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'Technology Leadership and Innovation as Guarantors of Long-term Growth'

Bayer MaterialScience AG : 27 April, 2005  (Company News)
At the European Coatings Show back in 2003, we presented to you the new face of Bayer, represented by Bayer Polymers and Bayer Chemicals, both of which were new business units at the time.
Since then, Bayer has undergone yet another phase of realignment, and presumably the last for the time being. In the process, Bayer Chemicals AG and some polymer activities were transferred to the newly formed company Lanxess. The bulk of the polymer business that remained under the control of Bayer has been integrated in Bayer MaterialScience AG.

Bayer MaterialScience is one of the world’s leading polymers companies. In 2004, it generated sales of EUR 8.6 billion with a global workforce of some 18,000 employees. Bayer MaterialScience produced 7 million tons of polymer raw materials at roughly 40 production locations. Last year, the company invested EUR 300 million in research and development, including collaborative projects with customers.

Bayer MaterialScience’s business activities are divided among five business units and its two wholly-owned subsidiaries, H.C. Starck and Wolff Walsrode. The largest contributor to sales with 45 percent is the Polyurethanes Business Unit, which manufactures raw materials for all kinds of flexible and rigid foams, as well as for polyurethane elastomers and specialty products. Number two, with a share of 24 percent, is the Polycarbonates Business Unit. It produces the transparent, high-tech plastic Makrolon®, not to mention a variety of performance films and Makroblend®, a PC+PBT blend. As you can see here, third place is held by the Coatings, Adhesives, Sealants Business Unit, a worldwide leading manufacturer of polyurethane raw materials in this segment. The Thermoplastic Polyurethanes and Inorganic Basic Chemicals Business Units are considerably smaller. As a result of backward integration, the latter BU has become a key contributor to the raw materials supply of our entire organization.

With sales of EUR 1.2 billion, the CAS Business Unit contributed roughly 14 percent to the total sales of Bayer MaterialScience in 2004. CAS employs some 2,250 people around the world. Our product portfolio mainly includes polyurethane raw materials for the formulation of coatings and adhesives. We are one of the global market leaders in aliphatic and aromatic isocyanates, which also holds for our resins segment. Products based on polyurethane chemistry are also a focal point of our adhesive raw materials line, which is supplemented by a range of polychloroprene raw materials. Finally, I would like to mention our latest product group for sealant and adhesive applications: silane-terminated prepolymers, or STPs for short. All of these raw materials are manufactured at eleven locations around the world.

One of these locations is the coating resins plant in Bitterfeld, Germany, where we have been churning out products for more than a decade. In the early years, our new line of innovative products was still in the developmental stage; today conventional coating resins now take a back seat in Bitterfeld. Attention today focuses on raw materials for coatings with a lower VOC content, such as dispersions for waterborne coating systems. Bitterfeld also produces raw materials for solvent-free systems, such as UV-curing coatings. In his upcoming presentation, Mr. Steinhilber will present to you a number of innovative developments based on raw materials produced at this location.

Besides innovative products, Bitterfeld’s success is also reflected in the expansion of its production capacity: in just over ten years of operation, capacity has risen by one-fourth.

At our Leverkusen site, we have erected a third, large and modern plant for the production of hexamethylene diisocyanate, or HDI for short, which officially went on line last year. HDI is a precursor for Desmodur® N, a key raw material used in high-quality polyurethane coatings for automotive, industrial and plastic finishing applications. With this HDI plant, we are very well-prepared to satisfy future growth, particularly in Europe. Together with a neighboring HDI plant, we now have a total production capacity of 60,000 tons per year in Leverkusen. Incidentally, the new plant has been equipped with the latest production technology to ensure both efficient and environmentally compatible manufacturing.

Currently, however, our investments are concentrated in the Asia/Pacific region, where we expect the highest growth in polyurethane coating raw materials over the next few years. Bayer owns an area of 1.5 square kilometers at the Shanghai Chemical Industry Park in Caojing, where the largest production facility for CAS’s coating raw materials in this region is being built, in addition to plants for other polymer materials. CAS is the first business unit of Bayer MaterialScience to establish new facilities at this site. Technically speaking, the plants reflect the absolute state of the art, and naturally also incorporate experience we’ve gained on other capital projects.

Construction of the production plants for isocyanate-based coating raw materials is broken down into three phases. Back in April 2003, we commissioned a facility with an annual production capacity of 11,500 tons of aliphatic polyisocyanates for the Desmodur® N range.

In January of this year, we commenced operation of a new plant with a capacity of 11,000 tons per year of aromatic polyisocyanates for the Desmodur® L range. These raw materials are used in wood and furniture coatings, for example. They make Bayer MaterialScience the first local supplier of coating hardeners based on low-monomer toluene diisocyanate (TDI) who supports the Chinese government in its initiative to reduce the free TDI monomer content of wood and furniture coatings.

Another large facility for HDI is currently under construction. An annual production capacity of 30,000 tons will initially be available starting in the fourth quarter of 2006, which later can be expanded to 50,000 tons per year depending on market development.

Our investments in new production facilities, which I just outlined for you, are a response to the steadily rising demand for polyurethane coating raw materials. One source of this growth is an increase in regional demand, mainly in Asia/Pacific and Eastern Europe. As a leading supplier, we recognized this upward trend in good time.

