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Framework conditions for innovation: The business perspectiveChina and R&D Globalisation: Integration and Mutual Benefits

Beijing, 28 August 2007

J. WuttkeBASF China

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1 | BASF in Asia Pacific

2 | Why innovation in Asia Pacific?

3 | BASF innovation in Asia Pacific

4 | Challenges

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BASF has been trading in China since 1885

BASF in Greater China

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BASF in Greater China

29 wholly-owned companies

9 joint-ventures

14 production sites

More than 5,000 employees

2006 3.8bn Euro revenue

Major investments

Verbund site in Nanjing

Polyurethanes complex in Caojing, Shanghai

BASF Sales Office

BASF Production Company

Nanjing

Beijing

BASF in Greater China

Shanghai

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1 | BASF in Asia Pacific

2 | Why innovation in Asia Pacific?

3 | BASF innovation in Asia Pacific

4 | Challenges

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A typical Euro centric Statement

“Let China sleep, for when she wakes, she will shake the world.”

Napoleon Bonaparte, ca. 1800

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3317 9 5 5 12 20 25

2216

127

35

811

3

87

66

2

919 27 22

2120

181517

26 26 19 1814

1110

20 4

2

4

33

1

01020

30405060

7080

1700 1820 1870 1913 1950 1973 2001 2015 2025

China Indien Japan USA Big 4 EuropeanSource: Angus Maddison

% of World GDP

at purchasing power parity

Comeback of China and India:GDP as a share of world GDP 1700 - 2025

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China‘s growth model will shift towards own innovation & new technologies

Workshop of the world

New technologies

„Copy-novation“

Innovation

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Consumer of chemicals

shifting to Asia

Origin of innovation and technologiesshifting to Asia

We innovate in Asia Pacific to leverage customer and technology dynamics

We need to innovate where our customers & latest

technologies are

Better understanding of customer needs

Faster reaction on customer needs

Wider access to latest technologies

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1 | BASF in Asia Pacific

2 | Why innovation in Asia Pacific?

3 | BASF innovation in Asia Pacific

4 | Challenges

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Prerequisites for successful university cooperation

Excellence, People, Trust, Mutual respectExcellence, People, Trust, Mutual respect

WinWin--Win SituationWin Situation

Scientific communityScientific community IndustryIndustry

Scientific Scientific ReputationReputation

Fast publication

Reputation and respect

Financing

Competitive advantageCompetitive advantage

IP-protection

Exclusivity

Economic value

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BASF´s cooperation model with ISIS

Scientific Excellence (Prof. Lehn)

IP protection100% BASF

cost efficient

flexible

R&D team at ISIS is integrated in

BASF

IInstitut de SScience et d‘IIngénierie SSupramoléculaires

http://www-isis.u-strasbg.fr/BASF/

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BASF R&D in SingaporeR&D for growth cluster nanotechnology

Competence center for nanostructured surfaces

Objectives• Create center of excellence

for surface science and nanotechnology

• Participate in excellent scientific infrastructure of academia (A*STAR institutes) and industry

• Strengthen research network in Asia

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Leverage all our innovationopportunities in Asia Pacific!

Global R&D Center

Basic research, cooperations with universitiesFocus on new technologies

Locations: Thane (India), Singapore

With three types of innovation centers in Asia, we cover local customer needs and participate in latest technologies

Regional R&D Center

Product developmentand formulationsFocus on regional market needs

Locations: Kuanyin, Shanghai,Yokkaichi Pasir Gudang, ...

Local Technical Center

Local product abaptationFocus on technical customer support

Locations: Nansha, Chigasaki, Sydney, Singapore, Bangpoo, ...

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Market Requirement: Adhesion of marine organisms leads to increased fuel consumption of ships by ca. 40%. Reduce fuel consumption by applying an eco-friendly solution

Solution through chemistry: Minimize adhesion of marine organisms by making the surfaces more repellent via biocide-free, eco-friendly nanocoating

BASF input: Fundamental research with BASF teaming up with 30 partners in a trans-national research collaboration Ship hull and propeller

covered with organisms

Nanotech solutions from new research lab in Singapore

Lotus effect in nature

How to prevent marine organisms building up on ship hulls?

