Momentive's Moment

GENERAL ELECTRIC is routinely cited as a great company to work with and an even better one to work for. Given GE's legendary support for its executives and the businesses they run, it's no surprise that the company has appeared seven times in the past decade at the top of Fortune magazine's annual survey of the most admired corporations.

Yet on Dec. 4, 2006, GE Advanced Materials, a maker of silicones and specialty quartz, left the GE fold to start a new life. It has new owners, the private equity firm Apollo Management, and a new name, Momentive Performance Materials. Wayne M. Hewett, its chief executive officer, now faces the daunting task of maintaining and even increasing the business' GE-bred performance, but without the infrastructure and support it long enjoyed.

Hewett, 42, is a product of that support system. An industrial engineer with bachelor's and master's degrees from Stanford University, he joined the company in 1986 in a manufacturing management program. As a rising star at GE, he moved among multiple divisions in positions of increasing importance before becoming head of the advanced materials business in 2003.

Although he acknowledges that life under GE was good, Hewett maintains that life as an independent company is going to be better. "There's one simple reason," he says. "We were less than 2% of the total sales of GE. When you are less than 2% of a big entity, you get treated as less than a 2% player."

With $2.4 billion in sales last year, the operations that are now Momentive are by no means small, but employees of a unit that size still can feel small, Hewett explains, when they work for a company that turns over $160 billion in sales every year. "You get into a small-thinking mind-set, as opposed to, 'Hey, we are a very large company—the second-largest player in silicones,' " he says.

The industry's largest player, as Hewett well knows, is Dow Corning. A 60-year-old joint venture between Dow Chemical and Corning, it reported sales last year of $4.4 billion, almost double those of Momentive. More ominously, perhaps, Dow Corning's 2006 sales were 13% higher than in 2005, while Momentive's silicone sales last year were up by only 2.4%.

Hewett claims he isn't troubled by this discrepancy. "Our strategy starting in 2003 is that we weren't going to chase market share," he says. Rather, his ambition is to increase sales of specialty silicones and reduce reliance on "core" products that are more or less commodities. Hewett says he's perfectly happy to see Momentive's sales increase at less than the overall market, as long as the firm is shifting to a more profitable product mix.

At the same time, Hewett concedes that he and his top managers have been preoccupied by the sale to Apollo and the transition to independence. As he told financial analysts in an April 5 conference call, the company's performance during the second half of 2006 wasn't in line with the past. "Along with additional freedom comes greater responsibility," he acknowledged.

ONE GOAL for 2007, Hewett says, will be to complete the transition without any impact on customers. He even thinks Momentive can save money in the process. Many industrial mergers are driven by cost savings, but Hewett is counting on separation from GE to save more than $15 million annually by replacing GE-provided services with less expensive ones. "A lot of things that make sense for a $160 billion company don't for a $2 billion company," Hewett explains.

He wants the stand-alone Momentive to maintain heritage GE qualities like integrity and strong people development while cultivating a degree of entrepreneurship and even aggressiveness that it didn't possess when it was merely a small unit of GE.

Health care applications such as contacts lenses and surgical equipment are examples of markets in which Hewett thinks Momentive can do more. A long-standing GE policy was to avoid any product that resided in the human body for more than 28 days. Arguably, this stance saved GE from pursuing silicone breast implants, a product that forced Dow Corning into almost a decade of bankruptcy.

But Hewett says it also caused GE silicones managers to take an overly conservative approach to health care applications. "Yes, we didn't get into implants, but the unintended consequence was to avoid health care altogether," he points out. "Now we're taking a fresh look at health care and seeing what comes out."

Momentive's new owners are willing to invest to achieve success in health care and other specialized markets, Hewett says. This trait goes counter to the reputation of private-equity-backed companies for slashing research and capital spending, he notes.

THE COMPANY just announced plans to build a $40 million-plus joint-venture plant in China for the siloxane starting materials that it uses to make silicones. And it's already in the process of building silicones finishing facilities in China and India.

As for research, Hewett observes that the firm's R&D spending was about 3% of sales last year, up from close to 2.5% as recently as 2003. "It has steadily increased, and it's fair to say we have no plans to reduce that," he says.

Indeed, Eric Thaler, Momentive's chief technology officer, is an important part of the specialties drive. An inorganic chemist with a Ph.D. from Indiana University, he is a longtime GE employee who knows the benefits a large company can bring. Thaler joined GE in 1989 at its global research center in Schenectady, N.Y., and worked in silicones, appliances, and quartz products before taking on his current role in February.

When they describe Momentive's growth opportunities, Hewett and Thaler both talk about "beacons." These are technical capabilities that the company views as a strength, that customers perceive as valuable, and that can be extended to new markets. Examples include controlled wetting, surface protection, adhesion, softening and conditioning, and emission reduction.

"We find that our biggest home run is when we can have a collection of these beacons in a specific product that far exceeds what the competition can do," Thaler says.

He admits that Momentive scientists have given up something by leaving the GE family. "The biggest thing you lose is networking capability," he says. "If something unique comes up, you have a lot of people to reach out to."

Yet Thaler plans to take a cue from his previous job as global technology manager for GE Quartz. Because of the business' small size, he had trouble getting the attention of GE central research and ended up developing needed R&D capabilities on his own. At Momentive, he also wants to replicate the partnerships with universities and other outside partners that he created in the quartz business.

A little-noticed aspect of the deal with Apollo was GE's buyout of two silicones joint-venture partners, Toshiba in Japan and Bayer in Germany, and its inclusion of these ventures in the sale package. Hewett emphasizes the operational efficiencies of this consolidation, and Thaler likes the way it has created a unified R&D organization out of one that was operating at three geographic poles. "Our R&D structure wasn't optimized, and no one pushed it before," he says.

Although Thaler and Hewett both want to push their new company toward more specialized silicones markets, at least one observer questions whether, even free from GE, they and their colleagues possess the corporate culture to succeed at it.

Dick Compton, CEO of NuSil Technology, a specialty silicones producer with annual sales approaching $100 million, says he has a lot of respect for Momentive. "The industry recognizes that Dow Corning is number one and they are number two," he says. "There is a fair gap between them, but both have great reputations."

From his 10 years at Dow Corning, though, Compton has concluded that the big silicones companies have "a very difficult time" making the shift from marketing commodities to marketing specialties. "When they think specialties, they aren't interested in things that don't have millions of dollars in potential," he says. "We consider a $50,000 to $100,000 product interesting."

Compton's take is that tackling true specialty markets is not in the culture of the big players and that they don't have the manufacturing and record-keeping procedures to pull it off.

Hewett says he knows the hurdles. "It's not easy," he admits. "Almost every company has a specialties strategy." But he thinks Momentive can tip its product mix toward specialties by a percent or two a year by focusing its research and marketing resources on its customers' problems.

"We've come to the conclusion that there are certain fundamental problems that we solve," Hewett says. "And if we can solve customers' problems in the best way possible, they will buy from us."