(2017). Hydrogen scaling up. Hydrogen Council. [302563]

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(2017). Hydrogen scaling up. Hydrogen Council.

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Earnshaw, R. (2017). [anonimizat]. Springer International Publishing AG.

Eyk Henning, A. K. (2018). Linde, Praxair Kick Off $8 Billion in Asset Sales. Bloomberg.

F. Budde, U. F. (2006). Value Creation: Strategies for the Chemical Industry.

F. Budde, U. H. (2006). Value Creation: Strategies for the Chemical Industry. WILEY-VCH Verlag GmbH & Co. KGaA.

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Wikipedia. (2017). Website. www.wikipedia.com.

Acknowledgements

I [anonimizat]. Dr. [anonimizat] I learned a lot and to my family for always believing in me.

Bucharest, June 2018

[anonimizat] 2017, will create a global leader in industrial gases with combined revenue of $29 billion and a market value in excess of $70 billion.

[anonimizat] a potential disruptive technology with high economic and environmental impact.

Keywords: [anonimizat], [anonimizat], value innovation.

Chapter 1: [anonimizat]. [anonimizat] a [anonimizat].

[anonimizat], air, water, metals, and minerals into more than 70,000 [anonimizat] .

In 2016, world chemical industry sales were valued at € 3,360 billion, which represents an increase of 85% over 2006 levels of € 1,803 billion .

Fig. 1 World chemical sales: geographic breakdown

Source Cefic Chemdata International, 2016

* [anonimizat], Turkey, Russia and Ukraine

** North American Free Trade Agreement

*** [anonimizat], [anonimizat] the first ever science-based industry, to its current maturity, companies are currently confronting ever increasing challenges in their business macroeconomic environment: globalization, ongoing commoditization of products, the influence of financial markets on publicly listed companies corporate strategies, climate protection and closing material cycles.

Fig.2 World chemical sales by region: 2006 vs 2016 vs 2030 projected growth

Source Cefic Chemdata International, 2016

* Rest of Europe covers Switzerland, Norway, Turkey, Russia and Ukraine

** North American Free Trade Agreement

*** Asia excluding China and Japan

As companies pursued growth and productivity, realigned their product and services portfolios, and focused on core competencies, many companies in the chemical industry are considering M&A a necessity to insure higher growth.

In particular, with an actual 39.6% share in world chemical sales, the rising economic importance of China both as a location for production and as a market has a significant impact on realigning strategies globally.

Fig. 3 World chemicals R&D Spending: geographic breakdown

Source Cefic Chemdata International, 2016

China’s investment in Research and development has seen a tremendous growth in the last decade, outpacing USA and Europe traditionally leaders and, indicating a sustainable trend in future growth rate of up to 44% from world chemical sales, innovation and further competitive advantage.

Fig.4 Global chemical merger and acquisition activity 2010 – 2016

Source: Deloitte Development LLC analysis of data from S&P Capital IQ

Diminishing opportunities to differentiate against competitors and inter-regional trade cost or regulatory limitations are creating a full scale consolidation in the commodities sector.

Fig.5 Global chemical merger and acquisitions by target segment 2010 – 2016

Source: Deloitte Development LLC analysis of data from S&P Capital IQ

The unprecedented level of transactions value in sectors that traditionally have been high in profit generation like specialty chemicals market and industrial gases is significantly indicating a trend in cross border merger of equals that is reshaping the structure the industry.

The industrial gases segment is valued at $120 billion in 2016. Despite the fact that industrial gases impact all fields of human activity, with the main four producers occupying positions in the top 34 chemical companies worldwide, industrial gases industry is not well known and even until present time remains recognized as the “invisible industry”.

Throughout this unfolding, further strategic development remains a key objective, although the paths to it have been altered and augmented by the shifts in the business environment.

Chapter 2: Company presentation

Praxair, a Fortune 300 company, is a leading industrial gas producer in USA and the third globally, with operations in more than 50 countries, 2016 sales of $10.534 billion and a market value of $34 billion.

For more than 110 years, Praxair has taken something as fundamental as air and turned it into ways to make production facilities operate cleaner and more productively, food taste better, breathing easier and processes more efficient – in short, to make all our lives better .

Fig. 6 Praxair Air Separation Unit

Source

The products can be divided into two main categories:

– atmospheric gases obtained in air separation units: nitrogen (N2), oxygen (O2), argon (Ar), noble gases like krypton (Kr), neon (Ne), xenon (Xe)

-process gases obtained as by products in other industries processes that are further purified: carbon dioxide (CO2), helium (He), hydrogen (H2), acetylene (C2H2), electronic, specialty gases

The main gases are produced in technical, food or medical grades serving diverse industries including Aerospace, Automotive, Chemical, Energy, Electronics, Food & Beverage, Healthcare, Metallurgy, Pharmaceuticals and Petrochemicals.

