Hoechst A.G. - Company Profile, Information, Business Description, History, Background Information on Hoechst A.G.

65926 Frankfurt am Main
Federal Republic of Germany

Company Perspectives:

The Hoechst Group is an international network of innovative and customer-oriented companies, which are among the top three suppliers in the pharmaceutical, agricultural, and industrial chemical centers of Europe, the Americas, and Asia. We are aiming for above-average return on capital employed.

History of Hoechst A.G.

With operations in 120 nations around the globe, Hoechst (pronounced "herckst") A.G. is the world's largest chemical manufacturer. By the mid-1990s, less than 25 percent of its annual revenues were generated in its home country of Germany. From its roots as a dyestuffs producer, the company grew to become one of that nation's top three chemical firms. It was a key component of the IG Farben chemical cartel, and emerged from the post-World War II breakup of that conglomerate as a strong and growing entity. Hoechst developed a particular focus on pharmaceuticals in the ensuing decades, but its diverse product line--including agricultural and industrial chemicals, fibers, polymers, and engineering services--helped to shelter it from vacillations in any one market. In 1996 the Kuwaiti government, through Kuwait Petroleum Corporation, continued to hold the 25 percent stake in Hoechst that it had first acquired over a decade before.

19th-Century Origins

Founded by Eugen Lucius in 1863, the company takes its name from the village of Hochst am Main near Frankfurt. At the time its entire capital consisted of a three horsepower steam engine and a small boiler in which anilin oil and arsenic acid, boiling together, produced a synthetic fuschia dye. By 1874 this primitive machine gave way to a new chemical plant. In a period of 20 years the Hoechst workforce grew from 5 to 1900 employees. By the end of the century, Hoechst had several thousand workers and a good reputation as an employer. The company reduced the traditional 12-hour day to 8 hours, and provided its employees with athletic facilities, midwives, and prenatal care.

Throughout the late 19th and early 20th centuries, dyestuffs accounted for 90 percent of Hoechst's sales. Although an 1883 brochure allotted the company's work in pharmaceuticals only one sentence, this work was, in retrospect, significant for both Hoechst and the history of pharmacology. At first glance, a dye company like Hoechst might seem an unusual setting for pioneering work in drugs, but it must be remembered that the German dye industry, with its ties to major universities, had a degree of technical expertise unrivaled in the world. Furthermore, many dyes and drugs shared a similar chemical composition.

In 1883 a Hoechst chemist working with quinine discovered Antipyrin, one of the first analgesics. The company cooperated with leading researchers Koch and Erlich to produce the Novocaine familiar to dental patients, and also Salvarsan, the first effective treatment for syphilis. Salvarsan was one of the first disease-specific medicines. Most 19th-century drug discoveries were, like aspirin, general remedies. The list of Hoechst's achievements in pharmacology includes the 1906 synthesis of adrenaline and the 1923 isolation of insulin.

Despite its contributions to medicine, Hoechst was not popular with American chemical manufacturers. Along with other German companies, including Bayer and BASF, Hoechst waged an intense price war against its U.S. rivals in the dye industry. One tactic of the German dye trust was "dumping"--selling chemicals below cost in order to eliminate indigenous competitors in the American dye market.

Global Conflict Spurs Creation of IG Farben

Although the American chemical companies fought back, the German chemical trusts, of which Hoechst was a leading member, did impede the growth of the U.S. chemical industry. The political implications of the German trade wars became apparent during World War I when the Americans found themselves at a technical and productive disadvantage for waging war. Before the advent of nuclear weapons, chemical companies played a leading role in arming a country. Not only did they produce gunpowder and mustard gas, but they made hundreds of synthetic substitutes for organic materials that were in short supply due to war needs or embargoes. After the outbreak of World War I the German chemical industry rushed to fill military requests for inorganic chemicals, pharmaceuticals, explosives, and photographic chemicals. While domestic business increased Hoechst, along with the others, lost its share of the American market and all its U.S. assets. After the war laws were passed to protect the American dye and drug industry from the aggressive policies of the German chemical companies. England, France, the United States, and Germany had all developed elaborate organizations to coordinate chemical production during the war. When peace came, however, all of the countries except Germany quickly dismantled these organizations. The survival of these organizations in Germany, coupled with American protectionism, encouraged the formation of the IG Farben in 1925.

Early in the century two large chemical cartels had been formed within Germany, one of which was centered around Hoechst. In 1925 it was decided by the leaders of the chemical industry that the two cartels should merge into a single company called the Interessen Gemeinschaft Farbenwerke, or IG Farben. From an early date the IG Farben was active in politics, especially in urging that Germany re-arm itself.

