americas is the reason Ian Paterson goes to work every day.
A 25-year Bayer AG veteran, Paterson took the helm of Bayer Polymers' Americas business unit in November. Paterson, a native of Scotland, most recently had served as leader of Bayer Polymers' business in Brazil.
A recent global reorganization left polymers as the largest of Bayer's four operating units, accounting for more than 36 percent of total sales. The new polymers unit — including plastics like polycarbonate and ABS, as well as polyurethane, rubber and coatings raw materials — had 2002 sales of 10.8 billion euros ($11.6 billion). Tough business conditions resulted in a loss of $132 million in 2002, as sales fell more than 2 percent.
The unit employs 22,000 at 120 sites worldwide, but is cutting 5,000 positions to improve operating efficiency and boost profit.
Paterson, who turned 50 last month, sat down in his Pittsburgh office recently to field questions on issues facing his business and the industry in general.
Q: Are you seeing any changes in economic signals as we hit the midpoint of 2003? Any reason for increased optimism?
A: We're still waiting for the corner to be turned. In the first quarter, globally, Asia was doing pretty well, but it calmed down. Whether that was driven by SARS or what, I don't know. On the other hand, the feeling we're getting in [late May] is that Asia is slowly starting to come back. There's no real reason not to expect double-digit growth in that region.
Mexico and south in the Americas did pretty well in the first four to five months [of 2003], but North America and Europe have really been pretty disappointing so far this year. There was a lot of talk that there was going to be a consumer-led recovery, but then we had problems in Venezuela and Iraq that dramatically increased prices of raw materials like natural gas and gasoline and so forth. We follow consumer confidence data in the U.S. and it's been up and down. It's fair to say business in North America has been disappointing. It's not growing as robustly as we had thought.
If you look at the auto industry, production must soon start to follow sales. Otherwise, the car companies are just building inventory. The [auto] industry seems to have sales diminishing but production isn't falling by the same degree. The good news there is that our penetration into automotive is increasing, giving us more pounds on each car. It's still good to have underlying growth and incremental increase in penetration, but the automotive industry is a bit of a worry.
Going into the wider market, like domestic appliances and electrical/electronic, people aren't rush-ing out to buy refrigerators and washers and dryers. The truth is that in spite of what the Bush administration is doing now with tax cuts, that if you look at the impact of those cuts on every individual as far as gas and energy prices go, people don't have any more money in their pocket this year than they did last year. On a personal level, I was pretty mortified when I saw my gas bills this year. And people are paying huge amounts of money for gasoline. The price got close to $2 [per gallon] here in Pittsburgh. You look at the impact that has on your pocket and you say you'll wait another year to buy a refrigerator or whatever.
The end of the economy that is holding up is housing starts. It's a little surprising, but I suspect that's because people can borrow money so cheaply. If ever there was a time to trade up from a small house to a bigger house, this is it. We're seeing positive impact there in the polyurethane side of the business in insulation. That part of the business has held up better than expected.
Q: Has the economic turndown caused a change in what processors expect from a material supplier?
A: What a lot of customers have done is cut their overhead and say we don't have certain in-house services anymore, and they want the [material] supplier to undertake that. But the situation we've reached now is that we're not always in position to be able or willing to do that. We can't compete with the lowest price and offer premium services.
Everybody wants to push inventory down the chain and everybody wants to improve cash flow and free up working capital. We have ongoing discussions about the cost of doing business, the price of production. There's an increasing desire on the customer's part to push inventory liability back down the channel. In terms of technical service and support, customers want mold-flow analysis and [computer-aided design and engineering]. They're saying they don't have the people who used to do that anymore and want you to do it.
But we've trimmed our spending also and we have to say we can't do it or, if we can, we have to charge an hourly rate. We're being asked to give creatively to the customer. We need to come up with new ideas and find ways to increase the whole cake of market, the size of the market. And we're doing that with “ideation” [market development] groups where we're investing in our future. We're not just talking about what we'd like to happen. We're willing to put some risk equity in this area and grow the total business. Our whole Fantasia [custom color] exercise is starting to grow now. We're getting a lot of inquiries in that area. At the beginning, it was kind of, “Let's see what happens if we offer this.” We put a lot of time and effort and brain activity into that. We're glad we did it.
Q: Has there been a change in the inventory situation as a result of customers buying resin more frequently or buying in smaller amounts? Has that affected Bayer's production?
A: There's been some element of that, where people are saying they want to buy in weeks' amounts instead of months' amounts. But we can't produce our products in smaller amounts. If we do, we lose the economy of scale that we need. A lot of our production is continuous production, not batch production. If we could reduce it, we'd have higher costs of production, which would make us uncompetitive.
So we're telling customers that if they're not buying in large amounts, there's a distribution channel available to them for smaller quantities. It's like how you can choose to shop at Sam's Club or Wal-Mart. If I'm willing to buy a three-month supply of kitchen towels, I can get them cheaper at Sam's Club than if I get them at Wal-Mart and buy two, which is what I need for the next week. It's the same in business. People have to go to the appropriate channel to get what they want.
