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Global Economics

Tough Times for BASF

The German chemical giant is hard-hit by the downturn, which is forcing it to reduce global production

Driving through Ludwigshafen on the way to the main administration building at BASF, Carl-Bosch-Strasse, gate no. 2, you pass by a small park: a reassuring patch of lawn among all the gray concrete buildings, steel pipes and chimneys. The park belongs to BASF, but it is open to the public, and when plant manager Bernhard Nick, 50, tells visitors about the internal elements that hold together the largest chemical company in the world, he talks about the park and the memorial that can be seen there.

The park features a kind of furnace—five meters (16 ft.) high, one and a half meters in diameter—that stands on the lawn next to a commemorative plaque. This pioneering device was the main component of the first facility to manufacture ammonia (NH3), and it's easy to understand why BASF is proud of it. German scientists Fritz Haber and Carl Bosch, its inventors, were awarded the Nobel Prize in chemistry. The Badische Anilin- und Sodafabrik (BASF) in Ludwigshafen on the Rhine, founded in 1865, rapidly became a major global company.

A few weeks ago, there was a visitor from China who, like Nick, is a chemist by profession and someone who normally doesn't let his feelings show. But when the man stood in front of the old ammonia unit in the park, he became choked up with emotion. The text on the plaque reads: "Without this process, the struggle against hunger would be hopeless." Nick says that they have calculated that in a world without ammonia roughly half of mankind would die of hunger because there would be no chemical fertilizer. That is certainly somber food for thought.

The Promise of a Bright Future

The plant in Ludwigshafen has other points of pride as well. One of those is that production has never been brought to a standstill for long. The ammonia plant weathered the stock market crash of 1929 just as well as it survived the bombings of World War II, the oil crisis of the 1970s and the recession of 2001. "Annual production of ammonia is increasing worldwide with continuously growing demand" is another sentence on the commemorative plaque. For the employees of BASF, this phrase has always held the promise of a bright future.

This makes the events of the past few weeks in Ludwigshafen all the more disturbing. Back in October, the company had to reduce its production of caprolactam, a compound used in making components for the automotive industry. This was followed shortly thereafter by a slump in the production of polystyrene (more commonly known under the brand name Styrofoam). Not a week went by after that without some machine on the premises having to be shut down. It has become unnervingly quiet at BASF. A total of 40 large-scale units worth billions of euros have suddenly come to a standstill.

The slowdown eventually hit A3, as the ammonia facility here is called. On normal days the unit produces more than 1,000 tons. Aside from the symbolic importance of this product, it generates potential sales of roughly €300,000 ($400,000) a day, a significant amount, even for a major player like BASF.

But in mid-November the company extinguished the waste gas plume, the eternal flame of the chemical industry. Since then, the approximately €500-million unit, which is normally operated in shifts, has not produced a single gram. Production at the second ammonia unit nearby, known as A4, has been reduced to a bare minimum. No one knows how long it will continue to run.

Never Experienced Anything Like It

It's a puzzling situation for BASF. Could it be that the world suddenly no longer needs ammonia? "Back in September, there weren't many indications of a crisis," says plant manager Nick. But that made the effects of the recession all the more profound as customers suddenly began cancelling their orders. Within only a few weeks, the market had virtually collapsed. Nick says that he's never experienced anything like it.

The situation at BASF illustrates how the crisis has reached the core of German industry. And it has dashed hopes that the destructive force of the recession would be limited to financial high-flyers, venture capitalists and the mismanaged automotive industry. There is no reason to succumb to a mood of gloom and doom, says BASF CEO Jürgen Hambrecht, but he is bracing himself "for very difficult times," and that is ominous news for the employees at Ludwigshafen—as well as the German economy as a whole.

BASF has always been the pride of German industry. It outperformed cheap suppliers on the world market with quality and innovative products made in Germany. The company expanded throughout the world without firing for economic reasons even a single employee at its original German headquarters. Instead of speculative stock market gains, BASF held out the possibility of solid dividends. It strictly adheres to all government environmental regulations, works closely with the chemical trade union, and requires the wearing of hard hats throughout the company premises.

The CEO has a Ph.D. in chemistry and speaks with a pronounced southern German accent. With his no-nonsense haircut and preference for rather inexpensive suits, Hambrecht has always stood in contrast to the arrogant manager types that occupy the board rooms of other companies. When German Chancellor Angela Merkel travels abroad with a delegation of German business leaders, Hambrecht is especially welcome to come along. The company has a long history of good political connections. Former Chancellor Helmut Kohl, who once worked part-time at BASF to pay his way through college, loved to visit the plant, which even boasts its own wine cellar and a cafeteria that occasionally serves his favorite dish—stuffed pig's stomach with fried potatoes.

