German industry is suffering an unaccustomed feeling of discomfort - some have called it a crisis.
In March, Manfred Schneider, at the end of his first full year as chairman of the board of management, announced Bayer's annual results to the world's press. It was an inauspicious debut. Pre-tax profits had fallen for the third consecutive year - down by almost 16% at DM2.7 billion - the workforce had been reduced by 7,800 and the dividend cut. The current year, he noted, had started no better; the forecast for group sales had been revised downward from a modest growth to a slight fall, chemical plant operating rates had fallen below 70% for the first time since the early '80s and, following a collapse in demand in certain product areas, 3,000 employees in Germany were to be put on short-time working.
Schneider, understandably for a chairman in such circumstances, searched for a statement of optimism and exhortation. He found it in the words of the Swiss writer Max Frisch. 'Crisis', he quoted, 'is a productive state. We just have to remove the sense of catastrophe that goes with it.' As a formula for recovery it was elegant, appealingly simple and infinitely rational. As a declaration of strategy by the head of one of Germany's largest companies it was highly unorthodox. Yet if Schneider is one of the few in his position to articulate such thoughts he is by no means the only one to be entertaining them. Across Germany's industrial heartlands companies are facing crisis and catastrophe for the first time since the war. After decades of growth and prosperity the economic miracle has been stopped in its tracks. In this context Schneider's words are evidence of a new, questioning mood in which a global downturn, the burdensome costs of reunification and the rising economic power of Asia have forced Germany's industrialists to face the prospect of having to repeat the miracle once more. The alternative to remedial action, political leaders warn, is decline through complacency.
Yet while Bayer's pre-tax profits continue to slide - down a further 20% at the half year - few seriously doubt Bayer's ability to weather this latest crisis just as it has weathered the numerous others it has faced in its 130-year history. In that time it has evolved from a partnership in textile dyestuffs to a highly diversified multinational with 154,000 employees, operations in 150 countries and a formidable record of innovation. One need only glance at its list of inventions - pioneering products that range from Aspirin to synthetic rubber - to gauge its impact on the modern chemical industry. Indeed, it is Bayer's breadth - six sectors covering polymers, organic products, industrial products, healthcare, agrochemicals and imaging technologies - that has traditionally secured its role as the most stable and best performing of Germany's trinity of chemical giants. Its profits, even in this 'crisis', have held up better than its mightier rivals, BASF and Hoechst, which last year slipped by 41% and 18% respectively.
When the chemical industry last boomed in 1989 Bayer was pushed forward to record profits by the success of its pharmaceutical division, in particular by that of its two blockbusters, Ciprobay, a best-selling anti-infective drug and Adalat, a treatment for angina. This time Bayer has felt pain on every front, from petrochemicals - a long-standing joint venture with BP - to high margin, non-cyclical businesses such as healthcare and agrochemicals.
Bayer's short-term travails have been compounded by a succession of healthcare reforms by governments across Europe - the most detrimental to Bayer being the cost containment measures introduced by German health minister Horst Seehofer in January. The principal aim of these was to reduce expenditure on pharmaceuticals by DM3 billion by the end of 1994. The package included a 5% cut in the price of prescription medicines, an extension of the reference price system (whereby patented drugs are subject to price control) and, most devastatingly, a reduction in doctor's drug budgets to 1991 levels. Any overspend has to be borne by the doctors themselves.
Franz-Josef Bohle, director of policy for Bayer's healthcare sector, observes a wholesale change in prescribing habits away from expensive, innovative drugs - the lifeblood of companies such as Bayer - towards low-priced generics, the copies of brand-name products that appear when a patent expires. 'Doctors are overcompensating and underprescribing to such an extent that, instead of a DM1.5 billion saving in 1993, the current pattern indicates that they will actually underspend this year by DM3 billion.' The reforms have so far shrunk Bayer's domestic pharmaceutical sales by 20%. The sales of generics companies, meanwhile, have soared by anything from 10-60%.
Bayer's other traditional mainstay business, agrochemicals, where it ranks fourth in the world, has recently suffered from the continued reform of the Common Agricultural Policy. Falling quotas and set-aside legislation have led to smaller amounts of land being farmed less intensively. The collapse of markets in Eastern Europe has proved equally devastating. In the space of three years Bayer's annual sales to the former Comecon countries have slumped from DM500 million to DM50 million.
Bayer has responded to austerity with a strategy that bespeaks a cool, long-term assessment of the future shape of Europe's chemical industry. Pol Bamelis, the board member responsible for Europe, dismisses any suggestion of an ICI-style de-merger, pointing instead to the synergies and economies of scale to be reaped from diffusing generic technologies and research expertise across a broad range of products and processes.
