MICHAEL MCCOY, C&EN NORTHEAST NEWS BUREAU
Dow Chemical has a lot on its plate. Not only did the company complete the historic acquisition of Union Carbide for $7.4 billion just a few months ago, but it's also in the process of consuming $3 billion worth of other chemical businesses it has picked up on an unprecedented buying spree.
If Michael D. Parker, Dow's president and chief executive officer, can successfully pull all these assets together, he will have significantly advanced the transformation of Dow into the world's largest and most diverse chemical company. Failure, however, will call into question the Dow model of an integrated company making everything from ethylene and chlorine to semiconductor materials and biotechnology-derived pharmaceuticals.
|HOMESTEAD Dow operations in Midland, Mich., where the company was founded in 1897.
"It's a big swallow," Parker, 54, admits. "Carbide plus $3 billion in cash-related acquisitions in a nine-month period is a lot to digest, but we believe we have the organizational structure, the leadership, the business model, and the mind-set to do it."
Dow is spending a lot of money, and it's doing so in a surprisingly wide range of businesses. Although it's the largest, Union Carbide is, in some ways, the safest purchase because many of its chemicals and plastics overlap with existing Dow products. As Parker says, it's "a very low risk transaction for Dow."
At the other end of the business spectrum, Dow just wrapped up the $440 million purchase of Ascot, a British firm that contract-manufactures pharmaceutical chemicals and carries out custom distillation. Andrew N. Liveris, president of the Dow performance chemicals unit where these businesses will reside, acknowledges that Ascot is a different kind of deal. "It's not a consolidation play like Union Carbide. It's a growth play," he says.
In between, Dow bought Rohm and Haas's agrochemicals unit for $1 billion and EniChem's polyurethanes business for $370 million. It purchased a Basell polypropylene plant and Reichhold's carpet and paper latex business. And for good measure, the company has purchased several small but unusual companies such as Collaborative BioAlliance, a producer of cell-culture biopharmaceuticals, and Isobord, a maker of straw-based construction board.
A CHEMICAL COMPANY with the size and breadth Dow is trying to achieve--it expects to double sales to $60 billion by the end of the decade--can be seen either as a tightly integrated, value-adding machine or as a dinosaur. Either way, there aren't many of its kind left: BASF and, perhaps, Solvay are the only other major examples left in an industry that has moved toward specialization in either commodities or value-added downstream derivatives.
Most of the oil companies that are Dow's main competitors in commodity petrochemicals--firms like Shell, Occidental, and BP--have pulled back sharply from downstream strategies that once seemed to make all the sense in the world.
Evert Henkes, Shell Chemicals' CEO, told reporters two years ago that the company finally realized that "we are not very good at downstream businesses." Executives at BP and Occidental came to similar conclusions after expensive forays into businesses such as fine chemicals and fabricated polymer products.
Parker is unfazed by this retrenchment. "Those are oil companies, into exploration all the way through to refineries and gasoline. They are truly commodity-oriented in their mind-set," he says. "I think where the chemical arms of oil companies moved away from downstream makes good sense. We are not an oil company. Our lifeblood is the chemical industry."
While the oil companies went upstream, many of Dow's competitors in the chemical industry abandoned petrochemicals and headed downstream toward specialties.
Hoechst no longer exists. ICI, once a petrochemical giant, left the field several years ago. Bayer is selling its petrochemical assets to BP. DSM is preparing to leave petrochemicals and polymers to focus on specialties and fine chemicals. Olin split into Arch Chemical and a much smaller Olin that is focused on chlor-alkali. Eastman Chemical is splitting in two in order to concentrate separately on commodity plastics and specialties.
According to Parker, tradition is a big part of the reason that Dow--and BASF for that matter--is sticking with the basics. "Every company has its history," he says. "Vertical integration is a key mind-set of the folks who built the modern Dow, the modern BASF."
At Dow, they started with two building blocks--ethylene from crackers and chlor-alkali from electrolysis plants--and pushed the chemistries forward. "There's a terrific integration to our company," he says. "We feel there are great strengths to that integration, but it needs to be managed well."
And managing commodities and specialties together is no easy task. Liveris acknowledges that people-intensive specialties businesses and operationally oriented commodities are culturally quite different. "It takes a lot of work to keep the iron-and-steel part of the company at bay," he says. "We work hard to marry the best of both."
