Brazil’s petrochemicals industry has been going through active consolidation, a phase that is almost at an end. That process, however, has seen the creation and growth of Braskem, a giant of a firm that is the largest petrochemicals producer not just in Brazil but in all of Latin America. Bernardo Gradin, who has been part of Braskem since the company’s formation in 2002, took over in July as its CEO. In an interview with Knowledge at Wharton conducted at the company’s Sao Paulo headquarters, Gradin discussed Braskem’s goal of becoming one of the world’s top 10 petrochemical companies as measured by shareholder value.
An edited transcript of the interview appears below:
Knowledge at Wharton: You took over in July as the CEO of Braskem. The company was formed in 2002 as part of the consolidation of Brazil’s petrochemical industry. Could you start by providing some background and context on that process? Why was that consolidation needed?
Bernardo Gradin: The petrochemical industry in Brazil was originally formed in 1970s from a positioning of the government substituting imports. Petrobras, the state-owned oil company, took the lead. It had a strategy of bringing technology companies, most of them Japanese and European firms, and proposed that Brazilian entrepreneurs would take one-third of petrochemical companies, Petrobras one-third, and the technology partner the other third. With this three-party partnership program, Petrobras would be the provider of raw material and the government would stimulate through tax incentives, substitute imports basically on petrochemicals. That evolved until the end of 1980.
When the first wave of privatization came, Petrobras sold its participation in most of the companies to Brazilian and international companies. The petrochemical sector had a private orientation, but Petrobras still had a big role. The problem was the number of small petrochemical companies. By the end of 1990’s and the beginning of 2000, because of a number of moves in those companies there was an opportunity for consolidation in the Northeast. From these moves the consolidation started. From 2001 to 2007, Braskem sponsored seven mergers and today is a consolidation of eight companies. The original one was CPC, Trikem, and now Braskem is the consolidation for all these companies.
Knowledge at Wharton: In 2007 Braskem acquired Grupo Ipiranga. Has the consolidation run its course, or is there still more to be done?
Gradin: The consolidation in Brazil is done. Petrobras also made a move on acquiring Suzano, which was another petrochemical company here. We are merging Suzano with Unipar and creating the Southeast Petrochemical Group. There are two big groups today. In both groups, Petrobras is a relevant shareholder and the only raw material provider. But the consolidation of the Brazilian petrochemical industry, I think, has ended.
Knowledge at Wharton: What is it like having a government company as a partner? Petrobras has a 30% voting stake in Braskem. How do you manage that relationship?
Gradin: It can be a challenge and an opportunity at the same time. It is a challenge because there are some differences in culture. Governance is a challenge in terms of how to implement agility and investment priorities. On the other hand, the opportunity is that we are able to move into the international petrochemicals arena. The international oil companies that drove petrochemicals in 1970 and 1980s and the large petrochemical companies that we knew when Braskem was formed seven or eight years ago are not there anymore. National petrochemicals companies are moving onto the world market from the Middle East, as are private funds and investors that have taken over the past icons of the petrochemicals industry. In that sense, having Petrobras as our main shareholder is also a defensive move. It shows how the regional market can be protected by our national agenda. There is an opportunity there.
Knowledge at Wharton: Let us turn now to Braskem’s strategy under your leadership. Before you joined Braskem, you had worked several years for the Odebrecht organization. Could you tell us about your career before you came to Braskem?
Gradin: I began working for Odebrecht just after finishing school. I went to civil engineering school and then I worked on hydro dams for about four years in the Amazon in the Central Brazil. Then I moved to the United States — my first job for Odebrecht in the U.S. was in Florida. I was the engineer of a project there. Then I went to Wharton, and after that I spent three-and-a-half more years in California working for Odebrecht, serving the US Army Corps of Engineers.
Then I returned to Brazil. I came to the petrochemicals business at the end of 2000. I was responsible for strategic planning, so I was directly involved in the many acquisition back in 2001. Later I left Braskem for a year and then came back in July. That is my career, in a nutshell.
As for our strategy, we are right at the point of rethinking the next 10-year strategy. Back in 2001, we had a strategy for 2010, which we have implemented two years prior to our deadline. Now we have to rethink and prepare our plans for the next 10 years.
