Publish in Special Reports - Wednesday, September 25, 2013
Braskem's La Porte plant in Texas. (Photo: Braskem)
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 Mercosur.
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, that year.
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 these petrochemicals.
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 acquisition.
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 produce petrochemicals.
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 their fallibility.
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.