Praxair also designs, manufactures and operates facilities that produce gases, distribution systems, equipment and management services for its customers.

VISION – TO BE THE BEST PERFORMING INDUSTRIAL GAS COMPANY IN THE WORLD, as determined by our customers, employees, shareholders, suppliers and the communities in which we operate, not just from a financial perspective but also in terms of our core values: safety, integrity, customer satisfaction, diversity & inclusion, environmental and social responsability.

MISSION- MAKING OUR PLANET MORE PRODUCTIVE, by developing technology, products and services that are helping to sustain and protect our planet.

The organizational structure has the following main characteristics: geographic divisions, product-based divisions and end market divisions.

In 2016, 94% of sales were generated by industrial gases in four geographic regions: North America, Europe, South America, Asia, with the balance generated from the Praxair Surface Technologies (PST) segment.

Fig. 7 Praxair 2016 Sales

2016 Sales

Source: Praxair Annual Report

Financial Highlights

Sales were 2% lower than the result obtained in 2015 offset by the negative exchange rate impact of 3%. Additionally, the difficult economic environment especially in North American manufacturing sector contributed in lower regional volumes and general price cost squeeze due the demand for lower prices, higher energy cost fluctuations and increasing competitors’ pressure to lower cost pass through for new projects.

Despite this decrease, the cash flow obtained of 26.32% and adjusted EBITDA of 33% indicates a positive price obtained by better sales results in high value added products as medical and specialty gases.

Source

Cash flow from operations is 26% from sales and the operating profit of $2,238 million was 4% below 2015. Capital expenditures in the amount of $1,465 million in 2016 represent largely 16 new investments in projects like air separation units and other equipment that insure future growth, from which 80% was directed in USA and the rest in Asia.

The figure below represents a comparison of the cumulative returns of Praxair’s common stock with the cumulative total return of the Standard & Poor’s 500 Index and the S5 Materials Index from December 2011 to December 2016.

Fig. 8 Praxair return perfomance

Fig. 9 Praxair annual cash dividents per share

Sustainability business model

Fig. 10 Praxair sustainability business model

Source

2.1 History

To set the context and comprehend the present dilemma facing the industrial gases sector, we have to understand its past that can be divided into two main periods:

The first period, from the 1750 until 1900, is characterized by applied research in identifying gas molecules, to developing the technologies of producing them on a large scale and more efficiently. It is a period characterized by intense R&D, innovation and engineering which gave birth to an industry that plays a significant contribution in the global economic activity.

The second period, from1900 until present, is characterized by the industry expansion through diversification in new applications of gases and customer services, globalization and mergers and acquisitions to obtain important economies of scale and scope.

In the beginning, the industry was characterized by low competition as the main players came to agreements on sharing intellectual property and on geographic division of activity. This pattern was reinforced by the characteristics of gas production and distribution as the industry is high capital intensive and imposes great investments in production plants and special containers for distribution that can be done only on few hundred kilometers distance due to the aggregate states of gases or the very high cost. Challenging a local producer with customer in depth knowledge and already depreciated investments would be ruining to any competitor, thus players pursued acquisitions when entering a new region.

Praxair's origins may be traced back to 1907, when Professor Karl von Linde from Linde AG Germany founded Linde Air Products Company, the first company in USA to produce oxygen from air using a cryogenic process.

Linde Air Products outshone its parent company in Germany, growing to become the largest producer of industrial gases in the world. The exponential growth experienced by Linde Air Products consumed massive amounts of capital which led to loss of control of Carl von Linde in favour of Union Carbide in 1917 and prior to World War I, all his shares and the right to use the Linde name in USA.

The national push for new technologies to help win World War I, research efforts and new applications developed for gases coupled with the growing chemicals operations of its parent UCC helped the company to become soon one of the world's largest producers of industrial gases.

In 1920, Linde Air Products put the basis of its own independent research and reached a share capital of $15 million producing oxygen in 28 plants. For a while, the German Linde Company feared being taken over by the Americans, as in 1920 a mere $200,000 would have sufficed.

After 1980 Union Carbide's market value plummeted 75 %, the chemical giant was compelled to take on massive debt which highly influenced research and development, diversification and international expansion.

In 1988 Linde Gases Division of Union Carbide is renamed Union Carbide Industrial Gases.

