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Volume 88 Issue 15 | pp. 10-13
Issue Date: April 12, 2010

Cover Story

Leading DuPont

After a difficult first year as CEO, Ellen Kullman sets the stage for growth
Department: Business | Collection: Economy
Keywords: DuPont, Ellen Kullman, chemicals, biotechnology, intellectual property
INTERVIEW
"I believe that without innovation, price goes down," Kullman told C&EN's Marc Reisch.
Credit: Thom Thompson
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INTERVIEW
"I believe that without innovation, price goes down," Kullman told C&EN's Marc Reisch.
Credit: Thom Thompson

In January 2009, when Ellen J. Kullman took on the role of chief executive officer at chemical industry icon DuPont, the business world seemed on the verge of collapse. It was a part she had rehearsed for, although that didn't make it any easier, particularly during the difficult first six months.

Today, Kullman is confident she made the right choices in that harrowing first year, she tells C&EN. During that time, she oversaw employment cuts, implemented productivity measures, and continued investing in promising businesses.

The 19th person and first woman to head the more-than-200-year-old firm, Kullman also held the line on DuPont's $1.4 billion annual R&D budget. And that commitment has put the firm in position, she says, to resume growth quickly as the business recovery takes hold.

Kullman, 54, didn't start her career at DuPont. A mechanical engineer with a B.S. from Tufts University, she first went to work for General Electric, a conglomerate well-known as a training ground for business leaders. There she held a variety of business development and marketing positions before coming to work for DuPont in 1988.

Over the past 22 years, she has gotten to know DuPont well, holding leadership positions in the firm's titanium dioxide, biobased materials, and safety and protection businesses, among others. She gained increasing responsibility during both good and bad times for DuPont and the chemical industry. However, in the three months after Kullman became president in October 2008 until she succeeded Charles O. Holliday Jr. as CEO, business conditions became increasingly difficult. Her first few months as CEO "were no honeymoon," Kullman says.

Revenues in the first quarter of 2009 fell 20% compared with the year-earlier period as demand shrank for chemicals and polymers, particularly those sold to housing, construction, and industrial markets. Earnings plummeted 59%.

Most competitors didn't fare much better, and many did worse. Dow Chemical, for instance, recorded a first-quarter sales shortfall of 39% and a profit decline of 89%. PPG Industries' sales were off 30%, and earnings sank 83%.

DuPont saw the economic train wreck coming almost a year earlier, Kullman says. "Our titanium dioxide business tends to be like the canary in the mine," she says, referring to the days when miners used the songbird as an assurance the air was safe to breathe. But during the second quarter of 2008, the singing stopped for the white pigment business, and that didn't bode well for DuPont as a whole.

Kullman was then an executive vice president and a member of the office of the chief executive. "We started working with the heads of our other businesses, making contingency plans in case sales dropped in their units by 5, 10, 20%, or more," she recalls. Many DuPont leaders "looked at us like we were crazy," she says.

"As a company, our sales volumes were up 13% at that point" compared with the year earlier, Kullman notes. As 2008 progressed, other businesses began to decelerate like titanium dioxide had. "Unfortunately, we turned out not to be crazy," she says.

But being forewarned and forearmed didn't make the hard choices ahead any easier, Kullman acknowledges. In December 2008, just two months after she became DuPont's president and a few days after economists confirmed a recession was under way, DuPont outlined plans to cut 2,500 employees and accelerate productivity savings by eliminating 4,000 contract positions. "I felt prepared," she says. "I felt we had the senior leadership aligned on what we needed to get done."

Kullman implemented the cutbacks, but they were not enough. With the recession deepening, in April 2009, the firm asked salaried and professional employees to voluntarily take unpaid time off. About 75 senior leaders also agreed to take three weeks off without pay. The last time the firm called for such a sacrifice from employees was during the Great Depression.

In May, DuPont said it planned to cut an additional 2,000 jobs and to increase planned 2009 fixed-cost reductions to $1 billion from $730 million. The firm ended the year with sales of $26.1 billion, off 14% from 2008, and a net income of $1.8 billion, off 12%.

Kullman says DuPont expects to complete its cost reduction effort this June. To effectively compete while going forward, the company "will have to hold those gains," she points out.

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The business climate has improved since the dark first half of 2009. But through it all, DuPont did not cut its research budget, keeping it pretty much in line with 2008 at $1.4 billion. Many competitors did the same. Some, like BASF, increased R&D modestly in 2009. Eastman Chemical, on the other hand, cut R&D by 13%.

