Braskem – Green Plastics – The Marketing Challenge Case Study

This case was written by Heiko Spitzeck, Fundação Dom Cabral (www.fdc.org.br). It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case has been compiled from publicly available sources, internal documents and interviews with Braskem executives such as Claudia Bocciardi (Director of Institutional Marketing), Jorge Soto (Director of Sustainable Development), Alexandre Elias (Director Renewable Chemicals), Marcelo Arantes (Vice-President Personnel and Organization) and Antonio Morschbacker (Director of Technology for Renewables). Further support has been received from Sonia Chapman, Mário Pino and Aline Mariscal Padeti

© 2016, Heiko Spitzeck, Fundação Dom Cabral – www.fdc.org.br. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any format without the permission of the copyright owner.

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Braskem – Green Plastics – The Marketing Challenge HEIKO SPITZECK1

It´s early 2007 and Claudia Bocciardi, Director of Institutional Marketing of Braskem, could not get to sleep. Braskem, Brazil´s leading petrochemical company, had just announced the successful production of a “green plastic” which is made out of Ethanol. The process substitutes oil in the production of plastics, in this case polyethylene (PE) by a renewable source: sugarcane.

Claudia knew that this was a big thing and recalls: “We knew that at in this moment we had a product which differentiates us in the market”. Several businesses, including Braskem´s clients, were talking about sustainability – it was the hot topic of the day. The Green Plastic would fare well in this respect as it offers some substantial advantages: - it substitutes non-renewable oil in the production process with renewable Ethanol made from sugarcane - the process captures carbon, as sugarcane absorbs CO2 in order to grow - Green plastic can be used easily by clients – an advantage called “drop in” – as the product is identical to its traditional version made from oil. This means that client’s don´t need to adapt their machines and production processes. - Green Plastic can as easily be recycled as easily as traditional plastic.

What sounds like a clear-cut sustainable innovation, comes with some challenges. In using oil for production, Braskem is involved with other petrochemical companies with – depending on the company – a track record of safety and well-defined processes as well as laws for environmental protection. In switching to sugarcane, Braskem involves itself with a value chain including small agricultural farms. This in turn has led potential clients to wonder about issues such as slave and child labour, deforestation of the Amazon forest, raising food prices as well as other social and environmental issues.

What most concerned Claudia was how to tell the story of Green Plastics to the right audience: “We are a petrochemical company, an organization used to communicating in a B2B environment. We are not a company used to communicating with the consumer.” Alexandre Elias – Director of Renewable Chemicals agrees: “How to communicate with the final consumer is a constant challenge. To talk about absorption of CO2 works well with the sustainability departments of our clients. However, consumers do not understand. Our industry is an industry of engineers and very technical in its communication. Once you have a product such as Green Plastic the challenge is in marketing, to communicate the concept of Green Plastics.”

1 © 2016 Heiko Spitzeck, Fundação Dom Cabral – www.fdc.org.br. All rights reserved.

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For these reasons Green Plastics required a B2B2C (business-to-business-to- consumer) approach. Brand owners such as Coca-Cola, Natura, Johnson&Johnson or Danone were most likely to be interested in using Green Plastic for their packaging in order to differentiate themselves as sustainable companies in the eye of consumers. As explains Jorge Soto, Director of Sustainable Development: “One of the first things we learned about Green Plastic was to contact not only with our direct client, but also with our clients´s client. So we are talking to brand owners such as Procter & Gamble, Coca-Cola or TetraPak. These organizations want to differentiate themselves in the market.” So Green Plastics, in the end, would affect consumption choices of their clients´ clients. Braskem needed to find a way to position the product in the market and to help their clients communicate the value Green Plastics added to the end customer.

The National Council of Self-Constraining Publicity (CONAR) issued norms regarding the use of sustainability in advertising such as: truthfulness, relevance and accuracy. In order to avoid advertising issues or “greenwashing” claims, Braskem needed to find a way to communicate the advantages of Green Plastics, while making sure that they can substantiate their claims and that potential risks such as child labour are well managed. As if this were not enough, Braskem also needed to make sure that their clients would not engage in greenwashing using the argument of Green Plastics with unsubstantiated claims.

Furthermore, Braskem needed to maintain a positive image about traditional plastics as their product portfolio will be composed of a mix of renewable and traditional petrochemicals in the foreseeable future.