Parker maintains that a successful marriage allows Dow to weather storms that can swamp other firms. For example, in the second half of 2000, specialties companies were having trouble passing on high energy and feedstock costs. Dow's commodity businesses did this better and helped it beat most of its peers in the earnings game.
Dow manages its wide array of products with an organizational approach that Parker considers world leading. "We think we have a great business model," he says. "The way we're organized is a strength and a competitive advantage."
OUTSIDE OBSERVERS generally agree that Dow has had a winning structure and management team since 1995, when Parker's predecessor, William S. Stavropoulos, became CEO and reorganized all of the company's major businesses on a global basis.
According to Sergey A. Vasnetsov, a senior vice president for equity research at the investment firm Lehman Brothers, this wasn't always the case. Prior to 1995, he says, Dow had a reputation with investors as financially undisciplined. "People didn't believe Stavropoulos when he said Dow would be disciplined around capital expenditures, acquisitions, and divestitures," he says. "It took several years of good results for Dow to prove itself."
Although Stavropoulos is now chairman, Vasnetsov notes that Parker and most of the other key players that Stavropoulos brought in are still in place at Dow. "Every company strategy is only as good as the people who implement it," Vasnetsov says.
Managing a diverse portfolio takes more than just good managers, though. Parker says Dow's "flat" organizational structure allows best practices to be quickly disseminated around the world with clarity and transparency. "There is no other company out there that is as flat as we are," he claims. "We're a $30 billion company running with six layers between the CEO and the front line."
Dow managers are trying to apply the same clarity of purpose to the acquisition of Union Carbide. "From day one, we started to plan for the close of Carbide," Parker says, mapping an integration plan out to "day 730"--two years after the acquisition on Feb. 6. The plan includes more than 300 integration projects; each will be tracked for two years and has a project leader who has milestone accountability.
Parker says Dow is taking great strides to communicate changes to former Union Carbide employees. All were connected to Dow's intranet on the first day after the close, and most got a visit from Parker, who traveled to every significant U.S. Carbide site within three weeks. "Communication was a major point of emphasis," he says.Assets from Union Carbide and the other acquisitions are being spread pretty evenly among Dow's eight global business units, Parker notes, so no one leader is overwhelmed.
|"We're a $30 billion company running with six layers between the CEO and the front line."
Four units are affected by Carbide: hydrocarbons and energy, headed by Theo Walthie; chemicals, run by Lee P. McMaster, the one former Carbider leading a global business; Liveris' performance chemicals unit; and polyolefins, led by Romeo Kreinberg.
The Rohm and Haas unit will become part of Dow AgroSciences, headed by A. Charles Fischer, and the EniChem acquisition will be folded into Robert L. Wood's polyurethanes unit. The Ascot purchase makes Liveris the only executive involved in two integrations.
Two leaders are unaffected: Ed F. Gambrell, in charge of market-facing units such as Dow Automotive, and Kathleen M. Bader, head of the polystyrene and engineering plastics unit. Bader has a key role in the acquisitions, however: She is leading the introduction of the Six Sigma quality initiative to all the new businesses.
Parker says that Ascot, Rohm and Haas, and EniChem will be integrated with the same rigorous methodology that is being applied to Union Carbide. "We're following the same discipline and mind-set," he says. "We know that we can put a good plan in place."
OF THESE MAJOR PURCHASES, Ascot most exemplifies Dow's emphasis on growth through new business. Although Dow created a contract manufacturing business several years ago, it was, until June 1, a relatively small player in the custom chemical field.
Ascot changes that significantly by bringing $335 million in annual sales from four major businesses: Haltermann Custom Processing, Haltermann Products, ChiroTech, and Mitchell Cotts. With the addition of these operations, Dow is creating a new global business unit--custom and fine chemicals--that will have $650 million to $700 million in annual sales, Liveris says.
Led by George Biltz, the new unit also includes the contract-manufacturing services business, parts of Hampshire Chemical, and Angus Chemical, a nitroparaffins producer that Dow acquired in October 1999.
