Report of the Directors
Business Review

Our Strategy

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Our Strategy in Focus – New Business Development

New business development is a major strategic theme for Johnson Matthey and we are actively working on new areas which align with our core skills. Following our strategy review in late 2010, we began a key programme of work with the aim of establishing new divisions with sales of around £200 million per annum by 2020. We aimed to focus on areas peripheral to our current businesses and that built on our core competences.

Two years into our programme we are making good progress across a range of potential new business areas. We have adopted a ‘market led’ rather than a ‘technology push’ approach to identifying new areas and the key global drivers impacting the chemical industry (as outlined in Supporting Our Strategy) are the starting point for our investigations. Potential areas must show a good fit with these drivers, offer strong market growth and present the opportunity for new market entry positions through a new technology solution. Moving into new markets does bring an element of risk and we are mitigating this through ensuring that any new areas fit well with our core technology competences.

These core competences are a fundamental set of interrelated technology skills in which we excel and that underpin the products supplied by our businesses today. These competences, which are described in the figure below, apply across the group. Crucially, it is our ability to apply all of these competences simultaneously that gives Johnson Matthey its strength and competitive edge.

Our New Business Development Process

We have a rigorous formal process to manage the development of new business areas. The first phase involves an investigation of market needs with particular emphasis on technical evaluation throughout to ensure appropriate fit with our technology competences. Financial assessment starts from the end of phase two when we have identified opportunities and have an idea of the scale and potential returns associated with them. As we move to phase three and beyond, we develop a more detailed business plan. Projects that do not demonstrate the ability to deliver acceptable returns at any stage are not taken forward.

Alongside organic development and the evolution of our business plans, we fully anticipate the need to fill gaps in our experience and accelerate our timescales through targeted acquisitions. The acquisition of Axeon represents a typical example of nature and scale.

The ongoing costs of our new business development process (excluding acquisitions) is approximately £6 million p.a. and involves around 40 to 50 people, the majority of whom work in R&D.

We expect to run between five and ten projects at any one time. The process is ongoing and we are simultaneously identifying and evaluating new areas whilst developing and filtering out those already in our pipeline. We have a number of projects underway at various stages of development and four of these are outlined in more detail below.

Opportunities in Air Purification

Improving air quality is strongly supported by major global drivers. Increasing industrialisation and car ownership continue to impact outdoor air quality and Johnson Matthey is already well positioned with technology to combat emissions from vehicles. However, air quality in enclosed spaces is often five or more times worse than outdoor air and we believe that new technologies will be required to effectively treat the full range of indoor air pollutants. This presents an opportunity for Johnson Matthey to provide advanced materials that are based on our technology competences and that draw on our existing expertise in vehicle emissions control. We estimate that demand for new air purification technologies will represent a market of around £1 billion a year by 2020.

We are already working closely with customers and have R&D teams developing novel technologies that are capable of removing contaminants at low temperatures. With a good market opportunity and a strong technology fit, this work builds on our portfolio of sustainable technologies and products. It has the potential to add value for our stakeholders and bring further improvements in air quality, both inside and out, for people all around the world.

Opportunities in Advanced Food Packaging

Consumers are increasingly demanding a wider range of healthy, more convenient foods all year round; suppliers are seeking to expand their markets; and supermarkets are looking to sell more high value food. All this leads to increased international food transportation and an overall need to improve the shelf life of fresh produce throughout its journey ‘from farm to fork’. When fresh produce is enclosed in packaging its biological processes continue and create a mini ecosystem of gases which can lead to premature degradation and decay. There are clear opportunities for technologies that can effectively manage and control the gas levels around packaged fresh produce, thus prolonging its shelf life.

Advanced food packaging applications will represent a market size of around £3 billion a year in sales by 2020 and the technology requirements fit well with our core skills. We are focusing our work on the development of advanced catalysts and absorbents that operate at ambient temperatures. At the same time we are looking at building our market applications knowledge. With strong drivers supporting an attractive market, we are applying our technology skills to address sustainability issues within fresh produce supply chains.

Water Purification

All four global drivers support strong growth in demand for industrial water purification products and there is a clear need for more effective technology solutions. We have identified good prospects within the niche specialised processes area of the water industry and our initial work has concentrated on the most attractive and urgent opportunities that we have found. For those initial areas we believe that there is demand of around £200 million p.a. if we were able to develop solutions today and we estimate demand closer to £500 million p.a. by 2020.

We have established a business team which has conducted further research to scope out specific opportunities. Click here to read more about our preliminary research efforts. We currently forecast sales from water purification products of around £10 million p.a. by 2017, followed by rapid growth thereafter as we introduce new products to market. We are currently investing around £1 million p.a. of our £6 million p.a. new business development expenditure on water purification. Although the water industry represents a new area for Johnson Matthey, it offers opportunities for growth through the development of high technology products.

Battery Technologies

The automotive market is well known to Johnson Matthey and the electrification of vehicles is strongly supported by major global trends. As detailed further in the Financial Review of Operations section, due to the limitations of today’s battery chemistries, battery electric vehicle suppliers are unable to fully meet industry and consumer requirements for vehicle weight, cost and driving range. Johnson Matthey has a number of R&D programmes in the battery materials area and we are working on the next generation of chemistries that offer step changes in performance and that start to approach that of conventional vehicle systems.

We have also sought to make suitable acquisitions to build our applications engineering understanding and to accelerate our market presence. The first of these is Axeon, which we acquired for just over £40 million in October 2012. By 2020 we intend to have significant sales of battery materials together with continued growth from the Axeon business.

Going forward we will continue to manage the Axeon business to deliver on its growth targets and build our position in the battery technology sector through a combination of organic growth and acquisitions. We hope to make further acquisitions over the next few years, probably of the same sort of size as Axeon, but which focus on improved materials for current and future battery chemistries. This, together with continued growth in the Axeon business, should enable us to deliver profitable sales and solid growth over the next decade in the battery technologies sector.

New Business Development in 2013/14

As outlined in the Chief Executive’s Statement, from 1st April 2013 our new business development activities will be reported, together with our Fuel Cells business, in a separate division named New Businesses.

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