Handicaps of sector and name fail to check Lanxess; The once-spurned chemicals group has been transformed; judicious CEO Axel Heitmann eliminated several layers of executives and business segments are free to conduct its operations without interference from headquarters to a degree uncommon at large German companies

August 1, 2013 4:04 pm

Inside Business: Handicaps of sector and name fail to check Lanxess

By Tony Barber

Lanxess

The once-spurned chemicals group has been transformed

The ugly duckling of Leverkusen turned this week into the swan of Cologne. Lanxess, a German speciality chemicals company spun off in 2004 from Bayer, had few admirers at its birth. Conventional opinion derided it as a ragtag collection of low-margin chemicals and polymers businesses. It existed, so it was said, for no better reason than that Bayer, like some cold-blooded, profit-hungry giant, had decided to dump old-fashioned chemicals and place its bets on healthcare, nutrition and high-tech materials. Yet the last laugh is with Axel Heitmann, chief executive of Lanxess from day one. He swiftly reorganised the newborn company, selling off a quarter of its portfolio and making astute acquisitions such asthe 2008 purchase of Petroflex of Brazil, Latin America’s largest synthetic rubber producer. After years of steady growth and improved margins, Lanxesswas promoted last September to Germany’s blue-chip Dax-30 index.Moreover, anyone who bought Lanxess shares at their opening price of €15.75 in January 2005, and who still holds the stock, can feel pleased with the investment. The shares, though below an all-time high of almost €70 touched in February, trade today at more than €46. The company’s first dividend, paid in 2006, was €0.25; last year’s was €1.

On Thursday, Lanxess completed the move of its headquarters from Leverkusen, an unglamorous Rhineland town dominated by Bayer, to Cologne, one of Germany’s most exuberant cities. The idea is to lift up and sharpen the company’s profile. The group boasts an annual turnover of more than €9bn, and its fame knows no limits in the esoteric realms of rubber additives and dichlorobenzene. Yet Lanxess is scarcely a household name in Germany, let alone farther afield.

One problem is, I dare say, the name itself. Lanxess combines elements of the French verb lancer (to launch) and the English word success. The unfortunate result is a name that is gobbledegook in German and, in English, is one spelling mistake away from laxness. This is not a trivial point. The company conducts most of its international business in English. It surely does not want to be identified with a word that means negligence.

With its name plastered all over the new Cologne headquarters, as well as a nearby concert and sports arena, now does not look like the right moment for a change. But there is a lesson here: beware external consultants or in-house brainboxes who dream up fancy names for your company. EADS, the European aerospace and defence group, is showing much common sense by choosing as its new name Airbus – simple, direct, an unmistakable brand.

Lanxess boasts an impressive record since 2004 in spite of having to adjust, over the past few years, to a dizzying plunge in Europe’s car market. About 40 per cent of the company’s revenues derive from products used in the automotive and tyre industries. Just as important, replacement tyres account for about 70 per cent of its tyre business. If Europeans are buying fewer new cars, and are clocking fewer miles on their old cars, demand for tyres goes down and Lanxess takes a hit.

But with the judicious Mr Heitmann at the helm, Lanxess has reacted quickly to such downturns and, in that familiar German way, continued to plan with care for the long term.

On one hand, Lanxess is closing a rubber chemicals plant in South Africa’s KwaZulu-Natal province and cutting jobs at a similar facility in Kallo, Belgium. On the other, the company is positioning itself to take advantage, in coming decades, of an expansion of road infrastructure, car ownership and use of trucks – and, therefore, demand for tyres – in China and India. It has just opened a butyl rubber plant in Singapore at a cost of €400m, its biggest ever investment.

The progress of Lanxess owes much to the corporate structures Mr Heitmann put in place after the spin-off from Bayer. He eliminated several layers of executives and rejected the idea of management by geographical region. Instead he divided the company into three business “segments” – performance polymers, advanced intermediates and performance chemicals. Within these segments are 14 business units, each of which is free to conduct its operations without interference from headquarters to a degree uncommon at large German companies.

The headwinds against Lanxess are strong, and that is showing up in reduced sales, lower profits and a falling share price. It is not, however, a company investors should accuse of making unforced errors. Patience is the watchword. The essential ingredients for long-term success at Lanxess are all there.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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