The last couple of years have been anything but easy for Clariant. Not only has the company been hit hard by the recession, but it has also come to terms with the fact that there is a large discrepancy between its production locations and its customer base. The company recently announced its Project GANO, which has been used to reevaluate Clariant's production network. The company has been taking drastic measures in order to expedite streamlining its business: Over 2,500 jobs have been cut since the end of 2008 due to internal restructuring and plant closures, and more cuts are planned for 2010. Brandi Schuster spoke with CFO Patrick Jany about the necessity of the company's restructuring.

CHEManager Europe: Mr. Jany, where have most of the job cuts taken place within Clariant since the end of 2008?

P. Jany: There has been a profound redimensioning of the whole group, with most of the reductions taking place in SG&A, our selling, general and administrative expenses. Only about 15% actually came out of the area of production. The cuts have taken place throughout the entire group, not in just one particular section.

Clariant recently announced plans to move its textile dyes and textile chemicals from Switzerland, to Asia. The company will also be moving the paper chemical production to its site in Prat, Spain, leaving only additives to be produced in Switzerland and affecting about 500 jobs, 400 in Clariant's hometown of Muttenz. What was the motivation behind this move?

P. Jany: We want to have a better geographical match between markets and production facilities, and it is important for us to be close to our customers in a number of areas. This is the case with lower-value products such as textiles, where it is vital to be close to the customer. Currently we buy many of the raw materials for our textile chemicals in Asia, ship them to Muttenz for processing and transfer them back to our customers in Asia. This clearly does not make economic sense and we need to shift to where the market actually is.

The shift of textiles to Asia began 15 years ago. Why is Clariant only now following suit?

P. Jany: Historically speaking, we have had a very good technology and capacity base in Europe, and we have grown with those markets as they have developed. However, these markets have developed faster than we have been able to transfer our production. And now it's time to adjust our position, because 60% of the textile market is in Asia. There is certainly a lag effect as well, and we have to correct it.

What was the motivation behind moving the paper chemical business to Spain?

P. Jany: That was a consequence of the moving of the textile business to Asia. Our paper chemicals production in Muttenz shares many infrastructure resources with textile production The reduction in textiles puts paper at a disadvantaged cost position, because it would be a small level of production inside a big plant. That would translate into a huge cost burden. Because we already produce paper chemicals in Spain, we can fully load that plant there.

That's a good point. Clariant has had several plants that have been running under capacity for some time now.

P. Jany: A crisis will always accentuate the evolution, but we had idle capacity in 2008 as well, and that is why we began our Project GANO. The whole point is to find the remedy for structural deficits that have worked their way in over the years through growing too much capacity with too many plants, particularly small plants.
We really need to concentrate on cost-effective plants that have a decent size at the right location. Wherever this is not the case within our network, we have to adapt. We have always had underutilization of capacity, so now we are cutting that in order to have a better cost structure.

Where has this underutilization come from?

P. Jany: It has been an evolution over the years. Just in Europe, we have opened plants in Spain, Italy, the UK, France, etc. Obviously, when you have one single market being opened, and more competition and prices being adjusted between the countries, you have an adjustment of the cost level. While this is necessary, it also makes some plants redundant. It is then logical to concentrate on the most efficient plants, while the others remain with an ever-increasing amount of empty capacity.
This has put a few plants in a very difficult situation over the years. They may have been totally necessary in the 1950s or '60s, but they have become emptier, because they aren't cost efficient and the new production goes somewhere else.

Clariant has also announced site closures in Brazil and India.

P. Jany: In Brazil it's all about textiles; we had two sites in Brazil, so we are transferring part of the production from one plant to the other, as well as partly to China. It's just a matter of cost benchmarking between the sites and ensuring that the products we are transferring can be produced in the long term at a reasonable cost at the right plant. We don't want to be restructuring every two years as we are already lagging behind. That's precisely what we want to avoid. In India, it's about site consolidation and saving on infrastructure costs. We have three sites there, and we are now closing one to transfer the production to another site. The plant we are closing is one of the oldest in our network and because of the rapid urban sprawl, it is now in a residential area of Mumbai.

Your company is also working on the centralization of its R&D efforts. What will that new structure look like?

P. Jany: Up until now, we've had a very business-unit based R&D. Historically, groups were working on specific projects all around the world, which leads to inefficiency in terms of allocating resources in a way that generates value. At the end of the day, we have too many people in too many locations involved in too many projects - and not enough people working specifically to finish the major projects. Our intention now is to concentrate our R&D into a couple of locations, which will also help to foster synergies between teams. We have now appointed a head of R&D, and it is his mission to design this new R&D environment during 2010 so we can put it into place by 2011.

Where will the main R&D focus be?

P. Jany: It is too early to say. But we will be pushing technologies rather than business units, making the technologies available group wide. Our main focus will be organic chemistry - we won't be starting anything new - but it is too early to say where we will further develop. We have good competencies in many areas, then we have to choose where there's a more creative part to it.

Clariant's new internal structure - 10 individual business units as opposed to four large divisions - went to effect at the beginning of the year. How much autonomy does each unit now have?

P. Jany: Targets were discussed, but the business unit leaders are now in charge. They have to run the business, and that's the whole spirit of having 10 entrepreneurs. We are going away from having a top-down leadership to entrusting an entire business to a business unit head.
They have to tell us how they will perform this year, given the current environment, and where they want to take their business units over the next 2-3 years. We have accepted their targets, and now they have to deliver. If we enforce targets from the top down, we would frustrate the people. With achievable goals, we hope to motivate our people. They are now running the show.

In which businesses are you expecting positive growth in 2010?

P. Jany: There are many where I expect an improvement on operating income, independent of real growth. From a growth point of view, we have modest expectations. There will be growth in Asia, and a bit of diverse influences in different business. There is still a significant drop there compared to 2008, but we expect that to stabilize during this year. The other BUs have stabilized, but we aren't counting on growth for them to improve their performance; they have to improve their costs first.

The company introduced the initiative "Clariant 2010" back in 2006, which outlined the direction in which the company wanted to go. How obsolete has that become over the last few years?

P. Jany: The real goal behind that was to have a sustainable above-industry average return on invested capital by the end of 2010, and we are on target for that. This goal was set to close the performance gap between us and our peers in the chemical industry. The global economic crisis came on top of it, forcing us to accelerate. However, we would have taken the steps we are now taking anyway in order to reach a good cost position by the end of 2010.