Brazil’s petrochemical giant Braskem makes a giant
bet on North America.
In recent years, several of Brazil’s largest companies have
aggressively expanded their presence in North America by acquiring major U.S.
firms in a range of sectors. In 2008, InBev, the Belgian-Brazilian beer
company, acquired Anheuser-Busch, the largest brewer in North America. Giant
Brazilian meatpacker JBS purchased both Swift & Company in 2007 and
Pilgrim’s Pride in 2009, in deals that created the largest beef processor in
the world. Over the past decade, Gerdau Group, one of Brazil’s largest steelmakers,
has become the second-largest mini-mill steelmaker in North America after
acquiring mills from numerous U.S. steelmakers.
No firm is more emblematic of Brazil’s industrial emergence in the U.S.
than Braskem, the Brazilian petrochemical giant. Philadelphia-based Braskem
America is the leading producer of polypropylene in the United States, with
five production plants located in Texas, Pennsylvania and West Virginia, and a
technology and innovation center in Pittsburgh. In the U.S, Braskem, co-owned
by Brazilian conglomerate Odebrecht and Brazil’s state oil firm Petrobras, has
directly invested a total of $600 million, highlighted by its 2010 acquisitions
of both Sunoco Chemicals (for $350 million) and Dow Chemical’s propylene
business (for $160 million).
Now Braskem is partnering with Mexican oil company Pemex and Grupo
IDESA, a large Mexican petrochemical group, to build a $3.2 billion integrated
petrochemical complex in the Coatzacoalcos Petrochemical Complex in the Mexican
state of Veracruz. The giant facility is scheduled to go on-stream in 2015.
Why has Braskem made both the U.S. and Mexico a priority in its global
expansion plans? Three years after its costly U.S. acquisitions, what new
opportunities and challenges is Braskem facing in North America? What role does
technological innovation play in the company’s expansion plans? Despite such
ambitions, in what ways might its style of management remain distinctively
Brazilian despite future growth?
The Importance of Scale
Felipe Monteiro, a senior fellow at Wharton's Mack Institute for Innovation Management, believes there are
two fundamental reasons why Braskem has made such a commitment to the United
States and Mexico. The first factor involves the large scale of operations
required for success in today’s markets for petrochemicals. “In order to
compete in that industry, you need to have a global presence,” and the United
States offered Braskem a major opportunity for an acquisition in the form of Sunoco’s
polypropylene facility, says Monteiro, who is also a professor of strategy at
INSEAD in France. “Without a target like Sunoco, it would have been much harder
to become a global player, because [doing so] takes a long time and lots of
capital” in this sector.
With annual average revenues in the U.S. of about $2 billion, Braskem
America is now the largest thermoplastic resins producer in the Americas and a
major global player in the polypropylene, polyethylene, PVC and chemicals
markets. Braskem is also the world’s largest producer of biopolymers
(bioplastics). Overall, each year Braskem spends an average of $40 million on
capital investments aimed at improving its U.S. assets.
Kirk Sherr, president of Clearview Strategy Group, LLC, an energy
sector consultancy, notes that although Brazil is the largest economy in Latin
America, and Braskem is “extremely competitive within the Mercosur [trade]
bloc,” Braskem’s prospects for further growth in South America are limited.
“There is not much more market share that Braskem can acquire inside Brazil,”
says Sherr, given that they already have a dominant (70%) share within
Outside Mercosur, other Latin American countries that are relatively
open to investment and trade -- such as Chile, Colombia and Mexico -- are
growing more rapidly than Brazil’s Mercosur partners -- Argentina, Paraguay,
Uruguay and Venezuela. Those other non-Mercosur countries, including NAFTA
member Mexico, can offer Braskem a lot more room for market expansion, Sherr
says. Unlike Mexico, the governments of Argentina and Venezuela, which joined
Mercosur in 2012, have pursued protectionist policies that have opened very few
opportunities for foreign investors.
On the other hand, when Braskem executives looked at Mexico, adds
Sherr, they saw a country where they could take further advantage of NAFTA to
increase Braskem’s penetration of growing markets in both the United States and
Canada. Mexico has enacted a wide range of free-trade agreements, not just with
the U.S. and Canada, but with free-market economies worldwide – including the
European Union, Japan, Chile, Colombia, Israel and Peru.