In 1992, Praxair became an independent publicly traded company.

Praxair stopped using the Linde name in 1999 after selling the rights to the name to Linde AG Germany for $60 million. Linde AG and its predecessors had been using the name in the rest of in the world since its incorporation in 1895.

There are few subjects that have impacted the industrial gas industry over the last 120 years more than mergers and acquisitions. The number and, in the last 15 years, the value of the mergers and acquisitions has created a highly concentrated industry.

2.2 Global Presence

Praxair’s main headquarters are located in Danbury, Connecticut, United States of America- the world’s largest industrial gases market.

Praxair is a global company with 26,498 employees worldwide and 56% of its 2016 sales outside of the United States.

Industrial gases business has operations through consolidated companies in:

-Europe: Austria, Belgium, , Bosnia, Bulgaria, Croatia, Czech Republic, Denmark, France, Germany, Hungary, Ireland, Italy, Netherlands, Norway, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia ,Spain, Sweden, United Kingdom, Ukraine

– Asia: China, Bahrain, India, Japan, Kuwait, Qatar, South Korea, Taiwan, Thailand, United Arab Emirates

-Africa: Ghana

-North America: Canada, Dominican Republic, Mexico, Puerto Rico

-Central America: Costa Rica, Panama

-South America: Argentina, Bolivia, Brazil, Chile, Columbia, Paraguay, Peru, Uruguay

Gas, by its very nature, is difficult to transport and thus local production is required. As industrial gases are either in cryogenic liquefied state or compressed gaseous state, inter regional transport is feasible only to a few hundreds kilometers away from the plant.

Praxair built a broad lineup of plants which supports its operations, from ultrahigh-purity gas manufacturing equipment for the electronics industry, large-scale air separation units for steelmakers to numerous cylinders and tankers for the cryogenic transport of liquefied gases. As a result, Praxair operates a dense network of approximately 445 production facilities –cryogenic air separation plants, non-cryogenic air separation plants as patented vacuum pressure swing adsorption and membrane separation, hydrogen plants, carbon dioxide plants, 9 major pipeline complexes, packaged gas filling stations, specialty gas plants, helium plants and other smaller plant facilities.

2.3 Local Presence

In 1987, Union Carbide entered into a technology and application know-how exchange with SIAD SpA- Società Italiana Acetilene e Derivati Spa, an independently owned gas company in Italy founded in 1927, which led to a joint venture between the two companies. After Praxair’s incorporation in 1992, SIAD became an equity company of Praxair with established positions in Austria, Bosnia, Bulgaria, Croatia, the Czech Republic, Hungary, Italy, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine.

The company entered the Romanian market, firstly with a representation office as a pioneer in industrial gases distribution, and later in 1996, SIAD Romania SRL was founded.

Three production facilities were opened: a packed gas filling station in Bucharest in 2006, a large scale air separation unit in Calarasi in 2007, a secondary packed filling station in Cluj in 2015 and an extensive nationwide network of distributors of a complete product portfolio.

The main competitor in Romania is represented by the Romanian Linde AG subsidiary which accounts for 67% of the market share, with the rest split between Air Liquide, Messer shares of 6% each and other local small distributors.

2.4 Activities

Industrial Gases Products and Manufacturing Processes

Atmospheric gases are the highest volume products produced by Praxair. Using air as its raw material, Praxair recovers oxygen (O2), nitrogen (N2) and argon (Ar) through different air separation methods of which cryogenic fractional distillation of air is the most prevalent.

Typical purities obtained in an ASU are minimum 99.9990% to 99.999990%.

Other noble gases, like krypton (Kr), neon (Ne) and xenon (Xe) are recovered and processed by the same method but in much smaller volumes due to their limited concentration in the atmosphere.

Fig. 11 Atmospheric gases extracted from air

As a pioneer in the industrial gases industry, Praxair is a leader in developing an extensive variety of proprietary and patented applications in collaboration with its key customers as well as dedicated supply systems technology.

Process gases, including acetylene, carbon dioxide, hydrogen, carbon monoxide, helium, electronic and specialty gases are produced by methods other than air separation.

Hydrogen

Carbon dioxide

Helium

Fig. 12 Process gases production Source

Acetylene is primarily sourced as a chemical by-product, but may also be produced from calcium carbide and water.

Most carbon dioxide is purchased from by-product sources, including chemical plants, refineries and industrial processes or is recovered from carbon dioxide wells.

Carbon dioxide is further processed in Praxair’s plants to produce commercial and food-grade carbon dioxide.

