Hoechst A.G.

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Hoechst A.G.

Frankfurt-(M)-80
Federal Republic of Germany
(0611) 305-1

Public Company
Incorporated: 1952 as Farbwerke Hoechst A.G.
Employees: 180,561
Sales: DM 33.994 billion (US$ 17.505 billion)
Stock Index: Munich Hanover Bonn Frankfurt
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Hoechst is the largest of the three chemical companies formed in 1952 after the Allies disbanded the German chemical cartel known as the IG Farben. A welldiversified company, Hoechst is particularly focused on Pharmaceuticals, and would like to see its subsidiary, American Hoechst, attain a prominent position in the U.S. drug market. This is not an unreasonable aspiration for a firm that was, until Du Font’s takeover of Conoco, the largest chemical company in the world.

Hoechst started out in 1863 on the Main River, 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, mid-wives and prenatal care.

Throughout the late 19th and early 20th centuries, dyestuffs accounted for 90% of Hoechst’s sales. Although an 1883 brochure alloted 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 seems 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 adrenalin 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.

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 gun powder and mustard gas, but they made hundreds of synthetic substitutes for what were blockaded organic materials necessary to the war effort.

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 orgnizations 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’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.

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 DM 211 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% a year. To put this figure in perspective, one of the fastest growing American chemical companies during the 1960’s, Union Carbide, had a compounded growth rate of 6.8%.

Hoechst’s growth was much quicker than that of Bayer and BASF, because unlike the other two companies Hoeschst 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% 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.

Hoechst began the 1970’s with sales of well over two million marks. In the early 1960’s the company was only a third as large. On paper, the company’s profit margin had decreased 9%, which is 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 plans for expansion in India. 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.

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% 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. The earlier purchase of the Hercules Corporation’s share of the South Carolina based Hystron Fibers Incorporated was of little comfort. Feedstocks were rising, prices were down, and patents had expired. There was little Hoechst could do but be thankful that its product line was well diversified.

During this time, the company continued its program of overseas expansion. 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. American Hoechst president John Brookhuis 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. Today Hoechst’s sales are five times Celanese’s.”

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 diuretic named Lasix accounted for 80% 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. The drive into America was part of Hoechst’s long range plan to raise its share of international sales from three and a half to five percent of the world-wide market. Furthermore, as part of its strategy to make U.S. Hoechst one of the largest pharmaceutical houses, Hoechst has also been investigating the possibility of genetic engineering. A joint project with Massachusetts General Hospital has been arranged in order to use this new technology to create insulin in the laboratory.

One reason for Hoechst’s expansion into the drug market, which began in the early 1980’s and continues to the present day, is that the returns for drugs are higher than they are for basic chemicals. However enthusiastic the company had been in regard to international expansion, Hoechst will not expand in Venezuela or Italy. In Venezuela the company has not been allowed to raise its prices for 21 years and Italy’s price controls and drug pirates make it “a drug market to forget,” in the words of one German executive.

The expansion of the world’s second largest chemical company is not, of course, limited to pharmaceuticals. In an ambitious move, Hoechst purchased the industrial ceramics division of Germany’s largest fine china maker named Rosenthal. The Japanese presently control 90% of the market for semi-conductor ceramics, but Hoechst is determined to take away some of Japan’s share. Hoechst will have to invest a substantial sum of money in the business to be competitive, but with profits increasing 80% in 1984, company management is not anticipating a cash flow problem.

Hoechst’s future appears to be quite promising. Since 1970 it has been larger than the IG Farben from which it sprang. The company has a few worries including protectionism and a high debt to equity ratio, but its worldwide market, foreign production facilities and diversified product line will insulate it from many undue economic and political trends. With its de-emphasis on basic chemicals and synthetic fibers, the threat from oil-rich chemical industries faced by many American producers is minimal for Hoechst.

Hoechst plans to increase its product line in pharmaceuticals and industrial ceramics, whose success depends on technical superiority. To that end, Hoechst has continued to spend approximately four percent of total sales on research and development, which is more than Du Pont. The company’s large research budget is evidence of the fact that Hoechst management thinks in terms of long term rather than short term benefits. According to one Hoechst executive, “American corporations have to show they can make more and more profits from quarter to quarter. We are not using that yardstick.” If, as this quote implies, Hoechst measures its success by how well it is positioning itself for the future, then it is a successful company indeed.

Principal Subsidiaries

Ruhrchemie AG; Behringwerke AG; Asid Bonz und Sohn GmbH; Hoechst Veterinaer GmbH; Uhde GmbH; Uhde Services und Consulting GmbH; Herberts GmbH; Helmstedter Lack-umd Chemische Fabrik GmbH; Permatex GmbH; Spies, Hecker GmbH; Standox GmbH; Hoffmann & Engelmann AG; Marbert GmbH; Balenciaga GmbH; Wohnungsbau Hoechst GmbH; Decker & Eisenhardt, Essigessenz-Verk. GmbH; Boehringer & Reuss GmbH; Farbw. Schroeder & Stadelmann GmbH; Goldbach GmbH; Hoechst Versicherungs-AG; Peralta Handel GmbH; Ernst Michalke GmbH & Co.; Spinnstofffabrik Zehlendorf AG (96.7%); Hoechst Ceram Tec AG; Messer Griesheim GmbH (662/3%); Oxytechnik GmbH; Oxysaar Huettensauerstoff GmbH (75%); Cassella AG (over 75.59%); Jade Cosmetic GmbH; Cassella-Riedel Pharma GmbH; Riedel-de Haen AG (over 76%); Cassella-med GmbH (51%); Albert Roussel Pharma GmbH (74.9%); Ticona Polymerwerke GmbH (59%); WackerChemie GmbH (50%); SIGRI GmbH (50%); Benckiser-Knapsack GmbH (50%); Abieta Chemie GmbH (50%).