Kullman explains the rationale behind DuPont's decision to continue to support R&D. "We felt we needed to emerge from the global financial crisis in a position that would enable us to help our customers be more successful," she says. "And the best way for us to do that was to innovate and develop new products that would enable our customers to succeed in their markets." Kullman adds, "I believe that without innovation, price goes down."

However, R&D managers were not given free rein to continue business as usual. Outside consultants were cut, and the firm nixed discretionary travel. Managers reviewed all R&D programs with the goal of centering on projects that were most promising to customers and that would also add to DuPont's bottom line.

Uma Chowdhry, DuPont's chief science and technology officer, tells C&EN that "DuPont research managers need to show their projects can be expected to make a tidy profit to continue to receive funding." In 2009, as DuPont increased research relevant to customer needs, company scientists and engineers filed 2,086 U.S. patents, Chowdhry says. Patent filings exceeded 2008 levels by 8% and were at their highest number in the company's history.

In addition, Chowdhry says, 2009 sales from products launched in the previous five years reached $10 billion, or 39% of the company's revenues. In 2000, new products accounted for 22% of sales. The company also commercialized more than 1,400 new products and applications in 2009, more than in any prior year.

About half of DuPont's R&D budget is now devoted to new agricultural and nutritional products. Efforts include the development of crops and crop protection products "with blockbuster potential," Chowdhry says. Among developments in nutrition is a "sustainable" yeast-derived source of omega-3 oils—compounds thought to enhance human health—as an alternative to fish-derived oils.

In other areas, Chowdhry says, DuPont is putting more effort into the development of photovoltaic products to improve the cost per watt of solar modules. In biofuels, the firm is working to extend its research beyond cellulosic fuels to ultimately realize an integrated biorefinery that produces both fuel and chemicals.

Historically, Kullman notes, about 60% of the new products that DuPont introduces annually replace older products, and 40% are brand new. "We are challenging our teams over the next few years to move brand-new products into the 50% range," she says. Many of those new products are intended to capitalize on growing demand for alternative energy, food, and products that ensure personal and environmental safety, she adds.

Thanks to economic growth, people in Asia, South America, and Eastern Europe need more food, energy, and protection, Kullman notes. In fact, these geographic regions accounted for almost one-third of DuPont's 2009 sales.

That sales growth translates into increased demand for the firm's high-yield soybeans. It also means more demand for energy-saving products such as DuPont's Tyvek house wrap and for protective products including Kevlar aramid fiber panels, which are used to reinforce vehicles in high-security zones.

Developed areas—the U.S., Japan, and the countries of Western Europe—offer other opportunities, Kullman says. Materials for alternative energy are one such opportunity, she says. Another is the continuing trend among automakers to specify plastics in place of metal for more fuel-efficient cars and trucks.

It is this focus on market and geographic opportunities that is likely to distinguish Kullman from former CEO Holliday, opines John Roberts, an analyst with investment research firm Buckingham Research. Kullman doesn't have the major portfolio issues that Holliday had when he took charge in 1998 and turned the company away from a past predicated on oil, petrochemicals, and textile fibers, Roberts says.

During his tenure, Holliday sold oil firm Conoco, acquired seed producer Pioneer Hi-Bred, and sold DuPont's Invista textile fibers subsidiary. Kullman inherited a company now positioned to take advantage of agricultural feedstocks and the tools of biology.

"Kullman is more of a marketing person," Roberts says. "I think she'll be more about deeper penetration of geographies and deeper penetration of applications." Getting a better handle on individual and geographic markets was one of the reasons that Kullman consolidated the firm's 23 business groups into 14 last August. At the time, she also organized those businesses under six reporting segments: agriculture, chemicals, materials, coatings, safety, and electronics.

Underneath the segment organization are regional heads, Kullman says, who are able to make decisions and allocate resources on the basis of local needs. The new organization has enabled DuPont to more quickly take advantage of the so-far spotty global economic recovery, she notes.

DuPont's reorganization and headcount reduction efforts should help it in 2010, company watchers say. In a recent report to investors, JPMorgan stock analyst Jeffrey J. Zekauskas wrote that DuPont "appears to be increasing its share domestically in corn and soy and growing strongly in offshore markets. Its more cyclical electronic and auto-related performance material operations are recovering from the depressed-volume conditions of 2009, and are improving margin performance."

When asked whether she is satisfied with DuPont's improved prognosis and current set of businesses, Kullman answers coyly. "Is one ever satisfied with one's portfolio? I think a portfolio is only as good as its performance, its potential to succeed, or its competitive position."

