C&EN's survey of 19 chemical companies finds that the group plans to raise its capital expenditures this year to $4.9 billion--a modest 0.6% rise over 2002. But the increase would be much higher--10.2%--without Dow Chemical. Dow, which spends more than any other in the survey, recently cut its capital improvement budget for 2003 to preserve cash as it continues to register losses.

AIR PRODUCTS PHOTO

For R&D, the spending outlook is not as bad as it first looks. As a group, 15 firms surveyed say they will slice 1% off already slim 2002 R&D budgets, to just under $3.3 billion in 2003. But individually, many more firms plan to increase R&D spending than cut it.

Still, future-oriented spending is in the doldrums. The 15 firms that supplied both R&D and capital spending data for the past decade plan to disburse nearly $7.9 billion in 2003--a low for the 10-year period. In 1996, the same group reached a decade high when they earmarked almost $9.4 billion for research and new plants.

The value of 2003 future-oriented spending funds erodes further if inflation is taken into account. The $7.9 billion targeted for this year represents $6.5 billion in 1993 dollars.

Over the decade, capital expenditures took it on the chin; R&D has held up much better. The proportion of future-oriented spending directed at R&D grew from a low of 32% in 1996 to the 10-year high of 42% in 2002 and '03. Funds directed to new capital projects suffered by comparison, going from 68% of spending in 1996 to a low of 58% in 2002 and '03.

Brad Bell, Rohm and Haas's chief financial officer, sums up the industry attitude on future-oriented spending. At a Salomon Smith Barney conference in New York City in December, he said his firm was "focusing on leveraging the economic recovery with an emphasis on new product introduction and operating efficiency."

However, budgets for this year are always subject to change. C&EN's survey--conducted in January--captures plans and expectations only for the moment. If chemical demand revs up or comes to a screeching halt, projects may be accelerated or delayed, respectively.

For example, companies surveyed in January 2002 expected to increase capital spending by 2.3% in 2002 (C&EN, Feb. 11, 2002, page 12). However, the companies surveyed this year say that, during 2002, they decided to tighten their purse strings when the economy didn't improve as expected. In the end, they cut capital projects by 7.3% instead.

The story for R&D was a little different. Last year's group expected to cut R&D by 3.4% in 2002. The companies surveyed this year report that in fact they cut it by only 2.6%.

Previous surveys included DuPont and Praxair, each of which had a significant impact on survey results. DuPont projected $1.6 billion in capital spending in 2002; Praxair expected to spend $650 million. Together, they accounted for nearly one-third of the capital budgets for the 19 companies in that survey.

These two companies and some others that were asked to participate in C&EN's annual survey decided they could not supply data this year. Some said they could not release data because they did not have budget numbers approved yet. Others said they were finalizing their numbers and wouldn't share data before they reported the year's financial results.

TABLE 1 - RESEARCH SPENDING
Overall spending by major chemical companies is forecast to slip again in 2003

TABLE 2 - PLANTS & EQUIPMENT
Major U.S. chemical firms will eke out a spending increase in 2003

The 2003 survey still indicates the relative importance of future-directed spending among large chemical firms.

YET ANOTHER reason companies give for not disclosing spending figures is a need to control and widely distribute information themselves. By not answering certain media inquiries, they say they are observing Securities & Exchange Commission disclosure rules. However, the SEC's final rule on Selective Disclosure & Insider Trading (often referred to as Regulation FD) says fair disclosure makes an exception for "ordinary-course business communications or disclosures to the media." The numbers for C&EN's surveys should not be that hard to get.

Even without DuPont and Praxair this time around, the 2003 survey still indicates the relative importance of future-directed spending among large chemical firms. After four years of declining spending, many firms are planning to make up lost ground. Of 19 companies surveyed for their capital spending plans, 14 expect to increase spending on new plants and equipment. Only two are planning cuts, and three anticipate holding spending level with 2002. This compares with only seven that increased spending in 2002, one that had no change, and 11 that cut spending.

And C&EN predicts that the group's capital spending as a percent of sales will be a modest 5.2%--a low for the decade. It assumes a 4% increase in sales in 2003 and excludes Solutia because 10 years of data are not available. In each of three years--1995, 1996, and 1998--the group hit the decade high, spending 8.6% of sales on capital projects.

Cytec Industries expects to make the largest increase in capital spending for the group. The nearly 67% increase brings spending for the company to levels not seen since 1998. Though Cytec says it is not expecting an economic recovery in 2003, stronger growth anticipated in at least two segments of the company's business--water and industrial products and performance products--has given it the confidence to pursue long-delayed capital projects.

Lubrizol plans the second largest increase--46% to $95 million. A spokesman attributes the increase to long-postponed projects to upgrade blending equipment. Hercules, too, plans a hefty increase. In 2003, it will spend $57 million on capital projects--one-third more than it spent last year. The increase will cover deferred projects as well as new growth and maintenance initiatives.

Nine of 15 companies expect to increase R&D spending in 2003, four plan no increase, and two will cut back some. This compares with only four that increased expenditures in 2002, two that made no change, and nine that cut their budgets.

C&EN ESTIMATES that in 2003, R&D as a percent of sales for the group will slip to a decade low of 3.8%--well below the 5.7% decade high in 1993. Survey results put it at 4.0% in 2002.