That such a large cartel should wield political power comes as no surprise, but the extent of the IG Farben's influence and the nature of its activities gives it a special distinction. After developing its own spy network and placing its directors in the German senate or Reichstag the IG Farben, as the representative of Germany's most important industry, was very influential in the 1933 elections. The man the IG Farben supported was Hitler.

The IG Farben profited greatly from Nazi Germany's political policies. Hitler's plans for world domination coincided neatly with the IG Farben's plans to monopolize the international chemical industry. After the fall of France the Nazis requested that the IG Farben formulate plans for managing the chemical industries in conquered lands, and the cartel complied.

Postwar Breakup of IG Farben

After the war the directors of the IG Farben were charged with war crimes. Their indictment at the Nuremberg trials stated that due to the activities of the IG Farben "the life and happiness of all peoples in the world were adversely affected." This was a serious charge, to which charges of fomenting war and killing slave laborers were added. Despite the gravity of the accusations and the large amount of evidence taken from the IG Farben's own records, no director received more than a four-year prison sentence. A few even returned to sit on the board of directors at Bayer and Hoechst.

Since the German cartel was closely connected to the Nazi regime, the Allies wanted the IG Farben broken up into smaller and less influential companies. The plan for dismantling the IG Farben into three large and nine small companies was less radical than the original plan proposed by the U.S., but by the year of the plan's implementation, 1952, the focus of U.S. foreign policy had shifted away from Germany and toward Russia. Enmeshed in the Cold War, a distracted U.S. finally agreed with France and England not to break the IG Farben into smaller pieces.

The companies absorbed into the IG Farben had lost their corporate identity and this posed a problem for the Allied bureaucrats charged with the task of dividing up the cartel. In general, the largest three companies were given back their pre-1925 holdings. This meant that Hoechst inherited its original Frankfurt works. Over the objections of some Allies, Hoechst also managed to obtain Bobingen AG, a fiber manufacturer.

The newly organized Hoechst grew quickly. The German economy, rebounding from the war, needed chemicals, and Hoechst's factories had survived the Allied bombing attempts. In its first year of independence from the IG Farben, Hoechst had sales of DM211 million. The next year, 1953, Hoechst obtained world rights (exclusive of the U.S.) to manufacture polyester. In 1954 the company began work with polyethylene and polyolefins; in 1956 it began to manufacture petrochemicals. By 1960 the company was clearly on its way to regaining its stature as one of the world's leading chemical companies. By the end of the decade, Hoechst achieved a compounded growth rate of 15.4 percent a year. To put this figure in perspective, one of the fastest-growing American chemical companies during the 1960s, Union Carbide, had a compounded growth rate of 6.8 percent.

Hoechst's growth was much quicker than that of Bayer and BASF, because, unlike the other two companies, Hoechst did not invest in expensive petroleum projects; instead it purchased oil and gas through large term contracts. Hoechst also had a well-diversified product line that protected it from the volatility of the marketplace. Its largest division, paints and plastics, represented only 22 percent of sales. Plastics, fibers, agricultural chemicals, and pharmaceuticals completed the product line. In 1963 Hoechst acquired a Dutch company that made plastic moldings. In 1965 the company built a Trevira polyester plant in neighboring Austria. In France that same year a venture in oxo-alcohols was started. In addition, Hoechst began manufacturing polystyrene in Spain.

Diversification into Pharmaceuticals Marks 1970s

With sales of well over two million marks, Hoechst had by 1970 surpassed the IG Farben from which it sprang. On paper, the company's profit margin had decreased 9 percent, which would have been quite a decrease for an American firm. German businesses, however, have different bookkeeping procedures. They tend to minimize profits where American companies tend to inflate them. The decrease in profits did not stop Hoechst's program of international expansion. Berger, Jenson and Nicholson, Britain's largest paint maker, was on the Hoechst shopping list, along with France's Roussel Uclaf, in which Hoechst took a majority equity position.

Moreover, the United States, with its lower labor costs, was also an attraction. Germany was in the midst of a labor shortage, and the presence of Arabic and Mediterranean guestworkers was becoming a sensitive issue. American workers accepted lower salaries, were entitled to fewer fringe benefits, and were more amenable to layoffs than German workers. Hoechst's acquisition of Hystron Fibers Incorporated in South Carolina made a quick amendment to its U.S. operations.

In the midst of Hoechst's foreign expansion, pharmaceuticals emerged as a significant market. Hoechst had almost gained control of the entire diuretic market, and was a leader in oral medication for diabetics. During this time problems emerged with the maturation of some established drugs and also with drug pirating in Italy. However, pharmaceutical sales still managed to grow at a rate of 13 percent a year despite these setbacks. The growth was fueled by a production of antibiotics, serum, and steroids, as well as a new hookworm medicine popular in Asia and Latin America. By 1978 Hoechst was fortunate to possess a large line of pharmacological products because the company suffered losses in the fibers market. Forbes magazine estimated that in a period of three years Hoechst lost one billion marks. Feedstock costs were rising, prices were down, and patents had expired. Company executives took solace in the knowledge that their company's diverse product line would shield it from long-term harm, and that pharmaceuticals would eventually repay their high up-front costs with equally fat profits.