A Global Corporation

But now it looks as if BASF is not robust enough to ride out the crisis unscathed. On two occasions in less than two weeks, the company has had to revise downwards its business forecast for 2009, something that has never happened under Hambrecht's solid leadership. Within just a single hour, the company's shares temporarily lost nearly 20 percent of their market value. That corresponds to roughly €5 billion, which analysts saw as an incredible overreaction, but it accurately reflects how strained nerves have become during the current crisis.

There is a large map of the world hanging on the wall of the visitor center at the main BASF plant in Ludwigshafen. Major production plants are marked with dark circles, and smaller ones with a dot. This is the map of a global corporation. With the exception of Africa and parts of Eastern Europe, there is no region that doesn't have dozens of branch facilities.

Anxiety in the Workforce'

BASF does over three-quarters of its business abroad, but what was once seen as an advantage has now become a problem. The company has to fight the downturn on all fronts around the world at the same time. Business has slumped everywhere, even in China, where BASF built a slightly smaller copy of its main plant in Ludwigshafen over three years ago.

"Asia is the real disappointment," says Hambrecht. Some 80 units around the world have ceased operation and 100 additional facilities have cut back on their production. Currently, roughly 20,000 BASF employees around the world—a fifth of the workforce—have nothing to do.

Hambrecht cannot say when it will be worthwhile to start up the facilities again. Expectations that business would pick up again before the end of the year have turned out to be little more than wishful thinking. Basic substances for laundry detergent and cosmetics are still selling well, but the outlook for the construction and automotive divisions is gloomy, and that augurs badly for the production in Ludwigshafen.

It's a very risky business to leave a unit out of operation at a chemical plant. In principle, the production could be compared to how people traditionally slaughter their livestock. Just like in the old days on the farm, the idea is to utilize an initial product directly on location—and to do this so thoroughly that not even a scrap remains. In the German chemical industry this compact production principle is called "der Verbund," which roughly translates as "the interconnection." In Ludwigshafen they are incredibly proud that their main American competitor, Dow Chemical, also refers to "the verbund" because there is no better equivalent in English.

Crude oil and natural gas are the essential starting materials for BASF. The raw materials are transported via pipelines and tankers to the plant, where huge facilities known as crackers break them down into their chemical components. These are then redistributed to adjacent units, where over a thousand different formulas are used to produce new chemical compounds.

The ammonia facility supplies the ingredients for dozens of mixtures. Urea is produced to manufacture tabletops and waste gas purifiers, and nitric acid is used for explosives and solvents. Some chemicals are refined to create automotive coatings, while others are used in permanent press shirts. A considerable proportion of the production is still processed to make chemical fertilizers that farmers use to reap rich harvests even from barren soils.

Switching Off the Ammonia

This process demands a great deal of experience and precise coordination, but it becomes really complicated when there is no application available for certain products. It is dangerous to produce large supplies of poisonous substances like ammonia and store them on the plant premises. At the same time, there is always a unit somewhere in the verbund that urgently requires ammonia.

BASF has therefore made strict rules concerning the conditions under which the ammonia unit can be switched off. This is regularly done every five years when basic repairs and inspections have to be made. The planning for such routine checks begins roughly a year in advance. There are instructional manuals over a hundred pages long where each procedure and sequence of actions is precisely determined. Up until now, however, no one has determined what needs to be done when the world is plunged into a sudden economic crisis.

Two men wearing immaculate white lab coats—Rainer Feser, 56, and Michael Mauss, 49—are responsible for shutting down the units. Actually they thought they had roughly eight months before the next scheduled maintenance. Now they have to turn off the machines within a few weeks, and you can tell that they haven't slept much recently.

Their troubles started with the weather. Normally, the units are switched off during the summer. There is less to do during the vacation period and the maintenance work is easy to do in mild temperatures.

Everything is far more difficult in the wintertime. Feser and Mauss have flushed the unit with nitrogen and burnt the surplus gas. Nevertheless, they could not rule out that water vapor may have accumulated somewhere in the kilometer-long system of pipes. And so they had to manually flush a large number of lines to prevent the pipes from bursting in freezing temperatures.

But what should the company do with the workers while the machines are idle? Feser and Mauss have talked with each one individually. They want to create as little anxiety as possible among the workforce. Fortunately, the surplus in personnel was not very obvious over Christmas and New Year's.

The works council has negotiated with company management that, for the time being, there will be no dismissals. "We're working off time credits, using up residual holiday entitlements and conducting training seminars," says plant manager Nick. "The overall situation isn't good, but the employees accept these measures." Eventually the crisis will pass, he says.

But it remains unclear when that will happen. BASF still has a buffer in its flexible working time accounts, a kind of credit line to bridge the crisis, but this is dwindling with each passing day.

"If the unit isn't running by this spring," says plant manager Nick in Ludwigshafen, "then we'll have a problem."

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