Apart from such radical solutions, the current tendency in the chemical industry, according to Bamelis, is to 'concentrate on core businesses and co-operate in the areas where you are not strong enough'. Indeed, over the last couple of years there has been a sudden flurry of joint ventures and asset swaps in the European chemical industry. In July Hoechst announced that it was to merge its agrochemical activities with Schering, having earlier put its viscose and acrylic fibres business into a joint venture with Courtaulds. Elsewhere BASF and ICI have proposed to swap their acrylic and polypropelene activities. Gradually, Bayer appears to be succumbing to the same inexorable logic. Earlier this year it announced that it was seeking alliances for a number of its mature, downstream chemical businesses - what Schneider described as 'a good method for dealing with structural problems'.
Bayer has also taken its first steps to slim down a rather unwieldy management structure. As of January six senior management grades will be reduced to four and the business groups, reduced from 23 to 21, will report directly to the board. In the medium term the number of management grade employees will fall by 560 - around 10%.
Austerity has also brought a more stringent approach to R and D, a shift towards projects with a keener eye on the market. Professor Karl Heinz Buchel, the board member responsible for R and D, has overseen the introduction of management tools that allow closer project selection and control and involve members of the production and marketing departments at an earlier stage. As well as supervising the existing budget more rigorously, Buchel also points to specific product areas - fibres, plastics and dyestuffs - where a narrowing of the scope for innovation and competition from low-cost producers has made investment in research less viable.
Buchel acknowledges a particularly German obstacle to innovation: regulation. Though all European chemical companies are now subject to EC directives, German companies have traditionally had a heavier dose than most. In the last 10 years, notes Buchel, over 2,000 new environmental laws have been passed in Germany. At the same time Bayer's operating costs for pollution control have risen steadily - from DM1 billion in 1988 to a projected DM1.5 billion for the current year. Though Buchel would not wish to revert to lower industry standards he acknowledges the problems that legislation presents: 'The German chemical industry cannot go on successfully selling goods on world markets if we try to lead the world in environmental protection and, at the same time, support a costly social security system and implement a mass of legislation that no other industrialised country has,' he says.
Regulatory strictures at home - particularly those regarding genetic engineering - have encouraged Bayer to broaden the geographic spread of its activities and seek locations where a looser regulatory framework is more conducive to research. To this end Bayer has invested heavily in establishing a presence both in the US and Japan. The advantages of the latter also include an entree to Japan's highly protected markets. Bayer's eastward move is further echoed in its plans to establish polycarbonate production in China.
Closer to home Bayer has been quick to respond to Chancellor Kohl's call for investment in the east, and has staked its claim on a 140-acre site at Bitterfeld, the polluted heart of what was the DDR's once-mighty chemical industry. Before unification the town supported 31,000 chemical workers. Today there are 5,000. Labour costs are currently 60% of those in the western Lander but are scheduled to rise to parity by 1996. The federal government will cover 40% of all capital investment but the initial promise of proximity to what were once optimistically judged the emergent markets of Eastern Europe now appears precipitate.
Unlike BASF and Hoechst, who have taken over existing chemical facilities in the east, Bayer has invested DM650 million in a now-decontaminated greenfield site. The development - three separate facilities for methyl cellulose, coating resins and self-medication pharmaceuticals - are in the last phase of construction. The plan for a smaller fourth unit, to make consumer products, was abandoned following a sharp fall in demand and the sudden availability of spare capacity in the west. The new site, claims Helmut Lehmann, Bayer Bitterfeld's managing director, will provide an opportunity to try new approaches, most notably to implement a flatter management structure than those found at older plants.
The good news amid the short-term gloom is that the chemical industry is now considered by analysts to be at the bottom of the cycle and that prices and volumes will begin to pick up next year. If this is indeed the case it follows that where the erosion of margins has been the greatest - in pure chemicals - the swing back into profit when the market picks up will be equally sharp.
Prospects for the traditional high margin businesses - agrochemicals and pharmaceuticals - are less assured. Continued healthcare reforms in Europe, a stagnation in the agrochemicals market and - in the eyes of some - a straightforward lack of new products will all play a part. 'What have been big assets in the past might well prove a bit of a problem in the future', observes Petra Zamagna, a chemicals analyst at Frankfurt's Deutsche Bank Research.
While few question the soundness of Bayer's strategy for recovery some question whether it goes far enough, whether the company that emerges at the other side of recession will have the necessary agility to compete in what are fundamentally changed markets. It is then that the validity of Schneider's formula - that crisis minus catastrophe equals productivity - will be put to the test.
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