Emphasis on U.S. Market in 1980s

Hoping to increase its global market share from three-and-a-half to five percent, Hoechst focused on the world's largest nation of consumers, the U.S. In 1980 Hoechst built a $100 million plant in Freeport, Texas, the largest single investment it had made. With the addition of this plant Hoechst became larger than Du Pont. John Brookhuis, president of the company's American subsidiary, was proud of Hoechst's growth. "When our parent company celebrated its centennial there was especial joy that Hoechst world-wide had just passed Celanese Corporation in sales."

Encouraged by its 20 years of growth, the management of Hoechst became determined to secure a larger share of the U.S. drug market. This would not be an easy task, even for Hoechst. Up to this point a single drug, the diuretic Lasix, accounted for 80 percent of U.S. sales. The first plan of action was to double the U.S. sales force, and also to target hospitals, the major customers for ethical drugs. Early in the decade, Hoechst presented Harvard's teaching hospital, Massachusetts General, with a history-making US$70 million grant to fund cooperative genetic research. Hoechst acquired New Jersey-based Celanese in 1987. By the mid-1990s, this subsidiary (renamed Hoechst Celanese Corporation) was generating nearly 25 percent of the group's annual sales. Hoechst capped its North American push with the 1990 purchase of a majority stake in Celanese Mexicana.

Efforts during the 1980s were not, of course, limited to North American pharmaceuticals. In an ambitious move, Hoechst purchased the industrial ceramics division of Germany's largest fine china maker, Rosenthal. At the time, the Japanese controlled 90 percent of the market for semi-conductor ceramics, but Hoechst was determined to take away some of Japan's share. Hoechst faced a substantial capital investment in the business to attain competitiveness, but with profits increasing markedly, company management did not anticipate a cash flow problem.

The 1990s and Beyond

As the twin demons of recession and drug industry consolidation bedeviled Hoechst in the early to mid-1990s, the company devised new strategies. Key among them was the joint venture, wherein two or more companies share the costs and benefits of researching, developing, and marketing new products. Joint ventures with Courtaulds in fibers, Schering in pesticides, and Wacker in plastics were expected to boost productivity in these lagging sectors. Cooperative projects such as these also helped forge vital relationships in new and emerging markets. In 1990, for example, the company signed an agreement with Japan's Teijin to manufacture flame-retardant fibers.

Ironically, acquisitions were also used as economizing measures, as Hoechst executives expected to squeeze economies of scale from new affiliates. Accordingly, the company acquired three European powder coatings operations, a German fibers producer, and a controlling stake in an American manufacturer of generic drugs. In a 1995 bid to re-establish itself as a leading player in the drug business, the company acquired Marion Merrell Dow for US$7.1 billion. The merger moved Hoechst into third place in the continuously consolidating pharmaceutical industry.

But in spite of these efforts, Hoechst's sales wavered in the early 1990s and its profits declined in four consecutive years from 1990 to 1993. To make matters worse, the company was found responsible for several chemical spills in 1993. Chairman Wolfgang Hilger retired early the following year, and was succeeded by 30-year Hoechst veteran and Chief Financial Officer Jurgen Dormann. Faced with a difficult trading environment and a multitude of internal inefficiencies, the new CEO vowed to increase profitability.

His first move was to appoint an eight-member task force composed of executives from Hoechst's global operations. The new leadership took a number of downsizing measures. Massive layoffs trimmed total group employment from over 179,000 in 1991 to just under 166,000 in 1995. A global rationalization of operations also helped cut costs. Dormann's plan appeared to be working in the mid-1990s. Sales increased by over 10 percent from DM46.05 billion in 1993 to DM52.18 billion in 1995, and profits multiplied from less than DM1 billion to a record DM2.25 billion during the same period. (further reading) Alperowicz, Natasha, "Dormann Leads a Revolution at Hoechst," Chemical Week, June 15, 1994, pp. 38-41. Around the World with Chemistry by Kurt Lanz, New York: McGraw Hill, 1980. Bdumler, Ernst, A Century of Chemistry, Dusseldorf: Econ, 1968. Hayes, Peter, Industry and Ideology: IG Farben in the Nazi Era, London: Cambridge University Press, 1987. "Pharma: German Majors Compared," ECN-European Chemical News, September 4, 1995, p. 24. Williams, Dede, "Hoechst Ponders Polymers Future," ECN-European Chemical News, September 25, 1995, p. 31.

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