Group Structure and Business Model
Organization
Covestro is one of the leading global suppliers of high-tech polymer materials and application solutions developed for these materials. Covestro AG, the parent company of the Covestro Group, is headquartered in Leverkusen (Germany). It is listed on the stock exchange in Germany and has been included in the leading German index DAX since March 19, 2018. In line with its product portfolio, Covestro is divided into three operational reporting segments: Polyurethanes (PUR), Polycarbonates (PCS), and Coatings, Adhesives, Specialties (CAS). The administrative functions are consolidated within the central units. As of December 31, 2018, the Covestro Group comprised 49 consolidated companies in 24 countries in addition to Covestro AG and employed around 16,770 employees1.
1 The number of employees on either permanent or temporary contracts refers to full-time equivalents (FTE). Part-time employees are included on a pro-rated basis in line with their contractual working hours.
The Board of Management of Covestro AG manages the operational businesses and defines and monitors corporate targets. Dr. Markus Steilemann became the Chief Executive Officer of Covestro in June 2018, succeeding Patrick Thomas in this position. In addition to this role, he remains responsible for innovation, marketing, and sales. Dr. Thomas Toepfer has been Chief Financial Officer since April 2018. Chief Technology Officer Dr. Klaus Schäfer is responsible for production and technology on the Board of Management and for overseeing all production sites. He also carried out the role of Labor Director through December 31, 2018. Dr. Thomas Toepfer assumed the role of Labor Director as of January 1, 2019. The twelve-member Supervisory Board advises and oversees the Board of Management. In accordance with the German Codetermination Act, half the members of the Supervisory Board are elected by the stockholders and half by the company’s employees. Dr. Richard Pott holds the office of Chair of the Supervisory Board.
See section “Declaration on Corporate Governance”
Group Structure
1 Business activities that cannot be assigned to the Polyurethanes, Polycarbonates, or Coatings, Adhesives, Specialties segments. These include, for instance, the marketing of by-products of chlorine production and use.
Business model
We produce precursors for polyurethane foams and the high-performance plastic polycarbonate as well as precursors for coatings, adhesives, sealants and specialty products, including specialty films. Other precursors such as chlorine and by-products like styrene are also part of Covestro’s range of products.
The company’s materials are used in many areas of modern life – the array of products ranges from insulation for refrigerators and entire buildings through laptop and cell phone cases to scratch-resistant and fast-drying vehicle coatings and film coverings for personal identification cards. Covestro therefore covers a wide variety of sectors. The company's main customers are from the automotive, construction, wood processing and furniture industries, and from the electrical and electronics industries. The products are also used in sectors such as sports and leisure, cosmetics and health, as well as in the chemical industry itself.
Going forward, Covestro aims to position the company even more broadly, thus further reducing the product range’s exposure to cyclical fluctuations. Covestro’s focus in this connection is on innovation and sustainability. To this end, we closely monitor the developments in our sales and consumer markets and support the growth of our customers. Together with customers as well as with business and scientific partners, Covestro works continuously to further advance products, technologies and application solutions.
Global megatrends play a considerable role in this process: progressing climate change, increasing mobility, a growing global population and rising urbanization are changing the lives of billions of people. Consequently, the polymer industry will have to change. Businesses such as Covestro are facing new tasks and require innovative solutions to handle them. The focus is primarily on the topics of “Renewable energy,” “Energy-efficient transportation,” and “Sustainable and affordable living.”
Covestro’s aim is to pave the way and support these trends with its materials. By replacing traditional materials with durable, light, environmentally-compatible and cost-effective materials, Covestro contributes to lightweight construction in the automotive industry, increases the energy efficiency of living spaces through the use of new insulating materials and improves the shelf-life of food through improvements in insulation along the entire refrigeration chain.
Segments
Polyurethanes
In the PUR segment, Covestro primarily develops, produces and markets chemical precursors for the manufacture of polyurethane foams. These precursors are toluene diisocyanate (TDI), diphenylmethane diisocyanate (MDI) and polyether polyols. Flexible polyurethane foam is used in products such as mattresses, upholstered furniture and car seats, thus making day-to-day life more comfortable. Rigid polyurethane foam is used mainly to efficiently insulate buildings and refrigeration appliances. In doing so, it contributes to reducing energy consumption. In 2018 Covestro was among the top suppliers in the global polyurethane industry in 2018.
Polycarbonates
In 2018, Covestro was also one of the leading global suppliers of polycarbonates. In the PCS segment, Covestro not only produces and distributes this high-performance plastic but also works to continually improve it. Polycarbonates are extraordinarily light, transparent, unbreakable and moldable. Available as granules, composite materials and semifinished products, manufacturers use this versatile material in a wide variety of products such as vehicles (e.g. passenger compartment and vehicle lighting), buildings (e.g. roof structures), electrical and electronic devices (e.g. cords and laptop cases), and for medical equipment.
Coatings, Adhesives, Specialties
In the CAS segment, Covestro was once again among the leading global suppliers in 2018. The focus hereby is on both aliphatic and aromatic isocyanates and their derivatives as well as polyurethane dispersions. These are required for the production of coatings, adhesives sealants, and specialty products. The latter comprise specialty elastomers, high-quality films and precursors for cosmetics, textiles and medical products. These materials serve to protect, bond, seal or functionalize a wide variety of surfaces. The main areas of application are automotive and transportation, infrastructure and construction, wood processing and furniture.