Liveris is keenly aware that several other big U.S. companies made ambitious moves into custom and fine chemicals production only to have second thoughts. In the end, Eastman Chemical and Honeywell tried to sell their businesses, although both eventually pulled them off the block. Some industry sources say PPG Industries wants to sell its fine chemicals unit as well. Liveris says Dow is different from these firms in at least two key respects. For one, it didn't jump headfirst into the business. It formed the contract manufacturing services unit in 1995, he says, then "spent four years learning how to pull this business model off."
Liveris claims it's also different in that it pursues contract manufacturing with equal vigor in pharmaceutical, agricultural, and specialty chemicals. "We didn't put all our eggs in the pharmaceutical basket," he says.
AS A MODEL for the fine chemicals business, Dow looked to Dowell, an oil-field services business, sold in 1993, that supplied the oil and gas industry with customized products and services. "We asked ourselves, 'Can we do this?' " Liveris says. " 'Can we isolate it from the 'tons-are-us' part of Dow?' That's what we tested for four years."
In the case of Ascot, Liveris says it's no accident that Dow acquired a European company: European firms have been committed to the specialty chemicals model the longest and in custom and fine chemicals are the industry leaders--a group he expects Dow to join. "I think we can be one of the few companies that are defining this marketplace," he says.
Dow's new business push is also in evidence in Gambrell's business unit. It includes the showcase market-facing business--the $1 billion-a-year Dow Automotive--as well as efforts in advanced electronic materials, industrial biotechnology, and household and personal care products.
Gambrell is confident that advanced electronics will be the next Dow Automotive. It was recently elevated to "business" status within Dow, with separate departments in semiconductors and flat-panel displays.
|LIVERIS (top) and GROSS
PHOTOS BY MICHAEL MCCOY
THE SEMICONDUCTOR department's first product is SiLK, a circuit line insulating material that has been adopted by IBM and other semiconductor makers. Already in customer trials, Gambrell says, is a second material used as a masking layer in conjunction with SiLK.
He also expects Dow to carve out a position in the chemical mechanical polishing materials used to smooth layers during chip manufacture. Dilute silica and alumina slurries are the polishing norm today, but Dow has a urethane-based technology that may be able to do the same thing without the expensive slurries.
Gambrell is also bullish about industrial biotechnology, particularly the contract biopharmaceutical manufacturing field Dow entered with the purchase of Collaborative BioAlliance. The business is something of a biotechnology-based sister to the new custom and fine chemicals unit; like Liveris, Gambrell believes Dow can become a leader by drawing on its capability in manufacturing and process optimization.
"That's why we acquired Collaborative," he says. "We don't have a lot of history in the biopharma area, but we already do most of the operations required to be successful."
At the same time, Gambrell acknowledges that nurturing new businesses requires more than the traditional Dow skills. "We're very good at running high-volume commodity businesses--the best in the world, in my opinion," he says. "We want to create the capabilities that allow us to do something else. That's why, for the most part, we separated these activities and created the new business portfolio."
He says the portfolio, which was created about two years ago, has a much higher priority in Dow than did previous new business efforts. Gambrell and other global business unit leaders sit on a "growth board" that Parker created to manage the portfolio. They meet regularly, Gambrell says, to discuss subjects like skills development and unique compensation to ensure that investments in growth projects are successful.
THE EFFORTS under Gambrell and Liveris exemplify Dow's move downstream, but they are not the only examples.
In Wood's polyurethanes business, Parker points to a gradual move into "systems houses" that formulate the basic isocyanate and polyol halves of polyurethane chemistry into a prepackaged system. Parker himself started the push in the early 1980s when he arranged the purchase of a European systems house.
Dow subsequently expanded it into a Europe-wide organization. "We learned about the business, built our own systems houses, and then started to see other opportunities," Parker says. Last year, the company took the strategy to the U.S., acquiring General Latex & Chemical and Flexible Products, systems houses with combined sales of close to $250 million per year. Today, Dow's systems houses consume about 15% of its base polyurethane chemical output.
Of course, Dow's new focus on value-added business requires a new kind of R&D.
Richard M. Gross, Dow's corporate vice president of R&D, explains that research at Dow was reorganized globally along with the rest of the company in 1995. Today, about 75% of Dow's roughly 6,000 researchers work for one of the eight global business units, with the balance in a central corporate R&D function.
