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 such as 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 rushing 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.