Unit 5: Regional concentration and global reach in the chemical industry

When talking about chemical production most people would first think of environmental disasters, such as that which occurred in Bhopal (India) [1] in 1984, where the uncontrolled release of toxic substances from Union Carbide’s pesticide production resulted in the deaths of more than 2,000 people. Further, in contrast to other industries, it is difficult to come up with a list of typical products that are produced by chemical firms. This seems somewhat surprising since basically every product or good that is used in everyday life has a number of important chemical components. These components, which are typically overlooked by the consumer, are what defines the characteristics of a product (e.g. they make a piece of furniture insensitive to scratches, heat, humidity, etc.). Aside from the ‘invisibility’ of its products, the chemical industry is characterized by a large degree of heterogeneity. Different chemical product groups are produced for a variety of customers in many different industries. The primary customers are the chemical industry itself (which require, for example, basic chemicals and intermediates), the health sector (pharmaceuticals), the automobile industry (paints, plastics), the private sector (cosmetics, body lotions, detergents), the construction industry (technical fibers, paints), the textile and clothing industry (textile fibers, dyes) and the agricultural sector (pesticides, herbicides, fertilizers).

Due to this variety of products and applications and the long tradition of chemical production, the industry has developed into one of the largest, most important and competitive industrial sectors in Germany. This becomes clear when comparing sales and employment data with that of other industries. According the industry association VCI [2], the chemical industry employed 501,000 people in 1997 (469,000 in western and 32,000 in eastern Germany) which corresponds to 8% of total employment in German manufacturing. The industry accounted for sales of DM 188.9 billion and research and development expenditures of DM 11.7 billion. In terms of its sales and organizational structure, the chemical industry is one of the most internationalized sectors in Germany. Large chemical producers are typically characterized by international networks of subsidiaries and branch plants with production activities in all major world regions. In 1996, Germany was the largest exporting country of chemical products, with a share of 15.5% of the world total ahead of the U.S. (14.4%) and Japan (7.5%). Exports accounted for 59.7% of total sales of the chemical industry. In addition, the industry was characterized by above-average productivity numbers.

The economic and spatial pattern of the chemical industry is closely related to its historical development, especially its rapid growth in the last century. At that time, massive population increases had created a high demand for textiles and clothing which, in turn, had stimulated a high demand for bleaching-agents, dyestuffs and other chemical products. Around 1850, and shortly after, a large number of firms were established to satisfy these needs. Before 1900, some of the early start-up firms in Germany had already gained international market leadership and started to diversify their production into other chemical product groups. These firms played a decisive role in the development of the whole chemical industry. They determined the development of new technologies and products because of their technological expertise in developing new products, handling toxic substances and controlling potentially hazardous production processes.

The dominant producers, especially BASF [3], Bayer [4] and Hoechst [5], became leaders in practically all branches of the chemical industry. They belong to the world’s most important group of chemical firms in terms of their overall employment, sales, investment and research, and development expenditures. In 1997, together these three firms had a combined international labor force of 370,000 employees, sales of DM 160 billion and net incomes of DM 8 billion. In the same year, they invested a total of DM 10 billion into research and development worldwide. All three chemical firms, although still being quite diversified, have aimed to shift their production from basic chemicals towards customer-oriented final products. They are, however, characterized by a different market orientation and have followed different strategies as to which product groups they favor and how to expand into new markets. In recent years, Hoechst has, especially, tried to concentrate investments within its life science segment. This includes pharmaceutical, animal health and agricultural products (e.g. pesticides) with special emphasis on genetic engineering, an area which had previously been neglected by German firms. In recent years, the firm has sold many of its former business areas (e.g. chemical engineering, cosmetics, textile dyes, specialty chemicals). The firm will fully leave the industrial chemical sectors by the year 2000 and sell all those activities that are not related to its life science segment (e.g. paints, technical plastics, industrial gases, organic basic chemicals). In comparison to Bayer and Hoechst, BASF has always been characterized by a stronger orientation towards primary and intermediate products (i.e. basic chemicals). The firm has, unlike Hoechst, continuously adjusted its production structure to changing needs rather than shifted towards new long-term goals. BASF still operates within its existing core business areas (e.g. organic and inorganic chemicals, plastics and fibers, pigments and dyes, gas and oil) and will continue to strengthen these.

Access to river systems (for transportation purposes and as a resource base), proximity to customers (i.e. the textile industry) and the availability of resources (e.g. coal deposits, rock salt) were important location factors in the early development of the industry. The original locations of chemical firms were, however, not fully determined by such factors. There was a distinct ‘window of opportunity’ in terms of where to set up a production facility. Subsequent location decisions were, until today, biased towards the early productions sites of the large chemical firms. This is because production activities within the chemical industry are often organized as coordinated industrial systems with strong interrelations between different production processes. Chemical reactions frequently yield several main and by-products which can be processed further. Since it is costly and often dangerous to ship these products from one location to another, more and more production and processing stages have been concentrated at the original production sites over time. These locations have developed into major agglomerations of chemical production and employment (coordinated industrial systems). To give an example of their significance, BASF’s traditional headquarter location in Ludwigshafen [6] at the Rhine river has a size of 7.11 sqkm. It hosts more than 2,000 buildings, 115 km of streets, 211 km of railroad tracks and 2,000 km of pipelines between different workplaces. In 1998, the firm employed a total of 45,000 people at its Ludwigshafen facilities.