Knowledge at Wharton: Braskem is the largest petrochemical company in Brazil and Latin America. Recently, there was a ranking, and globally Braskem was ranked 31st among the world’s petrochemical companies. If you wanted to take Braskem into the top 10 in terms of shareholder value by the year 2012, how would go about it?
Gradin: Good question. But I am not sure we would compare ourselves with the 31 petrochemical companies with which we were ranked. I am not sure which companies these are, so I am not sure about the rank. But we do have a goal of being one of the 10 most valued companies. That has a lot to do with how we improve our EBITDA, cash generation, protect our market and go international more aggressively.
The way we position ourselves is to become a more competitive regional player. The first move is consolidating our Brazilian assets, and then reaching for the competitive raw material in South America. We made a move in Venezuela and we became the preferred partner of the Venezuelan petrochemical company, Pequiven. We made the same move in Bolivia and in Peru — where the raw materials are. As a result of these moves, we will upgrade our EBITDA to become one of the 10 largest petrochemicals firms by 2012.
Of course, there is much to do. We need to improve our presence in the U.S. and pursue international alliances on petrochemicals in Asia as well as Europe.
Knowledge at Wharton: You have used acquisition as a growth strategy within Brazil. Will you take the same approach internationally?
Gradin: If there is an opportunity. We have the option to continue growing through acquisition, and that will depend on opportunities. It would be opportunistic because there are not many synergies in acquiring a company in the U.S. or in Europe and operating from Brazil. It involves geographical expansion, so it really depends on what opportunities we can find.
Knowledge at Wharton: How do you approach integration in a way that preserves value? Research shows that many mergers end up destroying value rather than creating it.
Gradin: Yes, that is true. One of the key elements is having a clear goal about where you want to be after the merger. That goal must be measurable in terms of performance, operations as well as costs. You must also identify the people who are responsible for leadership following the merger, and who are responsible for driving the synergies. This may sound like a common sense answer, but the key to ensuring value through mergers and acquisitions is having clear and tangible elements to measure, and having people responsible for key elements.
Knowledge at Wharton: Braskem has an interesting way of managing innovation. You recently announced a breakthrough in creating polypropylene from 100% renewable sources, or from sugarcane. Can you tell us about this project and its significance for Braskem?
Gradin: Until recently Braskem’s focus was on what our end-users needed in terms of the best products. Our goal was to help our clients develop such products. We also approached innovation as a barrier to entry and to acquire market share. About 18% of the products we sell today were developed during the last three years.
As for developing ethanol from sugarcane, we did that first with polyethylene. We did it 10 years ago in one of our plants. What is new today is that we can have it in a pure state so that we can certify for end users.
In addition, Brazil is probably the most effective and productive producer of ethanol and we think that will be the case for some time. Being positioned in Brazil with such technology can be really good in strategic and in operational terms for Braskem. The polypropylene you mentioned was also a breakthrough but it is not in a viable route so far. We are concentrating on polyethylene and we have a team that is developing green polymers. We are looking for international alliances.
Knowledge at Wharton: What competitive advantage would green polymers have over traditional products which are made from naphtha, for example?
Gradin: Today, the demand for [products made from] renewable sources is high. There will be more and more demand for such products, and being a pioneer we have first-mover advantage. We also think there is much to improve in terms of our cost advantages. Compared to naphtha, even if oil comes down to the 50s, it will still be competitive. But there is a first move advantage and also an advantage of having the best partners before the others.
Knowledge at Wharton: Speaking of partners, you recently signed an agreement with Toyota’s trading arm; they will be selling about 25,000 metric tons of green polymers from 2011. Do you see Asia as an important market? What is your competitive strategy for that region?
Gradin: For green polymers, definitely Asia is an attractive market. Asia has been a pioneer in many products. With Toyota as a partner, Braskem has a fantastic opportunity to enter Asia.
Knowledge at Wharton: What is the biggest leadership challenge you have ever faced? How did you overcome it?
Gradin: My biggest challenge is the one I face today. I have not overcome it yet but I plan to do it by having the best people around me.
Knowledge at Wharton: How do you define success?
Bernardo Gradin: It is a matter of having bigger challenges delegated to you.