Building a Future-Proof Business
AkzoNobel puts Sustainability at the Center of Every Strategic Decision to Increase Shareholder Value
What have sustainability and social responsibility to do with the financial performance of a materials company and the value it creates for its shareholders? A conversation with Ton Büchner, CEO of AkzoNobel, provides astonishing answers to this question. Within the 20 years of its existence, following the merger of Akzo and Nobel Industries in 1994, the enterprise with Dutch and Swedish roots has already undergone a fundamental transformation. Through a number of divestments and acquisitions, AkzoNobel has moved from being a diversified conglomerate of businesses like pharmaceuticals, biotech, fine & specialty chemicals, fibers, resins, adhesives or catalysts to becoming a focused paints, coatings and chemicals player. Following the acquisition of ICI, the company restructured in 2008. Early in 2013, shortly after Ton Büchner - a Dutch national and an engineer by training, with an MBA degree and global management experience - took the helm, a new strategy was launched. Besides pursuing performance goals, the company that reported sales of €14.6 billion in 2013, has been upholding a commitment to sustainability for many years and regards it as a crucial factor to further enhance operational efficiency and stimulate organic growth. Michael Reubold spoke with Ton Büchner about the role sustainability plays in the corporate strategy.
CHEManager International: Mr. Büchner, AkzoNobel has a proven track record in the area of sustainability. What role does sustainability play in your corporate strategy?
T. Büchner: Our corporate strategy is focused on organic growth and operational excellence, and it has sustainability built in at the heart of everything we do. We believe that business is sustainability and sustainability is business. You can't disconnect these two. We drive sustainability in all aspects of both our operations and our support functions. And by doing so for an extended period of time it has brought us to the number one position in the Dow Jones Sustainability Index for our industry for the second consecutive year. We drive sustainability under a very clear strategy that is implemented inside the individual business strategies.
So sustainability also impacts your business strategy and performance?
T. Büchner: Yes, it is about building sustainability into the business strategies. It has both an impact on the way we procure things and an impact on the way we invest, with the focus on using fewer things to create more value. And that can be in terms of energy efficiency and raw material efficiency. So there is a financial impact there as well.
A second part that is important to us is on the front-end innovation side. We spend a significant amount of our innovation budget on developing new products that have a sustainability advantage for our customers. And by having these new products developed as part of our innovation strategy that is driven with sustainability in mind, and also having that sustainability strategy on the procurement and the operation side, it really does have an impact.
Are you able to measure that impact?
T. Büchner: What we have tried to do is to commit to a set of targets that we want to deliver by 2020, for instance that 20% of our revenue should come from products that really deliver raw material and energy savings to our customers. And we even have given ourselves carbon reduction targets and have introduced a new metric named resource efficiency index, which correlates our carbon footprint with our gross margins and thus indicates how efficiently we generate financial value. We even have sustainability in the personal targets of our top 500 executives, with clear KPIs that their long-term remuneration is dependent on.
Your ambition when it comes to sustainability could be discounted as a marketing tool. After all, AkzoNobel generates a large portion of its annual revenues with consumer brands.
T. Büchner: Indeed, sustainability is a buzz word and a lot of people are using it for marketing purposes. We really have gone much farther and are using it as an attitude and a way to run the business. That attitude has two components to it. One is, as you say, the consumer that buys our products, but the second component is young talent. Sustainability is becoming increasingly important to attract young talent. University graduates today really want to see a company taking more than just the responsibility of financial value, they want to see a company having the right attitude when it comes to sustainability. So when I talk to students that are looking for jobs, besides a salary and a career they generally look at the behavior of the company towards sustainability when they make their decisions.
Soon after you became CEO at AkzoNobel you implemented that new corporate strategy focused on operational excellence and organic growth. What is your guidance for growing your business and which goals have you defined?