We're working very hard to understand inventory through the complete supply chain. We have to know what the automakers and [original equipment manufacturers] are doing and we're trying hard to improve our forecast factor. Our production isn't like a tap — you can't turn it on and off. It takes weeks to bring a major chemical plant back on line if we take it down. The best way to control it is to make new discipline in the industry. Customers commit to what they want and we'll commit to supply it.
Q: What about the impression that, because of their size, companies like Bayer, BASF, DuPont and Dow aren't well-positioned to meet some specific requests from customers?
A: We're working to get to a situation where we offer a tailored service approach to the market. We want to understand what customers need and what they value. The big [material] players are all very credible, very capable companies. We have to understand if customers are willing to pay a premium for services or if they're willing to give us a larger share of their business in return. An hourly rate from us can be cheaper than if a customer went to an independent third party.
We have facilities to do weather testing and all sorts of things and we wonder if we should be doing that. We should only be doing it if the market says it wants it, not because we think it might be nice to have.
Q: How does a company of Bayer's size approach product differentiation? It's not like you can stick your head out the window and yell out to the plant to get them to change a production run.
A: We define our business through three channels to the marketplace — solutions, materials and systems. Each customer has been mapped into one of those three. Those three align with end-use industries and processes as well. Injection molding falls into systems, for example. Within injection molding, we've mapped all of our customers and potential customers.
Q: Has Bayer's customer turn-over rate been affected by the economy?
A: It's fair to say there's a lot of stability in those situations in this industry. Most suppliers and processors are in business for the medium term and long term, not the short term. There's some quarterly change, but not much. That hasn't changed.
Q: What about keeping a focus on R&D? It must be tempting to look at R&D costs and wonder if that's an area you can cut.
A: One of the key issues we have is to just stay focused on R&D. Focus is a word I use heck of lot. You have to look at what the market wants, look at what we can afford to do and make sure your budget is very focused on getting the returns you want in the market. It's fair to say that in the past we did a lot of research that was being done just because it was being done. To be honest, maybe too large a portion of what was being spent was in very speculative areas.
We have essentially a “Stargate” process in place, where we define a project in the beginning and say, “This is our expected time scale, these are the results needed and this is the expected output.” What we try to do now is really monitor that. Every three to six months we sit down and look at projects and ask if we're on scale to reach our objective. Are we overspending or not? We have to be quite brutal and say if something's not going to happen.
But you have to realize some R&D projects run five, eight, 10 years. Some projects you still have to go ahead with. But we're trying to be less carefree about it. We still maintain some special areas that are seed for future “blue-sky” research. But we were also doing too much research in areas we'd never get payback from.
Q: Has there been a change in direction in Bayer's R&D as far as moving back toward more replacement of metal and other materials, instead of intermaterial competition with other plastics?
A: Resin makers need to grow the total size of the business. Some of our products are going to see market growth at [gross domestic product] or less and that's never been the case in polymers. Some products are pretty mature. If that's the case, we have two possibilities. We can squabble amongst ourselves or we can grow out and be more positive. If the cake gets bigger and goes beyond GDP growth, it's better for all of us.
In metal substitution, with our semicrystalline materials and nylon, there's a lot of hybrid activity. We've seen a lot of success with these in automotive. We have a dozen programs running in North America right now, when two years ago we had none.
Everyone is very focused on the auto industry but there are [material replacement] possibilities in other areas like aerospace and garden equipment. There are a lot of tractors out there. Look at domestic durable goods, appliances, any place where there's something made out of metal we have to ask if there's a way to replace it with plastic or a combination of plastic and metal. Customers see the advantage either where there's lighter weight or where they can do fancy things with coloring like Fantasia or where they can show actual physical benefits. A combination of plastic and metal may be better than the products individually.
Q: How does Bayer view the changing role of North America in the global economy?
A: We'd all like to know what the answer to that is. What we're seeing and hearing, from talking to customers, is that more and more products are being made offshore, increasingly in China. The situation we had was one where production went from the U.S. to north and south of the border and then maybe eventually to China. But now we seem to be missing that middle step and people are taking production straight from the states to China. That trend should continue and accelerate.
The move to Asia is primarily about labor costs, but there's some raw material cost factor involved. That's why we've put so much investment into Asia. Most of our new capital investment over the next two to three years is into Asia. If you look at China and India, they've both got more than a billion people. They're industrializing quickly and demand is growing.
The only counterbalance that we see is in some consumer electronics where fashion plays a larger role. I'm probably the only person left in the world with a standard Motorola mobile phone. Everyone else wants to change theirs, and if you want things done with some fashion element, time is very important. You have to get things to market very quickly, and if you have an extensive supply chain over to Asia, you're looking at having to do things nine to 12 months in advance. But the life cycle of some of these products is six months. There are certain niches like that where people are supplying demand direct from [North America].
The vast majority of auto parts don't ship. Not many people are going to import a Saturn. A lot of businesses will stay quite regional, where local production keeps local demand. That's why l think there will continue to be a strong auto industry here.