Abstract:
«During the 1980s, the fertilizer industry in Western Europe underwent some radical changes. Reduced profitability and overcapacity forced a number of smaller producers to close down, and most of the major firms in the business either withdrew from the market or reduced their capacity. The exception was the Norwegian industrial conglomerate Norsk Hydro, which expanded rapidly and established itself as the largest producer in Europe and later globally.
The article discusses the strategy behind Hydro’s expansion in relation to the changing structure of the fertilizer market, which historically was characterized by tacit and explicit agreements on prices and market shares between the major producers. Hydro’s strategy and growth are analyzed in relation to some theoretical contributions from the study of transnationalisation of enterprises. A main argument is that Hydro’s expansion was not driven by advantages in cost structure or organizational capabilities, nor did the expansion create such advantages. The Norwegian company expanded in foreign markets partly because it had less to lose from a counterattack than competitors in larger markets and partly because of strategic disadvantages. Contrary to most of its large European competitors, Hydro failed to identify the long term threats to the stability and profitability of the Western European market.
Production of fertilizer was, throughout much of the postwar period, an important part of Western Europe’s chemical industry. Several of the large industrial conglomerates, such as ICI, BASF, and Montedison, were involved. In addition to these giants, the industry also comprised a number of small companies that supplied domestic markets. Many producers were either state-owned or cooperatives. This was not only a result of postwar industrial policy, but also because fertilizer was an important input for agriculture, and states long considered it necessary to maintain a national fertilizer industry to ensure agricultural self-sufficiency.
From the early 1980s, the Western European fertilizer industry went through a dramatic and occasionally painful restructuring process. The establishment of a common European market had already brought about a series of shifts where smaller producers merged with or were bought up by larger firms. The most significant restructuring occurred, however, as a result of two dramatic price drops: the first in 1986, and the second early in the 1990s after the fall of the Berlin wall and the resulting flood of imports from Eastern European manufacturers. The production of nitrogen-based fertilizer—which was decidedly the most important type in the Western European markets—dropped from 27 million metric tons in 1980, to 20 million tons in 1990, and further to 16 million tons in 2000. The number of producers fell significantly. The internationally oriented manufacturers from the 1970s either withdrew or reduced their activity during this period. The one exception among the majors was the Norwegian company Norsk Hydro (normally shortened to «Hydro»), which expanded substantially in Western Europe during the 1980s. Hydro made major acquisitions in Sweden, the Netherlands, Great Britain, France, and Germany from 1979 to 1986. In the 1990s, Hydro continued to gain new acquisitions in Europe, as well as expand its reach in the rest of the world through both acquisitions and establishments. This firm became unquestionably the largest fertilizer manufacturer in Western Europe during the mid 1980s, and in the 1990s, the world’s largest. Alongside Norsk Hydro, the Finnish company Kemira also grew through direct investments in Europe in the 1980s. Initially, Kemira did not belong among the major companies, and it expanded from being a national company to a European concern. But these two Nordic companies were the only ones which advanced during the comprehensive restructuring of the European fertilizer industry.
Why did Hydro make such major acquisitions during these years? And why were there such substantial and dramatic structural changes in the European fertilizer market? In the following discussion, I will review Hydro’s technological, geographical, and financial point of departure, as well as the strategic choices that made the company into a large transnational corporation. These choices will be analyzed against a background of how the industry itself developed. Stable periods with high profits, characterized by formal and informal agreements between major actors, ended with dramatic price falls and genuine competition across markets. External conditions were important for the dissolution of the European fertilizer market. But Hydro’s, and to some extent Kemira’s, strategy is also important to understanding the sector’s development—in the sense that their aggressive penetration of Western Europe eroded the market discipline that had long characterized the major actors’ behavior.
A final section will discuss this case in relation to some theoretical contributions to the study of the transnationalisation of enterprises. Before 1978, Hydro had a number of smaller subsidiaries and production units in other countries. But expansion in the years 1979–1986 turned Hydro into a fullblown multinational corporation. Still, I believe that well known references to company-specific or country-specific advantages, to advantages of scale and scope, or to attempts to save transaction costs have limited explanatory power here. Asymmetries in market power among the major players in the market—and, possibly, strategic misjudgments made by the emerging market leader—better explain Hydro’s expansion .»
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