European chemicals: A German chemicals giant swaps its scientist boss for a restructuring expert

European chemicals: A German chemicals giant swaps its scientist boss for a restructuring expert

Feb 1st 2014 | BERLIN | From the print edition

IT IS always bitter for a chief executive to see his company’s shares spike when his departure is announced. But that is what happened when Lanxess, a German chemicals producer, said this week that Axel Heitmann would be leaving. He has run the business since it was spun off from Bayer, a pharmaceuticals and chemicals group, in 2004. Its shares did well in the early years, and recovered strongly after the financial crisis, but they have slid in the past year. Lanxess says the decision for Mr Heitmann to go was mutual.

To replace him, Lanxess brought back Matthias Zachert, a former executive who has recently been overseeing a cost-cutting drive as chief financial officer of Merck, a German pharma firm (unrelated to its American namesake). Investors think well of him: Merck’s shares fell by 10% on the news, as Lanxess’s rose by almost as much.

To some extent Mr Heitmann was the victim of his own optimistic spiel. The departing boss, a chemist, talked about escaping the fierce competition in global chemicals markets by spending plenty on research to create high-margin specialty products. He pointed (as every modern boss must) to “megatrends” like urbanisation and population growth, arguing that the future world would need Lanxess’s sophisticated chemicals to improve crop yields, for example, and make cars lighter and more fuel-efficient.

But Lanxess depends heavily on one of the European economy’s weakest sectors: it gets 25% of its revenues from tyres, and 15% from other car parts. Sales of new cars in the EU have dropped for six straight years; and motorists are driving less, so they need fewer replacement tyres. The “temporary weakness”, as Mr Heitmann called it last autumn, has taken its toll.

It was also hit from the supply side. Martin Evans of J.P. Morgan, an investment bank, explains that when Lanxess’s synthetic-rubber business was going well, it invested a lot in more capacity—only to see Chinese and other competitors also plunging in, causing a surge in supply and a resulting fall in prices.

Another analyst, Stephan Kippe of Commerzbank, says that at least under Mr Heitmann the company has built a promising suite of products; what it needs now is a disciplined manager to cut costs. That is where Mr Zachert comes in: Mr Kippe thinks that whereas the departing boss talked of shedding 1,000 or so jobs (of a total workforce of 17,500), the new chief will be more “radical”.

He will need to be. The German chemicals industry has been flat in recent years, even as the rest of the economy has grown. Mr Evans is bearish on Lanxess, as he is on other big European chemicals firms such as BASF of Germany and Arkema of France. He notes that not only are they threatened by state-backed Chinese rivals, they face a revived chemicals industry in America, where shale gas is a cheap source of both energy and raw materials.

One solution for Europe’s struggling firms is to produce abroad, in lower-cost places closer to their foreign customers. Lanxess and BASF are both aiming to do so. But for legal and political reasons it is hard for them to cut capacity back home. Another answer is to keep pushing those high-end products. But that alone would not be enough to replace, say, the quarter of Lanxess’s revenues from tyres.

Fortunately, Europe’s economy—even its battered car market—may at last be recovering. And Lanxess has high hopes for “green tyres”, which cost more but save petrol. If thrifty motorists take to them, Mr Zachert may fix Lanxess’s own flat, and get it back on the road.