T. Büchner: Well, we have made a very clear organic growth and operational excellence strategy with sustainability at the heart of it, and we have primarily set ourselves targets on the operational excellence and on the return side of the business. We have targeted a return on sales of 9% and a return on investment of 14% at the end of 2015. And we have also added a net-debt-over-EBITDA ratio, which we wanted to keep at a very healthy level below 2 by 2015 as well. Those are our financial targets. They are part of our company strategy launched in the early days in 2013, and are to be delivered in a very difficult global market environment with very volatile currencies. As we see some of that market and currency volatility continuing, we refrain from giving clear growth targets, because they are so currency-dependent. Instead, we focus on the quality of earnings, the ROS of 9% and the ROI of 14%. We are on track to deliver on these 2015 targets despite a strong euro and the expected continued fragile economic environment in 2014.
Today, AkzoNobel's business is based on three pillars: Decorative Paints, Performance Coatings and Specialty Chemicals. There were more than three pillars in the past. Is today's setup the optimum in terms of diversification or do you have plans to add further pillars in the future?
T. Büchner: We like all three businesses, and the chance that we will add additional legs to the portfolio is not so high in the short- to mid-term. Our strategy is aimed at delivering leading performance by building on our leading market positions in paints, coatings and specialty chemicals. We are really focusing on operationally improving the present businesses that we have. And with the sale of our Paper Chemicals business announced in July, which follows a strategic review of the business's fit with AkzoNobel's portfolio, we are following through with our strategy to focus on leading positions.
Sustainability, operational excellence and organic growth, as you say, form a triangle to base investment decisions on. Do all of the investments have to meet these requirements equally?
T. Büchner: What you see in our investments is that there are always measures, of course, on financial return values. We make investments that are very focused on operational excellence, and there are other investments that are focused on growth. All of them have a sustainability component. I can give you one example, which in addition to sustainability, actually serves both operational excellence and organic growth: We invested €140 million in an upgrade of our chlor-alkali facility in Frankfurt. And by doing so we actually reduced our energy footprint and our carbon footprint significantly by radically improving our efficiency and increasing our use of renewable energy. On top of that, the new facility drives growth because, firstly, capacity has been increased by 50%, thus allowing us to serve more customers; secondly, it is more energy-efficient and is therefore more financially efficient. So that is an example of an investment decision where all three aspects are being served.
Another example is the €80 million investment in our new Imperatriz "Chemical Island" in Brazil, which is now operational. With this project, we strengthen our leading position in bleaching chemicals and we provide sustainable solutions that meet our customers' operational needs.
You recently announced an investment in a new Performance Coatings technology center in China. What is your growth strategy in terms of geographical presence?
T. Büchner: If we specifically look at China, we have been on quite a significant investment program around our Specialty Chemicals business. We have also done a number of acquisitions there. And that all goes in parallel with investments in the Decorative Paints and the Performance Coatings businesses as well. So China has been a target country because the business there has been continuously growing in virtually all its aspects over the last several years. Thus, China is a recipient quite a significant amount of new green field investments. And what we are actually doing there is putting in the newest technology, so that we are future-proof when it comes to potential energy-efficiency requirements and when it comes to sustainability requirements that the Chinese government is developing as we speak, now that they realize that something needs to happen in terms of environmental measures that make the country and the cities more livable.
And we have another significant investment running in Europe, which is a new paint facility in the UK, which we expect to be finalized next year.
Do you have any plans regarding overseas markets?
T. Büchner: I guess what is important is that the global dynamics in the specialty chemical industry have changed quite significantly because of a variety of factors. And I would highlight maybe three factors that have an impact.
One is the shale gas and shale oil in North America that creates a significant energy advantage for North American industries. All industries that use a lot of energy - and the chemical industry is obviously one of them - have seen an influx of capital investments. But what you also see as an effect in North America is that the price of installing a new facility has already inflated quite significantly since the engineering contractors are quite full. As a result there is an upper pressure on construction prices, and that is all driven by the fact that a lot of people want to use the energy advantage while they move forward.
Another thing is that the Middle East, of course, has continued to develop very actively as well. In the past we used to buy oil from the Middle East. Now, they have subsequently integrated into base chemicals and petrochemicals and their intention is to go further downstream into specialty chemicals. So, in the future we will see added capacity in the specialty chemicals business in a region that also has a significant energy advantage.