When asked what kept Claudia awake at night she responded: “We had no idea about how to communicate, coming as we do, from a B2B environment. How should we communicate the story of Green Plastics to our clients, the consumers and to society at large?”

About Braskem Braskem is the leading Brazilian petrochemical company and the largest thermoplastics producer in the Americas. It operates 36 industrial plants in countries such as Brazil, U.S., Argentina and Germany.

The company is listed on the Brazilian Stock Exchange BOVESPA and since 2005 has been included in its sustainability index (ISE BOVESPA). It is also listed in New York (NYSE) and Madrid. In 2006 the company was controlled by Odebrecht (38.6% of shares), Petroquisa (8.3% of shares) while the rest of the shares are on free float.i

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Table 1: Key financial performance data for 2006-20072

Key Performance Data 2006 2007 Net Revenue (R$ millions) 16,969 18,788 EBITDA 3,023 3,250 Net Debt 7.278 6.123 Net Income 117 642

In 2007 Braskem had the ambition of being among the 10 largest petrochemical companies worldwide in terms of market value. ii The company´s Vision for 2020 is “to be the world leader in sustainable chemistry, innovating to serve people better”.

In 2006 the company produced 6 million tons of chemicals and petrochemicals including Polyethylene (PE), Polypropylene (PP) and PVC. Within the value chain Braskem concentrates its strategy on basic petrochemicals and thermoplastic resins. For it´s production it traditionally buys oil from companies such as Petrobras. The produced thermoplastic resins produced and converted by plastic converter companies into, for example, electronics and car parts, and packaging materials. Traditionally petrochemicals are a commodity business, in which strategic attention is directed to preserving margins and reducing costs. As research by Deloitte shows margins have shrunk and commoditization has increased in the chemical industry during the years 1998-2009.iii This is why Braskem opted for a vertical integration, which led to a reduction of suppliers and to the consolidation of the sector. Braskem: Largest thermoplastic resins producer in iv Figure 1Americas: Braskem´s location in the value chain and global leader in biopolymers

COMPETITIVE INTEGRATION

NAPHTHA CONDENSED ADDED VALUE GAS / ETHANOL COMPETITIVENESS

st nd rd EXTRACTION 1 GENERATION 2 GENERATION 3 GENERATION Raw Materials Basic Thermoplastic Plastic Converters Petrochemicals Resins

1 Overview Sales Revenues Industrial Capacity Industrial: 28 BRA, 5 USA USD 23,8 billion The green plastic 16 million ton/year and 2 GER 1EBITDA Projects: MEX e VEN USD 2,2 billion 2 See Braskem 2009 Annual and Sustainability Report, p. 17. 12011 | 4 |

Traditionally plastics such as Polyethylene are produced from oil and gas. Braskem has successfully produced Polyethylene made from Ethanol in a pilot plant, which in turn is made from sugarcane. It has thus substituted a non-renewable raw material (oil & gas) by renewable sources (sugarcane), which in turn can be considered a major sustainable innovation.

The production of the pilot plant required an investment of U$ 5 million, and it reached a capacity of 12 tons annually. The product was used for tests with potential clients.

Figure 2A bio-: The difference between traditional and green PEbased alternative to conventional polyethylenev

Traditional Sustainable

Oil

Polyethylene

Sugarcane Gas based Ethanol

13 The whole production cycle starts on the sugarcane plantations, which feed into distilleries, where sugar juice is fermented and distilled to produce ethanol. Through dehydration processes ethanol is transformed into Ethylene, a key ingredient in the production of plastics. Ethylene is polymerized into polyethylene (PE), which is then used by plastic converters in the same way PE made from oil.

The production of 1ha of land results in 3 t of Green PE. For a production of 200,000 t of Green PE approx. 65.000 ha of land are needed, an area, which represents 0.02% of all arable land in Brazil. Sugarcane is mostly grown in Brazil´s southeast region, far from the Amazon located in the northwest.

Figure 3: From sugarcane to Green PE – Metrics and Relationsvi

| 5 | From Sugar Cane to Green Polyethylene Metrics and relations

produces produce produce produce

1 Hectare 82,5 ton 7200 l 3 ton 3 ton of land Sugar Cane Ethanol Green Ethylene Green PE

Braskem’s Green PE: 200 kton/year During its growth sugarcane 460 millions liters consumes of EthanolCO =2 approx.from the 65 thousand atmosphere. hectares Research by Fundação Espaço Eco has shown that for~1,7% of Brazilian ethanol each ton of Green PE roughly 2.~0,02% of Brazilian 5 t of CO2 are absorbed. In contrast to oilproduction-based plastics, arable Green land PE does not emit CO2 in its production process and a production of 200,000 t of Green PE would avoid the emission of 920,000 t of CO2, equivalent to the CO2 emissions of 1 million cars per year.