IN CHARGE
Kullman has championed R&D, positioning DuPont to quickly emerge from the economic crisis.
Credit: Thom Thompson
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IN CHARGE
Kullman has championed R&D, positioning DuPont to quickly emerge from the economic crisis.
Credit: Thom Thompson

Some wonder whether the coatings business might go. Sales in that unit, which serves industrial and automotive markets largely in North America and Europe, were off more than 20% in 2009, and operating income slipped 58% to $84 million.

Kullman won't rule the unit in or out. "We just invested in that business not only to grow it in Asia-Pacific but also to create the right cost structure for it in the developed markets," she says. "I think we will perform well in that business. We constantly look at how we are doing versus a PPG or an AkzoNobel," she says, referring to two large competitors. "And we ask ourselves if we are bringing something to differentiate ourselves in that marketplace."

However, DuPont will emphasize businesses in promising agriculture, safety and protection, electronics, and alternative energy sectors, where, Kullman says, DuPont will continue to make bolt-on acquisitions. She won't count out large transformative acquisitions either. "The question is, can we create more shareholder value by doing something very different?" she says.

Kullman doesn't see any immediate need to make a transformative sale or acquisition, she says, adding that she has a "high bar" for such transactions. "But you can't rule out these things because you don't know what the world is going to bring," she adds.

DuPont owes much of its success to its patent position, and it has been especially outspoken in defense of its intellectual property. Last month, former DuPont employee Michael Mitchell was sentenced to 18 months in prison after pleading guilty in U.S. federal court to theft of trade secrets (C&EN, March 22, page 24). Mitchell admitted to giving South Korea's Kolon Industries stolen information on DuPont's aramid fibers. DuPont filed a trade-secrets-theft suit against Kolon last year.

In another recent case, DuPont filed a civil complaint against company researcher Hong Meng, claiming he stole trade secrets pertaining to the design of next-generation organic light-emitting diodes for computer and television displays. Federal authorities also stepped in and charged Meng with improperly accessing a protected computer belonging to DuPont (C&EN, Oct. 12, 2009, page 12). Both cases are still pending.

Although she declines to comment directly on these cases, Kullman asserts that the protection of intellectual property is an important issue for the company. DuPont has installed monitoring software that enables it to know how its information moves around its databases, Kullman tells C&EN.

"We've had to up our game over the past decade," she says, because of the ease with which people can electronically move large volumes of information either over the Internet or via portable drives. "Now we get warnings if things are happening that aren't within the norm for either the business or the laboratory," Kullman says. And she vows to hold DuPont employees accountable for the way they handle proprietary company information.

On the subject of climate change, DuPont's leader holds that for the U.S., a legislated cap-and-trade system would be better than allowing the Environmental Protection Agency to regulate carbon dioxide emissions. And she also notes that the effort to lower greenhouse gas emissions brings a lot of opportunities to companies such as DuPont.

If, as expected, global population grows by 50% in the next 40 years, many more people will want energy than currently do, Kullman says. Whether or not people think fossil fuels are constrained now, they are sure to be limited in the future, she contends. Replacing them will require a suite of new energy sources: Wind, solar, fuel cells, geothermal, and biofuels can all play a role.

"To me, that says there is an opportunity for materials science, chemistry, and biotechnology to play a part in broadening the way we get energy," Kullman emphasizes. Europe already has a cap-and-trade system in place, she notes. "So, as a country, do we want to be a leader or a laggard?" she asks. DuPont's own energy-saving programs "have had a net benefit for our businesses and have made them more cost competitive," she adds.

Through its investment in biofuels and the biochemical 1,3-propanediol and also through ownership of seed producer Pioneer, DuPont has been involved in biotechnology for a number of years. As Kullman sees it, biotechnology is in its infancy, just as the petrochemical industry was in the early part of the 20th century.

"Biotechnology can have a great impact on many of our businesses," Kullman says. She is especially happy with the recent start-up of a biofuels demonstration facility in Tennessee by the joint venture DuPont Danisco Cellulosic Ethanol. And a biobutanol demonstration facility being developed in Hull, England, in partnership with oil giant BP should be up and running in the third quarter, she says with some satisfaction.

Continuation of these research-intensive efforts not only advance biotechnology, but they also underscore what Kullman says is a concerted effort to emerge stronger after the financial crisis. "It's why we focused on R&D and on new products," she says.

The reorganization into fewer, more focused business groups simplified the firm's management structure and put it closer to the customer, Kullman says. So when she sees the convergence of DuPont science with global trends in security, energy, and population growth, she is convinced DuPont is on the right course. "There are great opportunities for the company in the future," she says.

 
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