And the third aspect which is very important is China. If you look at the chemical industry right now, China is very fast becoming even bigger as an industry than Europe and the United States combined. And that means that a lot of engineering, a lot of technology, a lot of knowledge, and a lot of growth is taking place in China.
These three developments have certainly created a shift in where people put their investments. And Europe is a bit on the short end of that investment decision cycle at this point in time. And that is in general, it is not specific to AkzoNobel. And some people are rather concerned about the European boundary conditions for success, with the energy advantage going to other regions.
So what is your take on that? As the CEO of a company based in Europe, how do you judge the competitiveness of the European chemical industry in that global context?
T. Büchner: Well, the energy disadvantage is real. And I think that the North American energy advantage will at least continue for the next 20 plus years. So that is one that we are not going to solve quickly if we don't find access to cheaper energy in Europe. Most European government plans at this point in time are actually driving towards more expensive energy. Other issues that are important for the competitiveness of the European chemical industry, of course, are raw material access, the availability of highly qualified people with a technical, engineering and chemical background, and a flexible workforce.
And may be success factors for European companies?
T. Büchner: The ability to innovate is an area where we can do something in Europe. Innovation has to continue to be a driver for the business; and Europe has always been strong in it. Particularly, innovation on the basis of sustainability can really be a differentiator for Europe, but we all need to put significant efforts in it to make it happen.
Innovation and sustainability are differentiators for AkzoNobel already. In the context of China you spoke about making cities more livable. Is AkzoNobel taking responsibility for this global challenge?
T. Büchner: Yes, for instance in June, we launched our "Human Cities Manifesto", which is really a serious responsibility-taking of AkzoNobel. Half of the world's population today lives in cities and by 2050 this number will probably have increased to 75%. Some of us may not like it, but we are unlikely going to stop it. A lot of people have been talking about the functional aspects of urbanization, that is houses, roads, trains, and so on. These functionality aspects generally forget the livability aspects of cities.
For AkzoNobel about 60% of our revenue is exposed to buildings, infrastructure and transportation, a lot of our products actually end up in cities. But it seems that people have kind of forgotten to integrate the livability and the enjoyability of cities in the design concepts of urban expansion. And we believe that we as AkzoNobel can play a role there, either with color, with the protection of heritage, with the support that we provide in education or sports initiatives. And with that we can do a lot of things - together with our sustainability approach - that make cities more human as opposed to just functional.
Of course, we are focusing on shareholder value and are doing things to financially improve our business. But sustainability and the responsibility to make cities more human is something that we think we can make a small difference.
During the Soccer World Cup in Brazil TV viewers could often see vividly painted houses in a favela in Rio de Janeiro. Some critics may say that you don't change people's life conditions by just painting their houses.
T. Büchner: Yes, but there is more. Actually, we haven't painted a single house in the favelas in Rio de Janeiro. We don't want to put a few colors on the walls and then feel good about it. In that favela in Rio that you see when you stand on Copacabana Beach, we have actually educated a number of local people to become painters and taught them the skills needed to adopt painting as a trade. And these painters have subsequently started businesses, and these businesses have been selling these colors. So what we have been trying to do is to stimulate the economy by creating entrepreneurs that actually can work for a living. And that has nothing to do with the Soccer World Cup held in Brazil this summer, because we were doing this favela many years ago and it just happens to be very close to the Copacabana Beach, which is why people now see it. We already started the "Let's Colour" program in 2011 and we have since completed dozens of projects around the world to help revitalize neighborhoods and create a better living environment. Color has certainly the power to change people's lives.
Another example besides color is heritage. We go to smaller cities and we make the population vote for what is the historical building that they think is the most important in their village. And then the people vote on how to restore it. Then our own employees take time off and - together with the local inhabitants of these villages - actually restore a church, a museum, or a school. And again, it is all about developing pride and motivation and enthusiasm within the people that help us there. It is not for us to paint the building in a certain color; that is not what we are trying to achieve.