In addition, CAS itself ensures future growth by promoting numerous innovative developments for new applications. Isocyanates are a good example: innovations have driven the success of this coating raw material right up to today, and they will continue to do so in the future. The success story began in 1960 with the introduction of Desmodur® N as a coating raw material for the coating of huge aircrafts. Thanks to the close cooperation with our customers and consistent improvements, we went on to develop numerous new applications for Desmodur® N. As a result, the product line enjoys sustained growth even today. Allow me to list just a few of the product’s other applications: corrosion protection, automotive OEM coatings, soft-touch coatings and truck bed liners.

According to forecasts, the global market for polyurethane coatings will post annual growth rates of roughly five percent over the next few years. In other words, growth will be above-average compared to other coating systems. This results from the versatility, but also the high performance of the systems. We expect the demand for polyurethane coating raw materials to rise most significantly in the Asia/Pacific region.

We currently live in a highly dynamic and intensely competitive environment: markets continue to merge, technology cycles are getting shorter, raw material costs and exchange rates are increasingly impacting our profitability. However, we are superbly positioned to deal with this situation thanks to our global presence, the operation of world-scale plants equipped with the latest technology, and a well-stocked innovation pipeline.

In general, the demand for raw materials used in low-emission or solvent-free coating systems is on the rise. The CAS BU for many years has been developing high-quality raw materials for waterborne and high-solids coatings, as well as for UV-curing and powder coating systems, which more than satisfy the ecological and performance requirements imposed on coatings. Mr. Steinhilber will tell you about current events in this segment.

Beyond that, several of our new applications have good to very good market potential. I will go into more detail on this subject shortly in connection with our innovative activities.

We likewise expect further market growth for adhesives and sealants. The most dynamic progress will likely be seen in the Asia/Pacific and Eastern European regions, where a similar trend towards increasing globalization of markets and customers can be observed. Accordingly, tailored services for customers expanding into the international arena will play a crucial role. Moreover, the market is characterized by a highly complex product structure. Systems with a lower VOC content and solvent-free systems are gaining significance in the adhesives and sealants segment as well.

In securing our future by means of innovation, we by no means restrict ourselves to the development of new products and applications for existing raw materials. The development of entirely new markets and new products is also extremely important for our future business success. One example is a project we refer to as the Smart Surfaces Initiative, the goal of which is to identify new business opportunities for raw materials used in functional coatings. In the process, we strategically exploit our extensive formulation expertise. These coatings offer special properties depending on their respective application. The properties range from enhanced scratch resistance, to antistatic effects and antibacterial action.

Accordingly diverse are the potential fields of use and applications, which we are currently analyzing. They include Medical Technology products, such as stents, as well as displays and monitors, optical products, and semiconductors. As with other potential applications, our objective is to develop new markets and industry segments that we can then supply with a mix of new and existing products.

One aspect of special significance in this context is nanotechnology, which makes it possible to develop materials with totally new properties and functions that achieve much higher performance than conventional products – or are the first to even offer the desired properties.

An illustrative example is the development of coating raw materials with nanoscale inorganic/organic structures that lend the clearcoat on a car body enhanced scratch resistance. The nanoscale junctions of these silicate structures in the polyurethane coating matrix provide for the required hardness, but do not cause the coating film to become brittle. At the same time, they are so small that they don’t impair the optical properties of the transparent coating film.

In our adhesive raw materials segment, we have developed a nanoscale additive based on silicon dioxide particles which we market under the name Dispercoll® S. It improves the green strength of one-component, waterborne adhesive dispersions. The advantage for processors is increased productivity, because they can continue processing parts immediately after joining.

Finally, I would like to briefly mention a highly innovative development that opens up a promising future for one of our specialty coating raw materials, although it has virtually nothing to do with coatings or adhesives at all. What I’m referring to are optical storage media with a very high storage density of up to 1.6 terabytes. That’s equivalent to 1,600 gigabytes, or enough to store some four million books, 1.6 million high-resolution photos, or 240 hours of videos on a single disk. Recently, we signed a Joint Development Agreement with the US-based start-up InPhase Technologies. Together with this new partner, we aim to develop the disk of the future. In contrast to the conventional CD and DVD, information is stored not on the surface of the disk, but rather through the full depth of the storage layer. Holography is the key to this technology. By late 2006, InPhase plans to market storage media with a capacity of 300 gigabytes, which incorporate our specially modified raw material.

As I hopefully have shown, the CAS Business Unit of Bayer MaterialScience is a global leader in the manufacture of polyurethane raw materials for coatings and adhesives. As such, it is ideally positioned for the future. We operate and are building ultramodern and efficient production facilities in all key regions of the world to secure above-average participation in future market growth. We have extensive formulation expertise and a well-stocked innovation pipeline, with which we aim to generate further growth for our products. In addition, we have highly motivated employees who offer our customers capable, all-around support.

To conclude, I would like to introduce to you the Management Committee of the CAS Business Unit, which steers the activities of our Business Unit and of which I am chairman. The Management Committee includes three Marketing heads: Bernd Steinhilber, Don Hummel and Marcus Yim, each of whom bear responsibility for specific regions. Then we have Eric Bischof in charge of global product management, Steffen Kühling for Production and Technology, Hans-Wilhelm Engels for Innovation and Karsten Malsch for Business Planning and Administration.

As head of Marketing for the EMEA and Latin America regions (where EMEA stands for Europe, the Middle East and Africa), Mr. Steinhilber is also responsible for our appearance at the European Coatings Show. He will now explain to you in greater detail our areas of concentration at the show, as well as our current marketing activities.
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