Hydrogen and carbon monoxide can be produced by either steam methane reforming or auto-thermal reforming of natural gas or other feed streams such as naphtha. Hydrogen is also produced by purifying by-product sources obtained from the chemical and petrochemical industries.

Most of the helium sold by Praxair is sourced from certain helium rich natural gas deposits in the United States, with additional supplies being acquired from outside the United States, like Qatar or Russia.

In order to economically be extracted from gas deposits, helium concentration should exceed 0.7% of its content. Helium is present in the Earth’s atmosphere as well, but in very low concentrations of 0.000005% in volume that does not allow an economic recovery, taking into account that an air separation unit consumes huge amount of electrical energy.

Raw Materials

Air is the principle raw material in industrial gas production.

Fig. 13 Industrial gases cost breakdown

Electric power is paramount in the production and distribution of industrial gases either followed by, natural gas or fuel for transportation.

The energy tariff fluctuations have a high impact in earnings this it is mitigated contractually with on-site and bulk customers by using price and other cost pass-through formulas adjusted periodically.

In the recent years there is a strong focus on increasing the sourcing of process gases from industrial recycling processes promoting an economic closing cycle in the chemical industry.

Customers, Diverse End-Markets and the Industrial Gases Supplied

Praxair is supplying around 4 million customers worldwide in extremely diverse end markets where industrial gases are critical materials that drive productiveness and heighten operational flexibility, from which most important are manufacturing, metalworking, energy and chemicals.

Fig. 14 End markets and gases supplied

Source:

Method of Supply

Depending on various customer requirements among most important product purity, quantity and pattern of usage, aggregate state during end process: liquefied or gaseous products as well as lowest cost, Praxair can supply industrial gases as on site, bulk and packaged compressed.

Distribution is complex as products need to be pressurized and/or liquefied for storage and transport, making their transportation difficult, dangerous, and costly.

1. On-site

Salt Lake City, Utah, USA Praxair Air Separation Unit Source

Customers that require the largest volumes of product oxygen, nitrogen(N2) and hydrogen and that have a relatively constant usage pattern, are supplied by cryogenic and process gas on-site plants that can be either on the customer site or adjacent (ever the fence supply) to these customers’ sites and delivered by pipeline. Taking into account the high investment is such plants, this mode of supply is agreed under long term contracts from 10-20 years and take or pay clauses and energy adjusting cost formulas.

The largest facilities are usually not dedicated to a single customer and can connect several customers via pipelines, produce liquefied gases for other medium customers or supply liquefied products to several packaged gases filling stations.

Smaller cryogenic facilities or non-cryogenic generators might be sold to customers with high gas consumption.

2. Merchant/bulk

Praxair cryogenic liquefied gas storage and evaporation unit Source

The bulk mode of supply is used for delivering liquefied products as oxygen (O2), nitrogen (N2), argon, carbon dioxide, hydrogen and helium in specialized road tankers or tube trailers to cryogenic storage tanks.

Depending on the aggregate state the customer is using the gases, how many points of use, temperature limitations or pressure, the cryogenic tanks may be followed by evaporation units that convert the product in liquefied state at -180 C in gaseous state, pressure regulators, heaters, pumps and distribution lines. The installation is usually rented to customers and serviced by Praxair.

Depending on the product cost and distribution cost, cheaper products like oxygen (O2) and nitrogen can be supplied economically only to few hundred kilometers distance from the plant while the distance can increase significantly to expensive products like helium.

Taking into consideration the investment in the installation, bulk business is taking place under 3 to 7 years, with existing formula to adjust the price depending on quantities or energy costs.

3. Packaged Compressed Gases

This is a supply mode adequate for small customers or for delivering high valued products as specialty gases: high purity gases, rare gases or various types of gas mixtures.

The products are loaded in metal cylinders under pressure and are sold under 1-3 years contract or by purchasing orders. Technical gases are distributed locally through a network of distributors.

Praxair cylinders Source

The supply is frequently integrated with products coming from the same air separation unit.

Source:

2.4 Competition

The industrial gas industry is an international oligopoly estimated at $ 81 billion and including end user self-production $ 120 billion.

The main producers are worldwide are Air Liquide S.A. (France), Linde AG (Germany), Praxair Inc. (USA), Air Products (USA) and many smaller regional ones like Taiyo Nippon Sanso Corporation (Japan) and Messer (Germany) or local suppliers and distributors, competing on price, quality, delivery and service to customers.

Important end users of gas are self-producing the high gas volumes used. These companies can be the source for a significant growth opportunity by conversion to on site customers.