These characteristics are highly attractive for companies that want to avail themselves of a differentiating factor in sustainability, especially in regard to climate change. Potential clients are Natura, Danone, Faber-Castell, P&G, Coca-Cola, Johnson & Johnson as well as Nestlé.

The Green PE is chemically identical with PE made from oil, which allows clients to use their existing production facilities and recycling technologies. Braskem calls this “drop in” as clients can simply drop the Green PE into their existing processes, an advantage compared to other available bio-plastics. The figure below summarizes the whole life-cycle of Green PE.

Figure 4: The whole life-cycle of Green PEvii

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Green Polyethylene Cycle

Ethylene CH2=CH2 FROM CRADLE Ethanol CH3-CH2OH At the distillery, the sugar Through the dehydration, the TO CRADLE juice is fermented and ethanol is transformed in ethylene distillated to produce ethanol Sugarcane The sugarcane crop metabolizes the CO2 to produce sucrose

Very Favorable Ecoprofile* Captures and Fixes

2,5 t CO2/t PE

Recycling The green polyethylene Green PE [CH2=CH2] is 100% recyclable Carbon capture The ethylene is polymerized (Mechanical / Incineration) in polyethylene production The green polyethylene is unities * Preliminary Ecoeficiency Analysis (From cradle to Braskem transformed in final products in gate)– Fundação Espaço Eco 2007/2008 the same unities already existents

While all this sounds like a major sustainable innovation, there are, however, some issues of concern. By using sugarcane, Braskem involves itself with a completely new value chain based on agribusiness. The sector, and in particular the Ethanol business has received criticism relative to social issues such as the displacement of food crops and the raising of food prices, occupation of indigenous lands, child and slave labour together with sub-standard working conditions. Additionally, environmental issues abound such as deforestation, expansion into conservation areas, water consumption and pollution, impacts on biodiversity, environmental degradation due to monocultures and sugar cane burning.viii

The next step: Building Client Demand

All the positive characteristics of Green PE – production from a renewable source, favourable carbon footprint and drop-in – are potentially very attractive to companies, which pursue a differentiation strategy and want to position themselves as sustainable companies. Brand owners such as Coca-Cola and Danone, however, are also very sensitive to potential reputational risks such as child labour or deforestation, which would affect their reputation.

Claudia and her team needed to come up with a communication strategy that manages risks and exploits the opportunities of Green PE and positions the product as an attractive alternative to existing bio-plastics on the market. If significant client

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demand can be built up, Braskem aimed to invest US$ 290 million into a green PE production plant with a 200 ktyix capacity.

i See Braskem´s 2006 Annual Report. ii See Slide No. 35 of his presentation “O case Braskem” at the ExpoGestão fair, 08.06.2006. iii See Deloitte (2010): The chemical multiverse – Preparing for quantum changes in the global chemical industry, p. 6. iv Taken from Braskem presentation “Sugarcane Based Polyoefins” made by Rodrigo Belloli at the Biopolymer World Congress in Venice, April 2012. v Taken from Braskem presentation “Sugarcane Based Polyoefins” made by Rodrigo Belloli at the Biopolymer World Congress in Venice, April 2012. vi Taken from Braskem presentation “Sugarcane Based Polyoefins” made by Rodrigo Belloli at the Biopolymer World Congress in Venice, April 2012. vii Taken from Braskem presentation “Sugarcane Based Polyoefins” made by Rodrigo Belloli at the Biopolymer World Congress in Venice, April 2012. viii See Xavier C. V., Pitta F.T. and Mendonça M.L. (): A Monopoly in Ethanol Production in Brazil: The Cosan-Shell Merger; Goldemberg J., Teixeira Coelho, S. And Guardabassi P. (2008): The sustainability of etanol production from sugarcane, in Energy Policy 36 (6), p. 2086-2097; FAO (2013): Biofuels and the sustainability challenge, Trade and Markets Division, Food and Agriculture Organization of the United Nations, Rome. See also: http://www.worldwildlife.org/industries/sugarcane (accessed 06.02.2015). ix Kty = kilo tonnes per year.

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