Statement to the press - Professor Dr. Ulrich Lehner

President of Verband der Chemischen Industrie (VCI)

4 December 2008, Frankfurt

(The spoken word takes precedence)

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Ladies and Gentlemen:

After strong growth in the past years, the production of chemicals stagnated in 2008. In the first two quarters, we were still recording growth figures in chemical output. But since the middle of this year, the impacts of the financial crisis and the global downturn have been felt throughout the entire German industry. This applies also for the business with chemical products; their output dropped in the 3rd and 4th quarters. Looking at 2008 as a whole, the weakening of the economy - with zero growth - is stronger than had been expected only six months ago.

Chemical sectors

Developments in 2008 varied in the individual chemical sectors.

Basic chemicals only slightly exceeded the level of the previous year. The production of inorganic basic chemicals dropped by 2.5 percent. The output of petrochemicals did not further expand in 2008. By contrast, manufacturers of polymers saw a slight production increase by 1 percent.

Impacts of the economic crisis affected in particular fine and specialty chemicals and consumer-related chemicals. In 2008 the output of specialty chemicals fell by 3 percent. With a production drop by 1.5 percent, manufacturers of detergents and personal care products did not reach last year's level. These two sectors were especially hard hit by the reserved consumption behaviour of private consumers and the crisis of the automotive industry.

In 2008 the production of pharmaceuticals went up by 3.5 percent, so that high growth rates of earlier years were no longer achieved.

Prices

Enormous price increases for oil, gas and other raw materials forced chemical companies to raise their prices, too. Until the 3rd quarter 2008, prices of chemical products had been climbing vigorously. With the spreading financial crisis, most recently the prices of raw materials fell noticeably. In consequence, also chemicals prices dropped at the end of 2008. But in the annual average, prices of chemicals were still around 5 percent higher than in the previous year.

Sales

Because of higher prices, total sales of the German chemical industry exceeded the previous year's level by 3 percent and rose to 178.8 billion euros.

Sales trends at home and abroad were almost similar. Foreign sales went up by 3 percent to 97.9 billion euros. Domestic sales climbed by 2.5 percent to 80.9 billion euros.

Exports and imports

Exports – this term comprises foreign sales by chemical companies, re exports and chemical exports by other industries – rose in 2008 by 8 percent to 140.1 billion euros. Because of strong pharma exports and the good demand from newly industrialized countries, the export business remained a mainstay of the German chemical industry – irrespective of the global economic downturn.

By contrast, imports grew much more slowly than last year. At 97.7 billion euros, imports were only 4 percent higher than back in 2007.

With ca. 42.4 billion euros, German chemical companies once more contributed strongly to the export surplus of our country.

Employment

In 2008 the German chemical industry had an average of 438,500 staff. Thus the number of jobs in chemistry was almost stable, irrespective of the less dynamic economic situation. Due to the spin-off of parts of companies, official statistics show a slight drop in employment by 0.5 percent.

Investment

In 2008 domestic investments by German chemical companies rose by 5 percent to 6.8 billion euros. Beside rationalization and replacement investments, companies increasingly focused on new capacities. In the present year, companies spent just under 3 billion euros on new plants for capacity expansions – twice as much as back in 2005.

But investment plans for 2009 are more cautious. In view of the difficult economic situation and the threatening costs of emissions trading, investment decisions are currently being reconsidered in many cases.

Research and development

In the present year, chemical companies once more increased their spending on research and development, totalling 9.7 billion euros. Out of this total, little less than 6 billion euros fell to the share of the pharma sector. This high R&D spending pays off, as it keeps strengthening the international competitiveness and the success of German chemical companies. This is reflected in high export figures.

Outlook

In the 4th quarter the demand for chemical products dropped noticeably. Therefore, companies are cutting down production. Due to the slack demand and much uncertainty, business expectations of chemical companies became less optimistic recently.

Now the financial crisis has reached the real economy of industrial nations. The USA, Japan and many European countries – including Germany – are in recession. Emerging economies – such as China, Russia and India – are not left unmarked by the crisis, either. Growth has become clearly weaker in all fields of industry. As private consumers and companies are taking a cautious attitude where consumption and investment are concerned, the demand for consumer durables and capital goods is falling. The automotive industry is particularly hard hit. In many countries, the real estate crisis is an additional burden for the construction industry.

These developments are reflected in the order books of our companies. In early 2009 the output should be further reduced. For next year, we are expecting a drop in chemical production. The pharma business – which does not depend on cyclical trends – has a stabilising effect, so that the drop by 1 percent will keep within certain bounds, given the turmoil of the global economy. With less pressure from raw material markets, producer prices will end their upward flight. We are expecting a moderate price decline. Chemicals prices will be 0.5 percent lower. Thus, total sales of the chemical industry should decrease by 1.5 percent.