Fig. 15 World industrial gas sales: main competitors

*Sales from non gas business excluded

**Other producers , distributors , self production/ captive is not inclded

The world industrial gases market is dominated by the Air Liquide, with a global sales share of 25% in 2016, after it acquired Airgas (USA) for $ 13 billion. The company has presence in 80 countries, a wide customer base of over 4 million with strong operations in Europe and North America, 67,000 employees and a tradition in industrial gases since its foundation in 1902 by George Claude and Paul Delorme.

Linde AG was founded in 1879 in Wiesbaden under the name Gesellschaft fur Linde's Eismaschinen to develop and exploit Professor’s Carl von Linde's inventions in the refrigeration field. It is the second largest producer worldwide with 23% market share, the most extensive geographic footprint in 100 countries and 60,635 employees traditionally focused on engineering and growth by M&A, from which most notable are acquisition of AGA AB in 1999 and BOC UK 2006 which propelled the company from a 5% in 1999 market share to 23% in 2016.

Air Products accounts for 9% from global industrial sales in 2016, 18,600 employees operating in 50 countries. It was founded in 1940 by Leonard Pool, a former salesman for two small US producers at the time. It is the only of the current players founded after 1907, challenging an industry with high entry barriers, initially focusing on distribution of gases and later on by sustained focus in research and development.

Chapter 3: Strategic Development

3.1 Merger of equals opportunity

Praxair approached Linde’s representatives in late 2015 and after several failed discussions, they agreed in June 2017 to pursue the business combination between the two companies as a merger of equals, upon regulatory approval to be finalized by October 2018.

Source

While weighting the potential merger, the representatives of the two companies considered the actual and forthcoming economic conditions, including the effect of a weakening industrial and capital cycle, fluctuating commodity prices resulting in comparatively lower levels of investment opportunities, as well as the recent change in the competitive landscape generated by the acquisition of Airgas USA by Air Liquid France.

The merger would create a leading integrated global industrial gases organization, under the established name at the base foundation of both companies – Linde plc. an incorporated public limited company founded in Ireland- a neutral European country.

Praxair and Linde AG have common roots and shared values and visions, thus the new company can further built on taking advantage of the proven strengths of each company by combining Linde’s capabilities in engineering with Praxair’s operational excellence.

The combined group sales are approximately $28.68 billion based on 2016 annual results, prior to any divestitures, and would have a market value of more than $70 billion.

A 50%-50% ownership will be reached by an all-stock transaction in which Linde AG shareholders would receive 1.540 shares in Linde plc. for each Linde share and Praxair shareholders would receive for each Praxair share 1 share in Linde plc., that will be listed on both the NYSE and the Frankfurt Stock Exchange.

Linde plc. would integrate the skill sets and capabilities of each of the companies’ management teams, governed by a board of directors having equal representation from Linde AG and Praxair, with the actual CEO of Praxair maintaining the same function and serving as director on the Linde plc. board of directors, as well.

Combination the two companies’ strengths would create an organization with stronger capabilities across larger and complementary worldwide geographic regions, with access to more diverse end markets, higher development potential, and an enhanced capacity to develop innovative, reliable and cost-efficient offerings portfolio.

Fig. 16 Combined Group Sales 2016

Source

Source

This financial strength of the combined group will facilitate investment in opportunities for future transformational projects and profitable growth.

Linde plc. is expected to reach approximately $1.2 billion in annual synergies and cost efficiencies within approximately 3 years after finalizing the deal.

The cost associated with the merger is evaluated at $1.0 billion, including transaction costs of $0.2 billion.

These synergies and cost reductions are expected to arise from economies of scale and scope, cost savings, and efficiency improvements.

Source

The main cost savings in the amount of $1.0 billion are expected from improvements of internal processes and reorganizations in the two companies with specific global function in USA and Germany headquarters.

Capital expenditures savings are estimated at $0.2 billion from more efficient resource allocation, production facilities and distribution network optimization.

Additional synergies from purchasing, logistics- by building density in regions where there are distribution channels, cross-selling efforts, divestiture of non-core assets, potential overlapping capabilities and best practices are considered, as well.

The biggest savings are expected from production and distribution synergies.

Other advantages are tackling the regional production overcapacity, gaining broader consumer awareness and market power.

Density insures further strong back-up stock configuration to facilitate new large-scale on-site production facilities investments and increases the operating rate of existing ones and spread of overhead.

Pipeline networks are strategic resources that can be exploited because of the low marginal cost of connecting reciprocal existing customers, the subsequent economies of scale, and better flexibility in managing regional capacities of the two companies.