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BASF innovation hub Shanghai area:Successful innovations for Asia Pacific

Technical R&D Center

Opened July 2005

>100 R&D employees

Main activities:- Dispersions (formulations,

paper, adhesives, coating)- Polymer materials (paper,

textile, leather, admixtures, construction, formulations)

- Pigments, dyes, stabilizers

Polyurethane TDRC

Opened June 2007

>30 R&D employees

Main activities:- Slab foams- TPU development- Automotive, CASE

rigit construction and appliances

Automotive Center

Opened 2007

> 20 R&D employees

Main activities- Technical Center for

engineering plastics- R&D for catalysts- Formulation development

for fine chemicals

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Is there the specific Chinese touch?

Market Requirement: Communication about hand feel can only be physical, thus we need to be literally close to the customer to develop the touch the industry wants.

Solution through chemistry: Unique combination of different chemistries to achieve a wet, soft, buttery touch and improved physical properties of leathers for garment, upholstery and shoe upper.

BASF input: Local development in a cooperation of selected customers, leather technicians and development chemists

Innovative handle modifiers from new technical R&D center in Shanghai

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1 | BASF in Asia Pacific

2 | Why innovation in Asia Pacific?

3 | BASF innovation in Asia Pacific

4 | Challenges

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Is China a technology threat? No

• China isn’t innovative enough today• Why innovation is important for China• Once inventive, but not innovative?• Why isn’t China innovative today?• How to become innovative?

Slide Source: CLSA 2006

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Not really ‘Made in China’

• 88% of tech exports from MNCs 2005

Up from 80% in 2003

• Only 4 of these top 25 exporters are local firms

• MNCs value-added in China overall is still too low

Source: CLSA 2006

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Policy challenges

• Coherent policy e.g controversial Patent Law• What is ‘Indigenous’ R&D?• Financing structure, lack of venture capital• IPR: enforcement problem, low penalty clauses• Forced technology transfer / local content requirement = wrong signal• Competition Policy e.g. Anti Monopoly Law and M&A regulations• Standards, why not int. standards• Mismatch: Skills university graduates vs. knowledge organisations• How to get state funding into SME’s• Public Procurement could promote innovation, GPA problem

Slide Source: CLSA 2006

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System challenges

• How to handle the conflict between • innovativeness — which is strongly determined by creativity, critical

thinking, and the willingness to take risks and to accept failures—and

• a political system and educational and organizational culture that discourage dissension and individualism.

Source: NBR, Sylvia Schwaag Serger & Magnus Breidne

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Innovation requirements in China

– Innovating in China is similar to innovating elsewhere in the world – It requires listening to customers, excellence in project management,

managing risks, providing leadership, etc.

But it requires a little bit more:– Most local organisations are not wired for innovation– There is a lack of market information or contacts with lead markets– There is dearth of resources in particular risk capital or creative design– There is a lack of understanding for intangibles e.g. IP or brands– Markets and Customers are hardly mentioned in R&D plan

Source: Cambridge University Arnoud De Meyer

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Rewiring the organisation

1. Innovation needs a focus on value creation2. Shift from creative improvisation to careful

process management3. See the firm as a bundle of competencies, not

as a portfolio of products4. Stimulate creativity: a difficult task in family

dominated organisations5. Get Marketing better: Build up antennae in

sophisticated markets

Source: Cambridge University Arnoud De Meyer

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Clever Management

1. Yes an appropriate and enforced IP protection framework is important

2. But you cannot wait till that is sorted out:» Learn from the imitators» Defend yourself with speed, back office

protection, brands, captive resources, etc.

Source: Cambridge University Arnoud De Meyer

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Consumer of chemicals

shifting to Asia

Origin of innovation and technologiesshifting to Asia

We need the best R&D talents from the region to successfully innovate in Asia

We need to innovate where our customers & latest technologies are

Better understanding of customers

Faster reaction on customer needs

Wider access to latest technologies

We are looking for the best R&D talents to innovate with us in Asia Pacific!

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Thank you