BUILDING THE PORTFOLIO

Air Products' John P. Jones III restructures, with emphasis on electronics, performance materials, energy solutions, and health care

MARC S. REISCH, C&EN NORTHEAST NEWS BUREAU

Although the actions were harsh, they weren't unusual for Air Products, the 11th largest U.S.-based chemical company. "In my mind, we've been restructuring for a while," says John P. Jones III, chairman, president, and chief executive officer. When the economy starts moving again, he expects four key areas to provide opportunity and growth for the firm: electronics, performance materials, refinery hydrogen and energy solutions, and health care.

The restructuring effort goes back to 2000, the year Jones succeeded Harold A. (Hap) Wagner in the top spot at the firm. Since then, says the 53-year-old executive--who is a 31-year Air Products veteran--"we've sold close to $850 million in businesses and bought about $900 million in assets."

Purchases include Ashland Electronic Chemicals--a $300 million deal that closed late last month and raised electronic gases, chemicals, and services to 20% of Air Products' total sales. Another purchase was American Homecare Supply, a provider of in-home respiratory therapy services that was bought for $165 million last year. Businesses sold include U.S. packaged gases to Airgas for $270 million last year and polyvinyl alcohol to Celanese for $326 million in 2000.

A chemical engineer who received his B.S. degree from Villanova University, Jones says he prefers to take a portfolio management approach to Air Products' business and would rather tinker and refine his business plans than make large preemptive changes. "We don't believe in across-the-board cuts," he explains. "We believe you must constantly evaluate your businesses and their performance in the market and then make targeted decisions. Restructuring is an ongoing process."

Air Products has taken a charge each year since 2000 to reduce costs. The company took a $55 million pretax charge in 2000 and eliminated 450 positions. In 2001, the charge was $109 million with a loss of 644 jobs. In 2002, the charge was $31 million with 333 positions slated to go.

Air Products turned to a portfolio management strategy shortly after the Federal Trade Commission (FTC) rejected the $11.2 billion plan the firm had hatched with French rival Air Liquide to buy gases producer BOC Group and split the company between them. In a single stroke, that acquisition would have boosted Air Products from fourth place to second among industrial gases producers after Air Liquide.

However, when the FTC decision came, Jones was just a few months shy of advancing to the CEO's spot. The rejection forced the company to reexamine its growth strategy. "Post-BOC was an incredible moment for me," he says. "The question was, 'What were we going to do?' We needed to sit down and really determine what our strategy would be."

Jones led a number of company executives in developing a one-page internal document called "Deliver the Difference." It focused the firm on realizing a vision "to be the best company to invest in, buy from, and work for." Among other things, that document calls for Air Products to manage its portfolio of businesses in a way that continuously improves financial returns.

AS PART OF its integration work prior to the proposed BOC acquisition, Air Products had identified strategic growth areas for what would have been a much larger company. It adapted that work to come up with a portfolio of four key platforms, and it decided to direct major resources to their development. "Today, we spend two-thirds of our R&D budget on our four growth platforms. Three years ago, we probably spent only about one-third in those areas," Jones says.

About half the company's 2002 sales of $5.4 billion came from those growth platforms, and Jones expects to boost their contribution in the future. That means more emphasis on electronics customers and respiratory services for homebound patients. It means increasing sales of hydrogen to refiners, oxygen to liquefied natural gas producers, and hydrogen to the nascent market of fuel-cell-powered cars. And it means more performance products such as water-based polymers for paints and adhesives.

Merrill Lynch chemical analyst Donald D. Carson says Air Products has chosen its expansion portfolio well. In a report issued at the end of July, he said these platforms "remain on track for double-digit revenue gains in fiscal 2004," because they should benefit from the expected economic recovery.

The firm's recent expansion in Asia is predicated on its ambition to grow as a supplier of gases and chemicals to electronics makers and a supplier of hydrogen to oil refineries. "About 60% of our revenues in Asia now comes from two growth platforms: electronics and hydrogen/energy solutions," Jones says.

Asian acquisitions have reinforced the firm's performance materials platform, too. At the end of March, Air Products acquired Sanwa Chemical Industry, a Japanese maker of epoxy curing agents and specialty polyamide resins with sales of $30 million.

Jones
PHOTO BY MARC REISCH

The result is that Air Products has considerably enlarged its presence in the region even without the boost that BOC's assets would have provided. In fact, local production and imports from Air Products facilities outside the region have boosted sales to Asian customers from $430 million in 1996 to $1 billion in 2002. That's a compound annual growth rate of 15%, Jones points out.