Every $2.5 investment is expected to generate $1 sales with, with one half of the investment going into production, the other half into distribution assets.

SWOT Analysis

PESTLE Analysis

Porter’s five forces

The companies agreed on a pain threshold of divestments on regulatory approval at maximum $3.7 billion in sales or $1.1 billion in EBITDA, case in which each company could withdraw without penalty.

In disclosing its full year financials, Linde AG confirmed that merger approvals have already been received for Algeria, Ecuador, Kenya, Pakistan, Paraguay, the Philippines, Russia, South Africa, Turkey and Ukraine.

The portfolio is attracting interest from rivals such as Air Liquide SA, Air Products & Chemicals Inc., Germany’s Messer Group GmbH and Taiyo Nippon Sanso Corp.’s Matheson Tri-Gas unit. Private equity firms including KKR & Co. and Carlyle Group LP are also weighing bids.

Laurence Alexander, an analyst at Jefferies stated recently that “The proposed divestitures are slightly larger than expected.” “One or more JV partnership structures appear likely, as well as possibly splitting off certain parts of Europe, in order to efficiently deal with existing regional overlaps.”

3.2 Innovation

In industrial gases the efficiencies generated by economies of scale and scope are a strong competitive advantage and insure the fasted growth rate.

But in order to differentiate among competitors and obtain a sustainable growth legacy, the company must orient in its strategic development towards research to develop new products, technologies and services for its customers.

Praxair’s R&D spending is directed toward developing new and improved methods for the production, storage, distribution and the development of new applications for gases.

Figure 17: Praxair’s R &D spending target

Since nineteenth century, all main players in the industry mainly focused in developing new application for the same products: undifferentiated gas molecules between competitors, which in time transformed into commodities. Even specialty gases and electronic gases business segments become commodities, with producers competing on price once the expertise in this range was developed, taking into account how difficult it is to protect a patent for such applications in the industry.

Figure 18: Praxair’s yearly sales vs. R &D spending value

While in the present, R&D is concentrated in two important centers in USA: Tonawanda, New York and Burr Ridge, Illinois, this activity should be further supplemented by open innovation platforms from external companies as customers and suppliers, universities, government and research institutes through licensing or joint ventures, divided into more regional satellites.

R&D spending value by Praxair is the lowest in the industry, even compared to competitors with smaller annual sales. Linde’s R&D spending in 2016 is $134 million, from which only $84 is allocated to Linde’s gases division. Total industry value spent in 2016 is $ 582 million and relatively constant in the last 6 years.

Figure 19: Main players R &D spending value

The pharmaceutical and bio tech industry invests on average 19% of sales in research; industrial gases industry spends on average of 0.9%, while the chemical industry average is 1.8%.

Figure 20: Main players R &D spending % of sales

With such low levels of investments, there are few R&D outputs in terms of new products and technologies. Spending is directed to short-term objectives, such as new applications and production efficiency improvement and away from new product discoveries.

Though, in the near future, new applications development will remain the most important growth driver in the gases industry, as they become more advanced and are more cost and know how intensive, Praxair should work towards insuring patent protection or customer licensing, instead of targeting an investment recovery through volume growth generation.

An innovation in process improvement is lowering the company’s cost structure and strengthens its cost leadership strategy without changing the utility proposition of its offerings.

Instead of focusing on beating the competition, Praxair should focus on making the competition irrelevant by reaching beyond actual demand and creating a leap in value for the company and its customers.

For reaching beyond existing demand, research and development is crucial for the sustainable development of Praxair but it can be expensive, and a combined group would provide the finances to make a realistic strategy:

– the merger would insure an improved and accelerated R&D activity and new windows of opportunities

– summing the R&D budgets would provide a competitive advantage in respect to other producers, faster time to market and access to a broader range of R&D

– having a better footprint the company can focus where the most customers are concentrated, supporting the customers activity in those regions to develop new products and services

– wider global network of experts complementing their expertise

– the value spent would be amortized over an extended market

Praxair receives government grants in research and development mainly for energy and aerospace fields and it can further increase its participation in research and development programs with major universities in USA, as they generally have significant internal resources, as staff, expertise and high-end equipment.

In recognizing the changing nature of industrial R&D through consultancy, collaboration, contracting or subcontracting and the increasingly global nature of R&D, due to the internet and globalization, the group may consider outsourcing their R&D activities to decrease overheads and optimize staff.

There are a number of national or international financing agencies that generally support pure research via open and focused calls for grant proposals, that the combined group can take advantage.