At the same time, Dow launched a program to increase the number of researchers devoted to new business. "We did an analysis of corporate R&D and were dismayed to find that two-thirds of every R&D dollar was spent to support existing businesses," Gross says. Today, the numbers are reversed: About two-thirds of research is growth oriented.
Gross thinks of the outcome of research as knowledge that enables, rather than mere chemical liquids or plastic pellets. "At the end of the day, we sell knowledge," he says. "We in the industry haven't thought enough about that."
Sometimes that knowledge can be sold outright. Gross points to a new business in Dow's epoxy products and intermediates group called Dow Dispersion Sciences that sells "the know-how to mix things together that don't like to be mixed."
|A chemical company with the size and breadth Dow is trying to achieve can be seen either as a tightly integrated, value-adding machine or as a dinosaur.
The technology is already on department store shelves in the form of Estée Lauder's Light Rain Moisture Droplets, a skin moisturizer that was launched in March after only eight months of collaboration. "Our technology allowed them to introduce a product that they made in the lab but couldn't find a cost-effective way to put into commercial production," Gross says.
Like Gross, Parker gets excited talking about Dow and the rest of the chemical industry as enablers. "What industry out there could be what they are without us?" he asks. "We enable electronics, automotive--virtually everything else--to happen." If Parker has his way, Dow will become even more of an enabler, creating new value-added businesses and moving ever closer to the ultimate consumer.
It's an ambitious vision, but Lehman's Vasnetsov, for one, is convinced that Dow will pull it off. "I think it's a credible plan, and they have the strong, disciplined corporate culture necessary to do it," he says.
The Dow culture isn't for everyone. Earlier in his career, Vasnetsov worked in corporate R&D at Union Carbide, so he understands the differences between Dow and the rival it has acquired. "Some people complain that Dow is a little bit like an army," he says. "It will be a cultural shift for them."
Dow may be an army, but rather than marching on its stomach, it seems to march on the sheer excitement of trying to do something big and brash. "I think we've invented a new drug,"
Liveris says. "It's a mixture of adrenalin and caffeine. We are energized and very excited about what we're doing."
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A Drive To Perfection At Dow
Employees at the companies and businesses that Dow Chemical has acquired are finding that a surprise awaits them: the Six Sigma business improvement process.
Since adopting it in September 1999, Dow has become a fervent convert to the Six Sigma methodology and is working rapidly to implement it across the globe in new and existing businesses.
The Six Sigma process was pioneered in the 1980s by the electronics firm Motorola. Derived from the term for a standard deviation in statistics, Six Sigma refers to a mere 3.4 defects per million opportunities, or 99.9997% error-free operation in any given process.
In the Six Sigma approach, trained employees known as "black belts" tackle manufacturing and other business operations, using special statistical tools to determine the root cause of quality problems and wipe them out.
A key Dow objective in employing Six Sigma is cost savings. CEO Michael D. Parker told analysts earlier this year that the company expects Six Sigma to add a cumulative $1.5 billion to the company's earnings before interest and taxes by the end of 2003.
However, according to Kathleen M. Bader, the business group president leading Dow's Six Sigma drive, it's much more than a money-saving technique. "Six Sigma is a cultural change program that accelerates perfection," she says. "Some companies are using it as an incremental change approach; at Dow it's a transformational tool."
Six Sigma, Bader explains, trains employees to use data to make decisions. "Six Sigma makes common sense the enemy," she says. "Rather than accept what you think you know as fact, you go back and prove it."
She cites the example of a Dow superabsorbent acrylic polymer plant where sifters would continually plug up. "Everyone knew that the product was too wet," she says. "But database decision-making says you have to prove it." So the black belt in charge of the Six Sigma project spent $75 to put a monitor in the line to measure moisture. The result: The product was in fact too dry. The fix was simple, Bader says, and the savings from being able to run the plant faster were significant: $713,000 in the first quarter of this year alone.
For a Six Sigma project to be considered successful, a full year of hard dollar impact must be recorded, and Dow employs 190 financial analysts who spend part of their time counting the dollars. It's not just manufacturing driven, either. For example, a project in Dow's legal department designed to speed the agreements management process has saved $600,000 to date, Bader says.
