Co-operative activity has been a major feature of Solvay's business strategy in recent years. Gordon McManus, research analyst with Frost and Sullivan, explores the details
The deals with BP, in plastics, and with Kali and Salz, in the salt market, demonstrate some of the multitude of reasons for which companies participate in such ventures and some of the advantages that can be gained by the parties involved.
Such deals have become a major feature of many chemical companies' strategies as they consider as broad a range of ideas as possible to create value and improve operations.
Several of Solvay's ventures have been set up in order to facilitate its strategic repositioning.
This has involved withdrawing from markets where it does not have a leading competitive position, optimising competitiveness in those that it does and generally moving towards higher margin speciality products.
The deal with BP was a three-way agreement, part of which involved Solvay swapping its polypropylene (PP) business in return for BP's engineering polymers business.
This deal achieves two of Solvay's stated strategic aims.
First, the sale of its PP business continues its plans to get out of markets where it does not have a leading competitive position and second, the acquisition of the engineering polymers business increases the share of higher margin specialities in its business portfolio.
The other part of the deal with BP is for the two companies to set up two joint ventures, one in Europe and one in the US, for the production of high density polyethylene (HDPE), with the joint venture company to be named BP Solvay Polyethylene.
Other co-operations in the polyethylene area in recent years have been the September 2000 announcement of plans for a 50% share of two new HDPE plants to be built in the USA with Chevron Phillip, and the October 1998 announcement of two co-operation agreements with Fina Chemicals in the HDPE sector.
These ventures improve the market position of Solvay in the HDPE market and, in addition, will better secure polymer feedstock supplies, previously a significant area of weakness.
The second agreement announced last week was a joint venture in the salt market with, Kali and Salz, a German potash and salt company, named European Salt.
Again, the salt venture increases the competitive position of both companies, with the venture company being able to lever greater economies of scale and providing more comprehensive geographical coverage, which Solvay stated as a key benefit of the venture to its customers. Solvay has entered into other ventures with similar aims in its vinyls business, including the setting up of Solvin, a joint venture company with BASF in 1999 and production agreements with Elf Atochem.
Another classic reason for setting up a joint venture is the chance to enter new geographic markets.
While one company gains a foothold in a new market, the other may gain much needed financial or logistic backing.
Solvay has used such a strategy to expand into new markets for its PVC compounds business.
This has included a venture in Russia with VCP called Solmir, one in Brazil with Dacarto called Dacarto Benvic, and plans for a joint venture in China with Shanghai Chlor Alkali Chemical.
The joint venture route offers several advantages to Solvay.
Primarily it avoids the company building up the large amounts of debt that a straight acquisition or setting up of a venture on its own might involve.
A joint venture also offers the opportunity to be more specific in finding a deal that addresses particular weaknesses that its business and those of its partners might have.
Of course this is obviously a key aim in most joint ventures, whereby both companies gain from each other, creating a business which is greater than the sum of its parts.
Importantly it appears that Solvay is the senior partner in many of these ventures, as they are in sectors in which it already has a leading market position.
In terms commonly used when analysing joint ventures, this marks Solvay out as the entering partner, who might well inherit the businesses, with the other companies perhaps seeking to get out of these areas in the long term.
If the ventures are successful, Solvay could benefit considerably by inheriting more competitive businesses, which are already largely integrated into its corporate structure.
Solvay is certainly taking an active approach in trying to achieve its very clearly stated strategic aims as quickly as possible, and looking at every available option to achieve these.
It has shown considerable business flexibility in the number and type of ventures it has gone into.
An important consideration when planning any such venture is whether or not the companies involved will share certain business goals and motivations, and the strategic fit that can be found between them.
Solvay clearly works hard to find such common ground with a variety of partners. Only time will tell if it can continue to be successful in this respect.
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