Programs as the Knowledge Exchange Funding in UK, providing direct grants to support the development of academy – industry collaborations and foster innovation by linking the industry with a university, academia and government or the European Commission’s H2020 Framework Programme enhancing collaborative projects capable of developing research and innovation in a particular area to deliver commercializable products which improve the competitive edge of European companies in worldwide markets, can be further accessed by the combined group.

Consortia for such collaborative projects are generally a mix of universities, industry, research and development laboratories with industry generally taking the lead role with the target to transform scientific proposals into innovative, market adapted technologies. (Earnshaw, 2017)

A transformational process should be implemented beyond just research and development staring with top management acknowledgement that innovation is paramount for the sustainable growth of the company and define clear performance indicators for innovation in line with higher R&D budget.

To accomplish a step-change in innovation, the process has to include five stages: redefining management aspirations, performing a reality-based diagnosis, defining a coherent innovation strategy, redesigning functions and processes, and finally, executing the process.

Hydrogen Energy Carrier – a potential disruptive technology

Another driver for high growth for Praxair and a potential disruptive innovation might be Hydrogen energy carrier.

Environmental climate change- the most genuine existential threat that humanity has faced in decades and the reducing sources of conventional energies like fossil fuels, gave birth to the quest for renewable energy.

At the 2015 United Nations Climate Change Conference, COP, 195 countries signed a legally binding accord to maintain global warming “well below two degrees Celsius above pre-industrial levels, and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius” by the end of the century.

Following, hydrogen became the central pillar of the energy transformation that can offer economically viable, socially and environmental beneficial solutions in decarbonizing transportation, building heat and power or industrial energy feedstock.

Adopting hydrogen to fuel the economy on a large scale can reduce reliance on fossil fuels, diversify renewable and sustainable energy sources, and diminish pollution and greenhouse gas emissions.

A fuel cell is a device which converts hydrogen (H2) in the presence of an oxidant as air or pure oxygen and a catalyst in electricity and heat with the only by product being water, making in the cleanest fuel available in the present.

As electricity, hydrogen is an energy carrier not a source of energy with the advantage that it can be stored. Therefore it needs to be produced.

Hydrogen (H2) is the lightest and most abundant chemical element existing in the Universe. On Earth, hydrogen only exists in bound form, meaning water, hydrocarbons and minerals and is predominantly produced from fossil fuels with around 90% from the total quantity obtained from natural gas via SMR (Steam Methane Reforming).

Hydrogen can be obtained from other sources like water by electrolysis, thermochemical and by photobiological or photocatalytic processes.

Compared to other fossil fuels, hydrogen has the richest value of energy per unit of mass, while the volumetric value is low.

A very important direction for Praxair in deploying its R&D spending is towards obtaining economically clean or green hydrogen from renewable sources and towards safer transportation and storage of hydrogen, a highly flammable, smallest existing molecule passible for leakeage, reaching extreme low temperature in its liquefied state of around -250 °C.

Hydrogen as energy carrier is not new; it was used as fuel in space rockets since 1930 and is already being used in transportation, predominantly as municipal buses. Hydrogen-powered vehicles are already on the road, with large scale commercial availability in the next five years in medium-sized and large cars, buses, trucks, vans, trains, and forklifts. In the following wave, costs are probably going to decrease with scale, enabling hydrogen to compete in other segments.

In 2017, there were 375 hydrogen fuel stations worldwide and the forecast for 2030 is 15,000.

By 2030, 1 in every 12 automobiles sold in California, Germany, Japan, and South Korea could be fueled by hydrogen, more than 350,000 hydrogen trucks could be transporting goods and thousands of trains and passenger ships could be transporting people without carbon and toxic emissions.

Hydrogen could be used as feedstock for the chemical industry together with captured carbon or carbon from biomass to substitute fossil fuels, creating a closing cycle economy.

For heat and power in buildings and industry, hydrogen energy can use existing gas infrastructure and assets without any modifications, as in first stage only low concentrations of up to 5-20% of green hydrogen could be mixed in public natural gas networks, before entire urban areas could be converted to pure hydrogen heating with infrastructure upgrade.

It is completely feasible to attract the investments necessary to scale the technology within the right regulatory context and with long term policies commitment, as there are much greater annual investments already in energy, oil and gas that amount to $1 trillion in energy each year.

Building the hydrogen economy depends on annual investments of up to 25 billion for a total of about $280 billion until 2030. Around 40% of this investment would go into the production of hydrogen, 30% in storage, transport, and distribution, and 25% in product and series development and scale up of manufacturing capacity.