Production sites
Covestro operates production facilities throughout the world for the different product groups. In terms of our production processes, the plant structure is characterized by a backward integration for key raw materials, such as chlorine and propylene oxide, thus ensuring optimal value creation. In addition, Covestro has installed comprehensive measures to secure and steadily improve performance in the fields of safety, costs and plant availability.
Covestro has 33 production sites located in Europe, America and Asia, eight of which have world-scale facilities. The latter are large-capacity production facilities that serve in particular to ensure that customers around the world are supplied reliably and efficiently. We operate additional plants in selected countries to manufacture polyurethane precursors and products of the Coatings, Adhesives, Specialties segment. Moreover, we operate production plants in selected countries where we compound polycarbonate resins to meet specific customer requirements.
The following table shows Covestro’s geographical presence and the 33 production sites.
Covestro Production Sites1
1 Excluding sites of PCS sheet business and PUR system business
We invest continuously in our global production network in order to maintain our production facilities and their infrastructure, to optimize manufacturing processes and to expand capacities in line with market developments. To do so, Covestro relies on advanced and environmentally friendly production processes and continually optimizes its technologies. As part of the Group’s strategy, Covestro conducts a program under the name OSI2020 for the digitalization of technical, operational and maintenance activities.
See note 14 „Property, Plant and Equipment“ in the Notes to the Consolidated Financial Statements
Procurement market
Procurement provides all areas of the company around the world with goods and services in a timely manner and at suitable market conditions. In doing so, it ensures the adherence of our Group’s high quality standards. Furthermore, Procurement makes sure that Covestro’s ethical and ecological principles are upheld. The principles of our procurement policy are set forth in a directive that is binding on all employees throughout the Covestro Group.
In 2018, goods and services were procured from some 15,500 suppliers (previous year: some 15,400) in 71 countries (previous year: 72) for approximately €10.1 billion (previous year: €9.3 billion). Distribution of purchasing volumes was balanced across the regions.
Procurement at Covestro is centrally steered and managed by the Procurement unit. The objective is to generate a competitive advantage for Covestro and make a decisive contribution to the overall value. In doing so, Covestro is guided by four strategic principles: reliability, sustainability, cost transformation and innovation.
Strategic principles in Procurement
The main precursors for our products are petrochemical substances such as benzene, toluene, propylene/propylene oxide, phenol and acetone – which collectively account for some 40% of our procurement spend. In addition, the operation of our production facilities requires large amounts of energy, that we primarily procure from external sources and in the form of electricity and steam. We endeavor to procure critical raw materials from within the Group or through joint ventures in order to reduce the dependency on external supply sources. To name just two examples: Covestro produces chlorine in-house and procures propylene oxide through a joint venture. We regularly monitor the sustainability and quality of our suppliers and ensure that they comply with internal and external standards.
Distribution and logistics
We are committed to supplying our customers reliably. We understand this to mean that the right product arrives at the right place at the right time and in the agreed upon quality without requiring subsequent improvements. To achieve this goal, our distribution maintains close contact with our customers and supports the operational business. In addition, it advises our customers on how to make the best use of our range of e-commerce services such as the web shop and online trading platform, serves as a point of contact for complaints and endeavors to acquire follow-up orders. In this way, distribution is a key contributor to the satisfaction of our customers and their loyalty to Covestro. Distribution is also responsible for new business.
Covestro relies on a regional distribution and marketing structure for its distribution activities. Each operational reporting segment distributes and markets its own products through its own distribution organization and through trading houses and local distributors. Major customers with global operations are an exception to this. These are serviced directly by our key account managers. Chemical by-products such as sodium hydroxide solution are marketed primarily outside of the operational reporting segments. Certain by-products such as styrene are also marketed within the operational reporting segments.
Three regional Supply Chain Centers for the EMLA, NAFTA and APAC regions provide assistance to the offices in supporting our customers and processing customer orders – from order acceptance through shipment planning, to invoicing and complaint acceptance. This organization enables us to process orders particularly smoothly and swiftly. We make use of channels such as e-commerce platforms for handling orders. Our customers can place orders and check the status of their orders at any time through the Order@Covestro online shop.
The transportation of our products to customers is handled by logistics service providers that are selected and evaluated according to stringent safety, environmental, and quality criteria. Alongside the protection of people and the environment, delivery reliability is particularly important. The preferred mode of transportation is rail or intermodal – in other words using a combination of different modes of transportation. When selecting the mode of transportation, we also consider resource efficiency and seek to reduce associated CO2 emissions. Customers are supplied from close-to-production warehouses, wherever permitted by transportation times and delivery reliability. In the case of longer distances and according to the reliability of the mode of transport, goods are temporarily stored in regional distribution centers and then dispatched with shorter delivery times.
In order to ensure a high level of customer satisfaction, our foremost quality target is avoiding errors in all of our processes. Customer satisfaction is regularly gauged and analyzed worldwide in a global management system. In doing so, we take into account customer satisfaction analyses and supplier assessments. Furthermore, we request feedback from our customers from which we derive corrective and preventive measures for the purpose of further increasing quality and customer satisfaction and lowering the error rate and the incidence of complaints. In 2017, Covestro recorded 6.88 complaints for every 1,000 deliveries. In the year under review, that number fell to only 6.72 complaints per 1,000 deliveries.