And money committed to R&D buys a whole lot less than it did a decade ago. Though actual dollars devoted to new product and process development for the group will be $3.3 billion, the commitment will be only $2.7 billion on a constant-1993 basis. The decade high of $3.5 billion was in 1993.

Albemarle plans the largest increase in R&D. A spokesman explains that the company ratcheted back in 2002 to capture cost synergies from its 2001 acquisition of ChemFirst's custom and fine chemicals business. Albemarle plans to boost R&D 18% in 2003 to $20 million to take advantage of new opportunities brought in by the unit. Cytec and Eastman Chemical both plan a 12% increase this year. The remaining six firms plan increases in the single digits.

The American Chemistry Council's industry dynamics and statistics group conducts an annual survey of members that includes an analysis of capital spending and R&D plans. Unlike C&EN's survey, which predicts a 1% cut in R&D funds, the ACC survey predicts a 3% gain in R&D spending in 2003. However, like C&EN's survey showing that most firms plan to increase capital spending, the ACC survey, conducted in the fall, predicts an uptick in 2003 capital spending of 7%, following a 12% decline in 2002.

Most of the increase in capital spending will fund replacement of worn-out plants and equipment and projects to improve health, safety, and environmental protection. The economy continues to recover, but spending to expand capacity for existing products has moderated, the ACC report's authors say.

Battelle Memorial Institute's Jules J. Duga tracks macro future-oriented trends, and he forecasts an insignificant increase of less than 1% for industrial support of R&D in 2003. Duga, a senior researcher at the Columbus, Ohio-based think tank, says his prediction is based on the slow economy and a weak stock market.

The Industrial Research Institute scrutinizes trends in R&D among its members, which represent 80% of the U.S. manufacturing sector's research. A fall survey of the 201 members indicated that more companies will reduce R&D as a percent of sales in 2003. They are increasing funding for new business projects while spending less on existing business and basic research. Many are trimming personnel and filling part of the void with more joint-venture R&D, grants and contracts for university R&D, and contracts with federal labs.

THOUGH C&EN'S survey shows that the dollars directed to chemical company R&D have been slipping, more advances are expected to come out of the lab than previously. Calvin B. Cobb, a vice president and chemical industry strategy expert at management consulting firm Cap Gemini Ernst & Young, points out that many CEOs have announced goals to derive anywhere from 25 to 40% of revenues from products that are five years old or less. However, many companies are not meeting those goals.

Most of Cobb's clients have tried to adapt statistical management tools, such as Six Sigma, to increase the success rate of R&D. What is at stake are "traditional ways of working," he says. In their place, managers are introducing a "culture of constant and acceptable change." Just as managers are looking for increased productivity from manufacturing, accounting, and other corporate operations, they are looking for similar improvements in R&D, Cobb says.

For instance, Cobb suggests that managers tailor information management systems to draw on the skill of all the scientists and engineers working in a company. Not only are scientists scattered at a variety of sites in a large firm, but many work outside R&D in a variety of production, sales, and management jobs. "The question is, How do we connect all the brains in a business quickly and efficiently?"

One answer, says Denise Myrtoglou of Cabot Corp., is to build a company intranet to allow anyone to propose new ideas. Myrtoglou, a new business development manager, set up such a network two years ago that allows people to post and track their suggestions. Senior managers meet periodically to review suggestions. When the status of a suggestion changes, the proposer receives an e-mail alert and can appeal decisions he or she may disagree with.

"Keeping the flow of new ideas is key," Myrtoglou says. Several hundred ideas have flowed through the pipeline, and 5 to 10% have gone on to become solid research projects. "It's important to keep the pipeline of ideas full because of the low probability of commercial success," she says.

Today, financial analysts look closely at returns on R&D, says Sal Puaar, production and process vice president for industry consulting group Celerant. Chemical firms annually spend $20.2 billion worldwide on R&D, half of which covers salaries, he says. Given time spent gathering information, compiling reports, and ordering equipment and supplies, some researchers may devote only 11% of their time to "creative" pursuits, says his colleague David Delvin, European process sector vice president.

BETTER MANAGEMENT of data to allow sharing information among groups is one way to make better use of time, Delvin says. And people also "need to use more statistical techniques to predict whether something will be a failure," Puaar adds.

Some are adopting a technique developed in the mid-20th century by Russian engineer and scientist Genrich Altschuller, he says. The theory of inventive problem solving, which goes by the Russian acronym TRIZ, found patterns in the evolution of technical systems that some companies are using to boost R&D productivity, Puaar explains.

He names Dow and DuPont among adapters. Cabot is adapting the analysis technique, too, Research Vice President David C. Bonner says. "We are training a small group of people in this process. It speeds the generation of solutions to problems based on what's been learned from inventive patents," he says. TRIZ "should help get new products to customers more quickly."

But whether it is boosting R&D productivity or getting the most out of limited funds for capital expenditures, the chemical industry continues to focus on cost reduction during these difficult economic times, Cap Gemini's Cobb points out. Celerant's Delvin notes that, as industry managers pinch pennies for future-oriented investments, they are also undertaking programs that will make better use of people and assets.

TABLE 1 - RESEARCH SPENDING
Overall spending by major chemical companies is forecast to slip again in 2003

TABLE 2 - PLANTS & EQUIPMENT
Major U.S. chemical firms will eke out a spending increase in 2003

TAXING MATTERS
Dividend Policy Won't Change Much

Chemical & Engineering News
Copyright © 2003 American Chemical Society