If hydrogen is adopted as a fuel, the potential growth opportunities are enormous as it could represent 18% of the total energy consumed by 2050, with the annual demand increasing from 8 EJ in 2015 to almost 80 EJ in 2050 and a market for hydrogen and related technologies estimated at more than $2.5 trillion per year, and jobs for more than 30 million people globally.

Being an energy carrier with tremendous potential for clean, efficient power in stationary, portable and transport applications could generate a disruption to the following:

– oil and gas industry which does not have the expertise in hydrogen liquefaction, transportation or storage possessed by the industrial gases producers;

– end users by providing them added value and changing the manner technology is used in present and changes the infrastructure.

3.3 New business model

Commodization is a key challenge for Praxair while servitization as “a market packages or bundles of customer-focused combinations of goods, services, support, self-service and knowledge”, is a key enabler in transforming the company in a solution provider.

The services offered need to solve real customer problems in an efficient and cost-effective way:

Industrial gases are probably the purest commodities from a chemical point of view. (Budde, Felcht, & Frankemolle, 2006);

Criticality: industrial gases and their supply is critical in all activities of Praxair’s customers, starting from medical oxygen continuous supply in healthcare, to the automotive and the high end electronic manufacturers demanding very complex products in terms of characteristics, safety, high quality and continuity in supply, as any syncope in the above can cause huge liabilities;

Applications require sound technical knowledge;

Processes involving gases require customer personnel training;

Environmental, health and safety (EHS) hazards represented by industrial gases;

Strict legal regulations exist for the storage and handling ;

In addition, regulations demand various reports and declarations for various national authorities as e.g. industrial gases can have a climate impact or are considered drugs;

The storage and distribution of gases require specialized equipment.

Integrated product-service offering is an excellent means of building a long-term competitive advantage by providing commoditized products the added value of service as solution to customer problems:

1. Renting all linked equipment and insuring repair, maintenance, inspection

2. Advisory/ consulting services for product technical expertise and process optimization

3. Quality assurance

5. Personnel training

6. Chemical tests and lab analyses

7. Environmental, health and safety inspection, compliance and reporting to authorities

8. Procurement, inventory management, distribution and container management where the process and level of transformation is determined by current progress of information and communication technologies and real-time access to data, including data analysis, machine learning and artificial intelligence:

-intelligent cylinders that display the gas type, content, flow and pressure, temperature

– Internet of Things and artificial intelligence (AI) applied to remote monitoring systems to enhance the product functionality, from a physical product to a product containing information and service features: internet gas cylinder management: automatic ordering, point monitoring gas usage and stock management or cylinder location,

– analysis of big data allows predictive maintenance with the identification of the weak signals that precede a malfunction.

Customers are finally buying piece of mind: one-stop integrated value added solutions, exclusion from damages, risks and liabilities with a reduction of cost for the customer by using Praxair’s existing economies of scope and scale.

By positioning itself as a solution provider that targets the improvement of the processes of their customers through a business model in lack of a product-based innovation, Praxair offers its vast expertise to give widespread improvements in efficiency and effectiveness to its customers.

The most obvious end user for these offerings is the electronic industry.

Industrial gases are indispensable raw materials used in manufacturing electronics such as semiconductors, flat-panel displays, photovoltaics and LED. The electronics end market relies heavily on the use of specialty gases in various processes, including deposition, etching, thin film forming, doping and ion implantation.

Large scale integration plants in electronic industry use over 50 types of specialty gases that are critical in more than 400 manufacturing processes with very strict safety compliance and strong operational support as most products are contained at high pressure and are toxic, corrosive and lethal in very small concentrations and where the quality of the products is of paramount importance and the slightest variation in the already very high chemical purity can impair tremendous loses.

This business model can be successfully applied in other industries, as healthcare, where authorities regulate a strict traceability of drugs as medical oxygen, nitrous or nitric oxide with many points of usage in a hospital and a supply management is extremely important for the life of patients.

Figure 21: Hospital supply point of use and supply methods

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Chapter 4: Conclusions

The potential merger with Linde AG provides the finances to invest in transformational projects and the strategic alliance to set the industry standard toward innovation in how it impacts our everyday life: from what we eat, drink, how we read, communicate and travel distances to making our planet cleaner and more productive.

This opportunity can be seized by reaching beyond core competences and developing new business models in attractive existing and new markets.

The key factors for success will be value innovation by new discoveries through sustained pure and applied research and development, perseverance in further improving potential disruptive technologies with tremendous economic and environmental impact, and by transforming the purest commodities available into high volume specialty chemicals by servitization business model.