"Our growth in Asia has been greatly affected by electronics. Last November, we commissioned the largest ultra-high-purity nitrogen plant and pipeline in the world in Taiwan's Tainan Science Park," Jones says. The park is home to many semiconductor and liquid-crystal display manufacturers. The efforts at Tainan and other locations help make Air Products the number one gases supplier not only in Taiwan but also in South Korea, where the electronics industry is also very strong, Jones says.

"For the next five years, Korea and Taiwan will have the greatest impact on our growth in Asia," Jones says. The Ashland business will boost offerings to electronics makers with photoresist strippers and high-purity process chemicals from manufacturing sites in Hsinchu, Taiwan; Kaohsiung, Taiwan; Pyongtaek City near Seoul, South Korea; and Kawasaki, Japan. With gases and now a slate of chemical operations in the region, Jones is eyeing China. "In the next five to 10 years, China will become a bigger part of our growth in Asia," he says.

BUT ASIA ASIDE, Air Products is not likely to reach its financial goals for fiscal 2003. "With the economy being what it is and the industrial recession still under way, a 13% operating return on net assets would be very difficult to achieve. I'm still optimistic that we are doing the right things to meet that target," Jones says. Operating return on net assets for the most recent quarter was about 10%. For the nine months ending June 30, sales were up 16% compared with a year ago to $4.7 billion, while net income, including charges, was off 30% to $266 million.

"For three years, the industrial economy has struggled. We are tied to it," Jones explains. Capacity utilization at many Air Products facilities is only 75%. High energy and feedstock costs have also hurt margins and made it difficult for the company to meet financial targets.

Jones has high hopes that the recent entry into the U.S. home therapy market will insulate the company somewhat from the industrial economy. The firm already had a presence in Europe before it bought American Homecare in 2002. That business "is driven by the aging population and the realization that it is cheaper to treat people outside the hospital than inside. And it offers patients a better quality of life."

Air Products' portfolio management approach requires a disciplined look at businesses that are performing poorly. "There are no sacred cows," Jones recently told an investor group. However, research analyst Mark R. Gulley with Banc of America Securities suggests that Air Products has more portfolio management to do in order to fix laggards such as the equipment and industrial chemicals businesses.

Next on the hit list, Jones says, is the European methylamines operations. In this industrial chemicals business, the company is unable to pass along increases in raw material costs to customers as it does in much of its industrial gas and in many of its chemical businesses.

Jones says he expects to sell the European methylamines business very soon. The U.S. methylamines business has been "stabilized," he says. The company has arranged a long-term contract to buy feedstock methanol from Atlas Methanol in Trinidad. Air Products will shut down some of its own U.S. methanol plants when the Atlas operation starts up in early 2004. Air Products and a Trinidad partner will supply oxygen to Atlas.

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"Today, we spend two-thirds of our R&D budget on our four growth platforms. Three years ago, we probably spent only about one-third in those areas."

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Although Jones says the company has been able to mitigate the energy volatility issue for methylamines in the U.S., the business may still go the way of its European counterpart. "We are looking at the alternatives we have for that business," he says. "Nothing is happening as we speak."

WHEN BIG THINGS happen at Air Products these days, they do so because of a corporate development office (CDO) and a companion growth board. The office was set up after the aborted BOC deal to take a kind of "gestalt" approach to the firm's many businesses. "The CDO deals with our strategic planning, mergers and acquisitions, and venture investing and runs our growth board," Jones says.

Instead of allowing business units to go it alone, the CDO follows what Jones refers to as a "one-company approach" to business that takes its perspective from all three sectors of the company: gases, chemicals, and equipment. The growth board is a kind of long-range think tank that "is composed of 12 senior executives from around the company who try to determine which ideas deserve corporate funding," he says.

The CDO and the growth board are "set up to take the emotion out of the decision-making process," Jones says. They are made up of executives with the experience to act on opportunities that may not be in their own business' vested interest but would make sense for the corporation. For example, CDO executives urged Jones to move on the American Homecare acquisition last year. "It's pretty powerful to get that kind of insight from people in different parts of the company," he says.

As for the growth board, members don't just pass or fail new research initiatives. Each makes a personal commitment to champion new ideas, Jones says. "Some of the long-range technologies now get funding where they might not have been funded before because of the need to meet everyday earnings. In other cases, projects might have received funding, but not enough to make them winners."

