Europe Reports

Akzo Nobel focuses on coatings

By Sean Milmo | March 15, 2006

Separating its pharma and paint businesses, Akzo Nobel is focused on expanding its coatings and chemicals businesses around the globe.

Akzo Nobel has become the second European coatings operation within a few months to reveal that it has decided that paints and pharmaceuticals do not mix.

The Dutch-based company, which is the world's largest producer of coatings, announced in early February that it is planning to spin off its pharmaceuticals business to concentrate on its coatings and chemicals activities.

Last October Altana AG, whose main businesses in coatings are in additives and effect pigments, disclosed that it would be separating its pharmaceutical and coatings/chemicals operations with the likelihood that the medicines arm would be placed in a joint venture.

Now Akzo Nobel has also conceded that the differences in culture and markets between pharma and coatings/chemicals activities are so big that it would be best that they were run independently of each other.

Analysts reckon that the impetus behind the proposed breakup came from a growing preference among investors for "pure play" companies rather than conglomerates. Akzo Nobel is now likely to be an even stronger competitor in decorative paint to rivals such as ICI and SigmaKalon. But with its strategy of having a broad coatings portfolio, Akzo will also be putting more resources into its niche operations in industrial coatings.

The split is likely to mean that in coatings Akzo Nobel will be investing more in acquisitions and in new production capacity in growth markets. Its priority will be to accelerate expansion in certain geographical areas, particularly in Asia and Russia, and in some industrial segments.

Commenting on the plan to spin off its pharmaceuticals business, Hans Wijers, Akzo Nobel's chief executive said that the move would result in "increased management and strategic focus and greater transparency" and the ability to invest in "attractive expansion opportunities" in coatings.

"Our coatings business is the market leader and our recent acquisitions underscore our commitment to pursuing opportunities globally, including in emerging markets," he added.

After an initial public offering (IPO) of a minority stake in the pharmaceutical business, which will be combined with the company's animal health activity in Organon Biosciences, Akzo Nobel intends to make the whole operation a totally separate entity within two to three years. Senior executives have indicated that the measure had been under consideration for a few years.

The company's existing structure, based on the necessity of meeting the two contrasting requirements of pharmaceuticals and coatings, is a handicap to a coatings operation which had to respond quickly to changes in a global marketplace, according to Wijers.

Akzo Nobel's management had to be able to concentrate on exploiting openings for accelerated growth in coatings, without the distraction of dealing with the different challenges posed by the pharmaceutical sector.

In 2005, the revenue of the coatings business in fact went up faster than the Organon pharmaceuticals activity-by six percent against three percent. Even in an improved fourth quarter, Organon's 11% rise in revenue was behind coatings sales at 12%.

Total coatings sales last year amounted to $6.5 billion, of which 36% was in decorative paint, 31% in industrial activities, 18% in marine and protective coatings and 17% in car refinishes. Marine and protective coatings recorded the biggest sales rise of 11% while the industrial operation achieved nine percent.

The return on invested capital (ROI) excluding incidentals in coatings was for the second year in succession higher than that of the Organon business-20% against 16%. Organon had the burden of R&D expenditure equivalent to 18% of revenue compared with a level of only three percent in coatings.

In fact, ROI without incidentals in coatings fell around three percentage points last year, mainly because of steeply rising raw material prices and difficult economic conditions in mature markets like Western Europe.

The six percent revenue growth was mostly driven by rising sales in the emerging markets, in particular those of Asia-Pacific, Eastern Europe and the Middle East. At the end of 2005 emerging markets represented 34% of the global sales of the coatings business.

By far the biggest of these new markets in terms of potential is China where Akzo Nobel opened new decorative and powder coatings plants last year and acquired the Chinese decorative coatings company Guangzhou Toide Paint Manufacturing Co.

"[China] has a key role to play in the company's growth strategy," said Wijers. "We aim to double our sales in China over the next five years and we have a clear ambition to become China's number one coatings company."

Coatings has been accounting for two-thirds of Akzo Nobel's revenue in China with a lot of its business coming from heavy engineering projects, such as Shanghai's new airport and stadium, the Ertan dam in Sichuan Province, and the huge Haicang bridge in Xiamen.

The nature of the Chinese coatings market epitomizes Akzo Nobel's need for a coatings operation which can react rapidly to fluctuations in the marketplace.

"Here [in China], everything is price, price, price-and it's very volatile," said Anders Broestrom, president of Akzo Nobel China. "In Europe you can fix the price for a commodity for a year. Here it can vary from month to month or even week to week."

Akzo Nobel runs its activities in China without a strong corporate center in the country, so that its business units have a relatively free rein to deal with sudden changes in the market environment.

"Our decentralized decision-making system allows our businesses to make independent decisions and respond very quickly," said Leif Darner, Akzo Nobel's board member responsible for China.

Russia, where the company has recently opened a state-of-the-art coatings plant, is another key emerging market for Akzo Nobel. But it has a relatively small share of its two Russian segments of decorative paints and car refinishes. Instead it is pursuing a strategy of targeting the higher end of the decorative market and the quality, service-supported area of refinishes. With Russia's economy expected to continue to show fast growth, Akzo Nobel sees Russia's burgeoning middle class as having big potential as a future customer base.

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