According to a statement by Braskem, the new petrochemical complex near
Veracruz will particularly strengthen commercial ties between Mexico and Brazil.
In 2010, Mexican exports to Brazil amounted to only $3.78 billion, or about
1.3% of total Mexican exports of $298 billion. That’s almost exactly the same
total ($3.76 billion) as Mexican exports to Colombia, a much smaller nation,
Braskem’s growing investments along the U.S. East and Gulf coasts – as
well as in Mexico – will make it easier for the Brazilian firm to take
advantage of the expansion of the Panama Canal, whose capacity is scheduled to
double by 2015. Gaining access to the payoff from the Canal’s expansion “is not
feasible if you are based only in Brazil,” says Sherr.
The Right Time for Expansion
According to Renato Monteiro, vice-president for business development
and M&A at Braskem North America, while the company has “a large market
share in the Mercosur market,” it has also identified “strategic opportunities”
that it can pursue in the Mexican market.
The timing seems to have been fortuitous: “The shale gas revolution has
opened up a new phase in the North American petrochemical industry” during the
past few years, he adds. As recently as 2006, he recalls, conditions in the
North America market were “grave, because there were not enough feedstocks” --
that is to say, the natural gas liquids such as ethane, methane, butane and pentane.
But with the dramatic increase in the production of such natural gas
liquids, the industrial base for petrochemical production has become “extremely
attractive, not just for Braskem but for the whole petrochemical industry,”
Renato Monteiro notes. Moreover, “as the price of oil has become very
expensive, ethane has become a much more competitive feedstock” for producing
Overall, Braskem’s Monteiro acknowledges that the firm’s aggressive
expansion efforts could hardly have come at a better time. Since Braskem
acquired Sunoco Chemicals in 2010, he notes, “the profitability of the
petrochemical industry has increased significantly” because of the decline in
the cost of its feedstocks. In addition, “financial multiples have also increased,”
which means that companies are willing to pay higher prices for corporate
acquisitions than just a few years ago, when Braskem made its Sunoco
Along with that optimism, some observers say that shale gas can bring
back manufacturing to the United States. Sherr notes that as recently as
2004-2005, the U.S. petrochemical industry “was pretty much dead in the water
because natural gas liquids were expensive. But now, natural gas is less
expensive, and all natural gas liquids are being produced in volumes that
exceed U.S. consumption.”
Nevertheless, Sherr warns that if he were on the board of Braskem, he
might be “on edge about what might happen if prices for ethane stay low” in the
U.S. “It could be a potential threat for their Mexico plant” if some buyers in
Mexico decide to take advantage of cheap feedstock prices and buy their
petrochemicals from nearby plants in the U.S. -- such as Texas and Louisiana --
instead of from Mexico.
“The U.S has cheap capital and cheap energy. And there is not much of a
labor component” in petrochemical production, so Mexico derives little
comparative advantage from having a lower-cost workforce, Sherr notes. “Instead
of buying the polypropylene from Braskem in [Veracruz] Mexico, plastic
manufacturers [in Mexico] could buy it from Houston…. It is only a few days
from Houston to Veracruz by ship or even by truck,” given the high efficiency
of U.S. supply chains. “This must a scary thought for Braskem, which has
committed $3 billion to a petrochemical plant,” he adds. In response, Braskem
America’s Renato Monteiro says that his company is not worried about such a
possibility because of contractual promises from its buyers.
The Role of Innovation
Braskem executives say they are competing in North America not just on
the basis of competitive pricing, but innovative product development. For
example, Braskem marketing materials boast about its portfolio of “high
performance, sustainable polypropylene,” which is said to meet the needs of
today’s sophisticated automotive and compounding applications by providing
reduced “wall-thickness capabilities” that manufacturers can use in order to
produce more finished goods using fewer raw materials.
This lighter, more efficient line of product is also said to reduce
transportation costs and vehicle emissions. One Braskem brochure boasts a line
of products that offer a “unique balance of stiffness, toughness and flow
properties,” and “exceptional competitive advantages for multiple end-uses.”