About 20% of Air Products' $121 million R&D budget is devoted to corporate R&D projects, says Miles P. Drake, vice president and chief technology officer. These projects, which are under the growth board's review, explore "big ideas that might develop into new platforms for the company," Drake explains. "That's where we have the time to look for what's new and different." It is not unlike DuPont's Apex research program that devotes corporate resources to developing longer range initiatives.

The growth board, says Drake, who has a B.S. in chemistry from Cambridge University and a Ph.D. in surface and colloid chemistry from the University of Bristol, is "examining long-term megatrends and big technology breakthroughs. What that means for us is that we've obviously got an interest in things like alternative energy solutions and nanotechnology."

And, like firms such as Dow, DuPont, and BASF, Air Products invests in venture-capital funds to keep an eye on new technology trends. Its investment in NGEN Partners, for instance, gives the firm an insight into nanotechnology applied to displays, electronic materials, polymers, and alternative energy.

	Drake
	PHOTO BY MARC REISCH

Funds like NGEN focus on businesses that have a very high new technology content, Drake explains. Insight into the deal flow of such funds allows Air Products "to see things that we can start to envision as either a potential joint development, a future acquisition, or a current investment."

Drake is chairman-elect of the Industrial Research Institute, a group of chief technology officers who promote best research management practices, and he is familiar with how other companies approach technology and innovation. He admires computer maker IBM's approach to venture investing. "They are looking at companies that in the future are going to be major customers who will use IBM systems. And so we are looking for companies that might be future big customers for Air Products."

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"When you have a good relationship with a venture fund, you can discuss ideas with the general partners and get a venture perspective on some of the things that we are doing."

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ANOTHER ADVANTAGE to flirting with investment funds is that "it exposes people in the technology organization to the venture world and how it operates. When you have a good relationship with a venture fund, you can discuss ideas with the general partners and get a venture perspective on some of the things that you are doing."

The part of Air Products' R&D budget that is not devoted to breakthrough technology goes mostly to growth businesses. "From the top down," Drake says, "we are about pushing money toward our growth businesses, and we are very prudent with any technical resources that go into core businesses." Little to no money goes into businesses that are being restructured or readied for sale.

IT'S A GAS Hydrogen energy-dispensing station in Las Vegas.
AIR PRODUCTS PHOTO

Many of the firm's research operations are "embedded in the businesses," Drake says. Business-based researchers are more heavily committed to new product and process development where "the time for fuzziness is over and you get into discipline and execution," Drake says.

Such researchers have come up with new developments such as ultrapure "white ammonia." The new-generation traffic lights based on green- and red-light-emitting diodes contain gallium arsenide that is made using ultrapure ammonia. White LEDs now under development could be installed, for instance, in the walls of a new home to provide efficient, long-lasting lighting, Drake predicts. However, white LEDs are possible only with an ultrapure white ammonia, and Drake says Air Products has perfected a way to deliver it to customers at 99.99999+% purity.

Globally, Air Products employs about 700 people in R&D. Another 100 or so are involved in technical service, engineering, and product development. About 80% of research is done in the U.S., with the bulk of it at the firm's campus on the edge of Allentown, Pa. The labs in Phoenix and on the West Coast are associated with the Schumacher electronics division.

The locations of foreign research and technical service operations include the U.K., Germany, the Netherlands, Mexico, Spain, South Korea, and Japan. "We haven't yet put a large block of R&D in Asia," Drake says. "But as time goes on, we'll have to think how we'll manage that. A number of things we are working on today will be emerging technologies in China, Taiwan, and Japan."

Air Products is the world's only company with significant businesses in both gases and chemicals, and sometimes the dichotomy shows. "We have a tendency to talk about gas versus chemicals within the company when we consider the skills that different growth platforms need," Jones acknowledges. But he is making every effort to change that mind-set even as Drake works to change it among the company's research and technical community. Jones admits there are limits to how closely chemicals and gases can be allied, but "we do have a tremendous opportunity to bring our unique gas and chemical capabilities" to customers.

The paradigm for this transformation is the electronics business. "It started out as a gas business, and then it developed into specialty electronic gases," Jones recalls. "Now we are bringing chemicals into play."

Restructuring efforts under way are likely to lead to many more alliances of chemical and gas technology among the remaining portfolio businesses. That "will differentiate" Air Products and make it even more successful in the future, Jones says.

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