Projects in one field--environmental health and safety--are exempt from money-saving goals and focus instead on the waste, emissions, and injury-reduction targets that Dow has set for 2005. But Bader points out that many of these projects will save money anyway: A project aimed at reducing spills from polystyrene silos, for example, ended up reducing off-grades and saving money as well.
Six Sigma is moving rapidly into Union Carbide. According to Bader, 55 former Carbiders are already black belts and 65 projects have been launched at Carbide facilities. Dow's goal with any acquisition, she says, is to have 3% of employees in training or trained one year after the deal closes.
Although some 1,800 projects are active or completed at Dow, Bader doesn't see Six Sigma running out of steam anytime soon. Getting under way is Design for Six Sigma, a program under which new plants and products are designed and old ones are redesigned using Six Sigma metrics.
Also emerging are projects tied to customer loyalty. "We've told our people that 25% of a business' projects can be without a hard dollar impact if they are related to loyalty," Bader says. Her goal is that half of all Six Sigma projects will be loyalty-based by 2003. Loyalty-related projects can be at a customer's site, such as one in which Dow black belts helped a Mexican plastics molder reduce the rejection rate in a plant that makes electrical switches. Although Dow didn't save money, it sold more plastic. Indeed, Bader claims that Dow has raised revenue by close to $500 million to date because of Six Sigma.
But she expects that even the nuts-and-bolts manufacturing plant improvement projects will be around for a while. "Most of the chemical industry is at three sigma," she says. "We won't get to four or five sigma in just a year or two. It will take years."
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Wringing Savings From A Merger
ompanies usually talk about the savings they will reap from their mergers or acquisitions, but they often come up short in the final analysis.
At a meeting on Wall Street last month, Dow Chemical's chief financial officer, J. Pedro Reinhard, took pains to describe how Dow will be different following its acquisition of Union Carbide. Its ambitious goal: Within two years of the February close of the deal, it expects to be saving $1.1 billion annually.
The savings, Reinhard said, will stem from measures large and small, creative and mundane. Most of it--about $600 million--will come from a workforce reduction of 4,500, or about 8% of the combined workforce of the two firms.
The layoffs will happen at both firms, but mostly at Carbide, Dow officials acknowledge. The cuts will be equal to about 80% of Carbide's October 1999 administrative workforce; 45% of its sales, marketing, and supply-chain personnel; 35% of its people in R&D; and 25% of its manufacturing force. Dow wants to make these reductions rapidly: Half the reductions will be completed by Sept. 30, and 80% in the first 12 months. All employees will know their status by August, Reinhard said.
Dow also wants to treat workers with respect. Reinhard pointed to West Virginia, where some 500 Union Carbide employees will lose their jobs. To help preserve employment in the region, Dow and the services company EDS have struck a deal under which EDS will open a resource center in the state's Kanawha Valley that will employ up to 120 information technology professionals. Priority will be given to former Carbiders.
Under a second agreement, Dow has committed a portion of its North American engineering work to the engineering firm CDI. CDI, in turn, has agreed to do much of the work in West Virginia, creating and maintaining 400 to 500 jobs.
After workforce reduction, supply-chain optimization is the next biggest savings area, with an expected yield of $350 million. Examples already in place include a 15% cut in Carbide's railcar fleet, reductions in barge operations, lower packaging costs due to fewer drum and resin carton specifications, and reduced shipping mileage due to re-sourcing from Union Carbide plants.
Some savings came quite quickly: Reinhard said insurance synergies were in place on the first day following the acquisition. Others, such as the application of Dow work processes to Union Carbide facilities, will take a while but should have a profound effect. For example, increasing the average operating rate of Carbide's polyethylene plants from 85% to Dow's 95% average will add the equivalent of 600 million lb per year of capacity to Dow's system at minimal capital expense.
Another $150 million in savings will come from purchasing, where Reinhard sketched out four scenarios. In cases where Dow and Carbide were buying a common product from a common supplier, Dow will simply choose the most favorable supply agreement. Common products from different suppliers will lead to a consolidation of suppliers. Different products from common suppliers will lead to bundling, while different products from different suppliers will spur standardization.
According to Reinhard, implementing the first two purchasing scenarios has already achieved about two-thirds of the $150 million target.