Operating Environment

Global economy

The global economy weakened increasingly during 2008. Major factors contributing to the decline were the sharp increases in commodity prices in the first half of the year and the severe real-estate crisis in the United States. Market prices for the petrochemical raw materials relevant to our business reached an all-time high in the summer but showed a distinct turnaround in the second half.

The global financial crisis worsened as the year went on, accelerating the global economic downtrend. The economy of the Unites States remained reasonably robust in the first half thanks to monetary countermeasures adopted in the form of sharp cuts in interest rates. After that, however, the U.S. economy weakened considerably. In Europe, too, the downturn intensified as the year went on, plunging some countries into recession. Yet in many emerging markets, particularly the so-called BRIC countries (Brazil, Russia, India and China), growth initially continued almost unabated thanks to robust domestic demand. There too, however, economic growth slowed increasingly toward year end.

HealthCare

In 2008 the market for prescription medicines posted stable growth in the mid-single digits. The importance of specialty pharmaceuticals continued to increase and, as in previous years, there were further regional shifts. Pharmaceutical markets continued to expand in the emerging countries, where health services are becoming more broadly available and the demand for the treatment of chronic diseases is growing. By contrast, there were signs of slower market expansion in the United States and the major European countries. This was due partly to the fact that leading drugs in major therapeutic areas such as cardiovascular care have come off patent, with generic products increasingly capturing market share as a result. In addition, growth in western Europe in particular was hampered by health policy factors that drove more rigorous cost containment and limited access to certain types of treatment.

The global consumer care market again experienced solid growth, to which all regions contributed. Market expansion was above the average in Latin America, eastern Europe and the Asia/Pacific region except for Japan. The animal health environment was again favorable, with firm growth in most areas following a record year in 2007. In the majority of the industrialized countries the companion animal market made a strong contribution to the positive market development.

CropScience

The global seed and crop protection market benefited in 2008 from very favorable conditions on the world agricultural markets. Market prices for the principal plant-based raw materials reached an all-time high in the first half of the year, boosting crop production and the related demand for crop protection products worldwide. The higher prices for agricultural inputs in general enabled prices to be raised for crop protection products as well. Climatic conditions in the most important growing regions were also favorable. In this environment, the crop protection market registered double-digit growth rates in all the major regions. This performance was particularly positive in Latin America, where growth was driven primarily by higher farm incomes in Brazil. Crop production and the related demand for crop protection products also intensified in eastern Europe, especially in Russia and Ukraine. The suspension of mandatory fallowing practices in the European Union benefited the cereals sector in particular. In North America, crop protection products were used increasingly to improve yields. The market situation in the Asia/Pacific region varied from one country to another. While the agricultural economy in Australia benefited from considerably higher precipitation and the Chinese and Indian markets also developed favorably, Japan continued to show a slight downward trend.

MaterialScience

The business environment for the automotive industry deteriorated sharply in 2008, especially in the second half of the year. Experts believe the entire industry is facing its most difficult period in decades. Global manufacturers saw sales drop more sharply each month. Most manufacturers responded to this very difficult situation with temporary shutdowns or worktime reductions or by shedding contract workers. This directly impacted the automotive supply industry and the car retail trade in the fourth quarter.

The real-estate and financial crisis also had a significant effect on the construction industry, where global investment was slightly down compared with 2007. This was due to the dramatic decline in the United States and to distinctly negative developments in major western European countries (Spain, United Kingdom, Italy). These factors were partially offset by what was still a robust situation in eastern Europe, the Middle East and Asia/Pacific.

In contrast to many other sectors, the electronics industry maintained growth in the mid-single digits in 2008, again driven by Asia and eastern Europe. Highly developed technologies (such as renewable energies) and strong exports to eastern Europe and China led to moderate growth in the western European electronics industry, while the sector’s performance in North America was impaired by the economic crisis.

The furniture industry had to contend with increasingly difficult business conditions worldwide. The uncertainty created by the real-estate and financial crisis also made consumers somewhat reticent about buying furniture. This trend particularly affected manufacturers in North America, although companies in western Europe and Asia also had to contend with a drop in demand.