Longer term, Braskem is also banking on its ability to produce
innovative bioplastics at competitive prices. Unlike traditional plastics made
from natural gas or petroleum, bio-based -- or plant-derivative -- plastics are
biopolymers made from renewable biomass sources such as corn starch or
vegetable oil. A growing volume of plastics are known as bioplastics because
they are made from feedstocks like sugar cane or corn. According to the
American Chemical Council, although the first plastics, including cellophane,
were made from bio-based materials, those plastics were largely eclipsed by
more efficient options.
But bioplastics are reemerging as scientists develop more efficient
ways to produce them, and in response to rising concerns about the use of
finite resources, primarily natural gas and oil. In 2012, W. R. Grace &
Co., for example, signed a multi-year agreement with Braskem to develop process
technologies and catalyst solutions to produce green chemicals. The agreement
is intended to advance the commercialization of a process to convert renewably
sourced feedstocks into value-added products.
It’s hardly accidental that a Brazilian company has become the leader
in bioplastics, according to Sherr. As a feedstock for manufacturing
petrochemicals, Brazil pioneered in the usage of sugar cane, and the country
was an early convert to the use of ethanol. Braskem’s view was that if it could
use this sugar to produce oil and gas, then it could use it as a feedstock to
In the U.S., such a decision made little commercial sense, notes Sherr,
because “[Americans] are very price focused.” When it comes to bioplastics,
“Braskem is different, because it has 70% of the Brazilian petrochemical
market. As the largest producer [of petrochemicals], they have more control
over prices. They can use their market power and close relations [with the
government] to encourage broader adoptions of bioplastics” in that country. The
challenge for Braskem in the U.S. is that it will have to compete for market
share in a country where “price is as strong, or stronger, a consideration for
most people who are buying plastics products,” adds Sherr.
A Shortage of Talent
For all its promise, the U.S. petrochemical sector’s recovery is being threatened
by a shortage of experienced engineers. “There is a big hole in the U.S. in
terms of the ages of petroleum and petrochemical engineers,” says Sherr. “There
is a big gap between the supply of engineers in their mid-fifties, and those
from 25 to 30 years old. The experienced young generation only goes up to about
35, because the U.S. did not produce a lot of petroleum engineers” during the
years when the industry was languishing.
Back home in Brazil, Braskem still faces a different sort of challenge
popularly known as the “Brazil cost.” Even Brazilian firms often talk about
excessive bureaucratic barriers to doing business in the country, involving
“long decision-making time,” acknowledges Braskem’s Renato Monteiro. INSEAD’s
Felipe Monteiro, also a Brazilian, agrees that products made in Brazil
generally tend to be more expensive because of complex regulatory requirements,
high taxes, weak infrastructure and other inefficiencies.
While acknowledging “the Brazil cost,” Felipe Monteiro stresses that Braskem
is “part of a big group [Odebrecht] that is very well connected with the key
players,” and Petrobras is one of their key shareholders. Those connections
mitigate the impact of the Brazil cost, and make things “less costly for them
to do business worldwide,” he notes.
In any case, Felipe Monteiro argues that U.S.-bred engineers will face
relatively few cultural barriers as they attempt to climb the ladder of
Braskem’s North American hierarchy. A major focus of incoming Brazilian
managers in the U.S. has been to enact a homespun Brazilian style of
management, rather than to focus excessively on technology. Despite all their
portfolios of innovative products, “what they bring from Brazil is not a better
way to build [products], but the Brazilian culture,” says Felipe Monteiro.
He adds that Braskem’s style of management is “very open,” reflecting
“the ability of people at the top of their hierarchy to be accessible.”
Braskem’s Brazilian-style model for corporate globalization involves being
“very humble and transparent in their behavior” and very direct about admitting
In the not too distant future, Felipe Monteiro wouldn’t be surprised to
find an American at the helm of Braskem’s North American operations. “This
style of control is very similar to what other Brazilian companies like InBev
[which acquired Anheuser-Busch] used when they came to North America. They bring their DNA,” he notes.
Republished with permission from http://www.knowledge.wharton.upenn.edu --
the online research and business analysis journal of
the Wharton School of
the University of Pennsylvania.