On July 20, 2020, BASF announced that BASF Venture Capital, the corporate venture capital company of the German chemical group, is investing in SmartAHC, a supplier of digitalization solutions for pig farming on the Chinese market.

Does that mean BASF wants to enter pig farming in the future? This seems like a somewhat strange activity for the world`s largest chemical company. And indeed, that is not BASF`s goal. But why the investment then?

According to their website, BASF Venture Capital wants to “accelerate the development of the chemical industry by investing in young companies and funds that develop new technologies and disruptive business models.” Specifically, the focus is on three different areas, namely New Materials (currently 5 direct investments), Biotechnology and Sustainability (10 investments) and Digitalization (9 investments). In addition, BASF Venture Capital invests in funds which themselves primarily focus on the same areas as the direct investments.

The aim of these investments is not primarily to earn money. Typically, the investment size is between $1 million and $5 million (the total fund size is $250 million) – not nothing but quite small compared to BASF`s annual sales of more than €59 billion (about $68 billion). Even if any of these investments turns out to be wildly successful – e.g., bringing a fivefold return – the resulting gain of $5 million to $25 million would still be very small compared to BASF`s annual profit of almost $10 billion.

Why these investments then, and why in these areas? To quote from the website, “An important aspect of our investment decisions is the connection of the BASF Group’s strategic and operative interests with the technical and commercial development objectives of young companies.” In other words, the investments are in areas that have a connection to BASF`s business.

Let us take a closer look at the investment in SmartAHC mentioned earlier. SmartAHC was founded in 2014 by graduates of Nanyang Technological University in Singapore. The Shanghai-based start-up provides, in nice consultant speak, “customized digital solutions to increase efficiency throughout the pork value chain.” In other words, SmartAHC uses sensors, cameras and artificial intelligence to observe the condition of farmed pigs throughout the rearing process. Pig farmers can therefore continuously monitor the health of their animals and take action, for example, by selectively providing medication, adjusting the feed or separating sick animals.

Of course, it is not an accident that this start-up is focusing on the Chinese market. Half of the global demand for pork comes from China – around 700 million animals per year – as pork is the most popular meat in China.

Coming back to our original question, why did BASF Venture Capital invest in SmartAHC – does BASF plan to open its own pig farms? Obviously not. However, the aim of the BASF fund is to generate new growth potential for BASF by investing in new companies and funds. So, there should be a link between the SmartAHC business and the BASF portfolio.

Basically, SmartAHC uses artificial intelligence (AI) to optimize the pig farming process from breeding to finishing and slaughtering. One of BASF`s 6 business segments has a division named Nutrition & Health. Its portfolio is described as “Products for the food and feed industries, the flavor and fragrance industry, the pharmaceutical industry and the ethanol industry”

The relevant aspect here is products for the feed industry. These cover additives for the feed (and food) industries, such as vitamins, carotenoids, sterols, enzymes, emulsifiers, omega-3 fatty acids, human milk oligosaccharides.

If working as planned, the SmartAHC monitoring tools should give farmers both timelier and more individual information on the health of their pigs. Accordingly, the farmers could change the feed mix to their animals, i.e., by adding or reducing the amount of any of the additives produced by BASF. This could be done on the level of individual animals (if monitored and fed separately), or larger groups of animals.

Chemical suppliers (such as BASF) to industries such as automotive, farming and many others are afraid to become “dumb” suppliers of materials, far removed from the value-creating steps of information gathering and utilization. BASF`s investment is to be seen in this light. In future, it is possible that a company collecting animal health data (such as SmartAHC) and adapting the treatment of the animals accordingly (e.g., by adjusting feed mix and medication) will control a large share of the market for feed and feed additives. BASF as a supplier of those additives could then be one step further away from the farmer than they are now, as the data company would in effect buy from them (or at least have a strong influence on the decision). BASF wants to avoid this by becoming part of the data collecting organization.

Interestingly, Evonik has also invested in SmartAHC. The company has 5 divisions, one of which being Nutrition & Care. One subunit is Animal Nutrition, with amino acids as the main products. Evonik is also interested in AI applications in animal farming. For example, for poultry, their website describes the merits of Precision Lifestock Farming (PLF): “Evonik PLF combines science, expert knowledge, intelligent software, and connectivity into a comprehensive solution for poultry production – by focusing on a wide range of applications from nutrition, health and farming. Evonik Precision Livestock Farming enables the transformation of data from the entire value chain into valuable information that – with help from Evonik experts – leads to new knowledge about livestock farming. This knowledge facilitates facts-based decision-making, which results in precise actions that make use of Evonik’s proven feed supplement and gut health portfolio.” These statements also indicate Evonik`s desire to be a part of the knowledge-oriented aspects of animal farming rather than just providing pure materials, as – similar to BASF – the company believes that this is the main area of future value creation.

As such, BASF`s interest in SmartAHC is part of a larger trend that can also be seen in other investments of BASF Venture Capital – trying to get involved in the decision making and knowledge creation part of materials usage. Here are some related examples of BASF Venture Capital stakes:

• BigRep offers comprehensive additive manufacturing solutions including 3D printers, engineering grade materials, proprietary software, and services. Of course, this is relevant for BASF as a producer of polymers used in 3D printers
• Hummingbird Technologies is involved in remote sensing, artificial intelligence, machine learning and data analytics for agriculture, and thus linked to BASF`s pesticide portfolio
• EcoRobotix is working on precision technologies for weeding and is thus similarly linked with BASF`s pesticide portfolio

In conclusion, BASF`s investment in SmartAHC is the latest step in a long process of leading chemical companies moving from providing materials to complete solutions. Companies such as BASF have already taken many steps along this way, so far mainly by moving away from commodities and focusing on specialty chemicals instead. In the future, even this will not be enough to avoid commoditization and to protect margins. Embracing solution providing in the future will mean more and more working with data, not just producing chemicals, however innovative those may be.

Dr. Kai Pflug
Management Consulting – Chemicals, Shanghai, China
kai.pflug@mc-chemicals.com