Due to the industry’s historical development, production activities are highly concentrated among a few large firms which form a limited number of geographical clusters of chemical production and employment. There is, nonetheless, a large number of small and medium-sized chemical firms (e.g. 58% have less than 100 employees). Of the 1,720 German chemical firms existent in 1995, only 85 firms (5%) employed more than 1,000 people. These large firms, however, accounted for more than 55% of the total labor force and total sales in the chemical industry. As a result, the chemical industry is characterized by a strong tendency towards spatial concentration. This becomes particularly apparent when analyzing the number of employees by Länder and the spatial distribution of employees by county. Main Länder of chemical employment are traditionally North Rhine-Westphalia (with 151,000 people in 1997), Hesse (with 71,000 people) and Rhineland-Palatinate/ Baden-Wurttemberg (with 127,000 people, with a concentration in the border region of both Länder). These Länder account for more than two thirds of the total chemical work force. County level data provides evidence that the concentration pattern of the German chemical industry is closely related to the spatial distribution of large firms. Major clusters of chemical employment are the regions Leverkusen-Köln-Düsseldorf (Bayer, Henkel), Frankfurt-Wiesbaden (Hoechst) and Ludwigshafen-Mannheim (BASF). Secondary clusters have developed in Hamburg, Altötting and Berlin.

The chemical industry in eastern Germany developed under totally different economic and political settings (i.e. a planned economy) than in the West. After World War II, large chemical Kombinate were established according to product groups. They were characterized by a relatively narrow range of products, a high degree of vertical integration (from raw materials to final products) and rigid top-down planning procedures. This resulted in a regional specialization pattern. For example, production activities in Schwarza were specialized in fibers, Piesteritz in agricultural chemicals, Sondershausen in potash mining, Dresden in pharmaceuticals, Fürstenwalde in paints and varnishes. The prevailing investment patterns resulted in the development of monostructured agglomerations of chemical production in eastern Germany, with major concentrations in the southern parts. More than 40% of the employees were employed by six state-directed conglomerates in the Halle-Leipzig region. The production activities were characterized by obsolete production technologies (sometimes originating from the pre-war period), overemployment, low productivity and severe environmental problems due to the dominance of inefficient coal-based production technologies (instead of modern oil-based technologies). After the unification in 1989, these factors led to the industry’s incapacity to compete at an international level. In a dramatic restructuring process, plants with obsolete and environmentally harmful production activities were shut down. Most other plants had to reduce production and employment to a minimum. Of the original 300,000 employees (excluding those in petrochemicals, potash mining and chemical engineering), only 32,000 were still employed in the industry in 1997. This has contributed to high unemployment rates and social problems in the former centers of chemical production.

In the 1980s and 1990s, the chemical industry of western Germany also had to undergo substantial restructuring processes. A consequence of these changes was a reduction in the labor force by 45,000 people between 1991 and 1994. Firms invested into new production technologies with a high degree of automation in order to reduce labor costs and replace even more capital for labor. Furthermore, production activities have been reorganized to increase efficiency and secure high productivity. Facing greater global competition, chemical firms have eliminated overcapacities and restructured the geographical distribution of their production facilities in favor of a stronger market orientation. This became even more important as markets in Germany were subject to stagnation while other world regions seemed to have a higher growth potential and associated lower costs. As a consequence, the large producers have expanded their production networks into the major world regions. For instance, BASF is in the process of establishing new coordinated industrial systems in each important market region, while Hoechst strives for global market access based on international acquisitions of other firms. Some branches of the industry such as textile dyes and synthetic fibers have been forced to relocate their center of activities simply because a large proportion of their customer basis (in this case, the textile and clothing industry had moved away from Germany. Other changes in the production structure have been related to new health and environmental regulations and a shift in demand towards higher-quality products, a greater variety of products and those products which are ‘environmentally friendly’. As a result, changes within the product structure have occurred in recent years. Inorganic and organic basic chemicals have experienced growing price competition from producers in low-cost countries. Their share of the total production value in western Germany has decreased from 29% to 21% during the period from 1983 to 1992. Producers of consumer goods and specialty chemicals have been the primary beneficiaries of the restructuring processes. Pharmaceuticals and cosmetics/ body lotions have increased their overall share of the production value from 19% to 26%.

These restructuring activities have affected the spatial distribution of chemical firms and employment in Germany. Between 1985 and 1994, a large number of counties were still characterized by modest gains in employment. There were, however, significant job losses within the main agglomerations of chemical production. Examples of this are the Leverkusen-Köln-Düsseldorf, Frankfurt-Wiesbaden and Hamburg regions. During the 1990s, this trend has continued with significant job losses in most German counties. Despite this tendency, the core areas of chemical production have not lost their dominance. Nor have other German or foreign locations replaced the existing centers in terms of importance. It is foreseeable that German chemical producers will concentrate their investment activities in the future in those market regions which are characterized by the largest growth potential. This will lead to a spatial reconfiguration on a global scale but does not mean that German regions are threatened. BASF’s strategy of establishing a worldwide network of coordinated industrial systems is an example of such a strategy. Hoechst, in contrast, has given up its traditional structure and split up its production complexes which has resulted in dramatic restructuring and many job losses. If unsuccessful, this could induce further mergers and acquisitions in the future. As a response to increasing competition in the major world markets and the formation of large conglomerates, Hoechst and Rhone-Poulenc have merged into a new integrated firm in 1999, i.e. Aventis [7].

[1] http://www.bhopal.com
[2] http://www.vci.de
[3] http://www.basf.com
[4] http://www.bayer.com/en/index_en.html
[5] http://www.hoechst.com
[6] http://www.basf.de/basf/html/e/ludwigsh/anfahrt/anfahrt.htm
[7] http://www.aventis.com/main/0,1003,EN-XX-100---,FF.html

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