Ladies and Gentlemen:

With a bundle of measures, our companies are preparing themselves for recession. Many countermeasures are about cost structure. Resorting to this area, companies are trying to remain successful in a difficult environment. We know this from a topical survey among member companies. After my statement, Dr. Tillmann will inform you about the most important results of this survey. Let me just say that companies are doing whatever they can to keep their permanent staff. Thus they are making an important contribution to stabilizing the current situation. We very much hope that they can hold out until we have passed the trough and the demand picks up again.

We are also expecting the state to make a contribution toward safeguarding jobs. One thing should be quite clear: The chemical industry does not need any financial rescue funds or government stimulus packages which go beyond the measures adopted by the cabinet.

Classic economic stimulus programmes, where public administrations - instead of companies and consumers - spend money, are a double-edged sword. Such programmes may be suitable to stabilize economic imbalances in the short term. But they also distort competition and create desires for the future. What we need is a sustainable strategy, which makes the industry location Germany more successful and, consequently, more resistant to crisis. In plain words: We need an industry-friendly policy.

Preserving and expanding this industry location means primarily: Creating an investment-friendly environment, promoting research, strengthening small and mid sized enterprise, and improving infrastructures.

Where investment and innovation are concerned, the state must further improve framework conditions for all companies in Germany - irrespective of what industries they are part of.

Significant costs, which are threatening for energy-intensive industries from emissions trading, have the opposite effect. Even if the intervention of the federal government in the Council gives reason to hope for at least partial compensation, emissions trading remains a heavy burden for the future for many companies and a danger to their international competitiveness. Therefore, we once more urgently ask the European Parliament and the Council to bring emissions trading in a concrete shape which enables energy-intensive industries to continue producing and investing here in Germany. This is the only way for us to make our contribution to employment in Germany also in the future and to help protect the climate with our innovative chemical products.

From our viewpoint, fiscal support for research and development is an adequate instrument for promoting innovations. This form of promotion is already being put into practice in most EU Member States and in all major countries outside Europe. It makes sense, both in terms of innovation and industry location policies. The state should have a profound interest in encouraging as many companies as possible to undertake research in Germany. Therefore, we proposed - already before the financial crisis - tax credits in the amount of 10 percent of their total R&D spending, for companies of all sizes.

What was good and necessary before the crisis is now becoming even more urgent. The state should not create any extra obstacles and burdens for industry. It is in the interest of all of us – industry and general public – to get the economy going again as fast as possible:

This is because industry with real values – and not the service sector – forms the core of value creation in Germany. Industry is the guarantor and the factor of stability for growth, prosperity and jobs. In hardly any other industrial nation is industry's share in the creation of value as high as in Germany with around 26 percent. And this share is rising: While in other Western European countries the share of industry in the gross value added dropped noticeably over the last few years, industry's contribution in Germany continued to rise.

In view of these facts and especially in difficult times, when hopes for another upswing of the economy rest essentially on industry, we need the right signals in the next few months to come. The right signals which economically justify new investments in Germany. This includes, first and foremost, a full commitment of politicians to Germany as an industry location.

Ladies and Gentlemen:

The crisis of financial markets has brought about many problems. And it has further weakened the confidence of citizens in the social market economy. This is dangerous, because we know no other organizing principle which brings better results. Some 50 years after [the then economics minister and German chancellor] Ludwig Erhard shaped our understanding of social market economy, people should now regain their trust in this form of economy. As a prerequisite the right rules are needed, so that the forces of the market create – and do not destroy – the prosperity of society. Market economy needs rules. Such rules must be set by the state or by the community of states. In the past, rules were lacking in the financial sector and supervision failed. The action plan of the G20 summit in Washington for reforming and controlling global financial systems is an important step in efforts to find a way out of this crisis.

But the social market economy needs more than rules, it also needs ideals. We as entrepreneurs must do our share, too, to rebuild and to strengthen confidence in the social market economy. Should the impression be spreading in the public that managers only care about higher profits or personal enrichment, this might be partly attributable to populist statements by some politicians who demand a change of system without providing well-founded economic or legal arguments for their demand – or who are even speaking of an 'expropriation' of staff by companies.

Undeniably, there were individual cases of misconduct of companies or managers. But such cases must not be generalized, and they must not block the view for the vital contributions from companies and their managers to the prosperity of German society. Therefore, our companies must be even more convincingly and publicly convey our message that for us profits, social participation and responsible action do not stand in contradiction to each other - but that they are all essential parts of management with ideals and values. For a long time now, the work of the overwhelming majority of German companies has been oriented to sustainable corporate development with "corporate social responsibility", i.e. responsibility in society. Here, the decisive point for companies is that they act responsibly along the entire value chain.

Ladies and Gentlemen:

Government and industry are faced with difficult decisions in their efforts to counteract the economic downtrend. The German chemical industry is working intensively on the best solutions for our industry – because strong chemistry in Germany is important for the labour market, for stability and for the innovative strength of our country.