Issue Date: June 21, 2004
CHEMICAL INDUSTRY'S LOST STATURE
THE CHEMICAL INDUSTRY AT THE MILLENNIUM: Maturity, Restructuring, and Globalization, edited by Peter H. Spitz, Chemical Heritage Press, 2003, 387 pages, $45 (ISBN 0-941901-34-3)
The travails of the global chemical industry are well known to readers of C&EN:
◾ The industry's competitiveness in the U.S. and most of the developed world is slipping in relation to that in the Middle East and other regions with cheap hydrocarbons.
◾ Companies rarely resist the temptation to build excess manufacturing capacity, which preserves their market share but ruins profitability for years.
◾ Many specialty chemical companies don't seem to know what business they're in. Their portfolios are in a state of flux, often miring them in financial problems.
◾ Though chemical companies enjoyed high growth during the decades after World War II, the developed world is now saturated with chemical products and the real growth today is in Asia and Latin America.
How did the chemical industry end up like this?
"The Chemical Industry at the Millennium: Maturity, Restructuring, and Globalization" attempts to answer that question and analyze the above issues--and many others. The book is a collection of 10 essays edited by Peter H. Spitz, who authors five of the pieces and coauthors one other.
Spitz is the founder of the consulting firm Chem Systems and the author of the 1988 John Wiley & Sons book "Petrochemicals: The Rise of an Industry." The new book is a follow-up that zeroes in on the chemical industry during the past 30 years.
Most literature on the chemical industry is focused on the present day, so the historical context of Spitz's book lends a welcome perspective to the major events of the past generation.
For example, in a chapter on industry restructuring, Spitz writes that the modern petrochemical industry began in the early 1980s, after the Iranian revolution led to the second oil price crisis. This made chemical companies rethink feedstock sources. Meanwhile, the replacement of traditional materials, such as glass and metal, with plastics started to slow; the industry overbuilt capacity; and the U.S. economy hit a recession.
These factors prompted the first petrochemical projects in Saudi Arabia. They also influenced companies' business strategies. For example, DuPont bought Conoco to back-integrate in 1981. DuPont turned around and spun off Conoco in 1998 after the benefits of having an upstream energy business did not materialize and DuPont became more interested in biotechnology.
Few major events of the past 30 years are omitted in the book. Spitz throws in everything--including the kitchen sink--or at least the McDonald's polystyrene clamshell sandwich container. For further information, Spitz describes that the 1984 Union Carbide disaster in Bhopal, India, ultimately led to the decline of the company and helped spur creation of the industry's Responsible Care initiative.
Spitz has a tremendous ability to distill events down to their essence. When he describes Dow's infamous attempt in the 1980s to build an oil refinery for the sole purpose of making petrochemical feedstocks, Spitz explains why it failed in terms that imply Dow executives should have known it wouldn't succeed. "The project was eventually written off, as Dow learned to its dismay that a refinery that does not produce gasoline will probably not be profitable," he writes.
Spitz also does a clever job of selecting topics. He and Michael Eckstut, formerly of A. T. Kearney and now with software provider Model H, note how, at the advent of chemical industry cyclicality in the 1970s and '80s, business strategy in the chemical industry--with the help of consultants--developed beyond planning for new plants. No longer could companies assume that new capacity would quickly be soaked up by new demand. If they did, they would be strapped with costly periods of low operating rates. Spitz follows this with a chapter on the influence that reengineering and managerial tools such as Total Quality Management and Six Sigma have had on the chemical industry. Accenture consultant David A. Crow then provides an essay on information technology.
It might seem strange to juxtapose these chapters with the other essays in the book, which focus on critical industry issues such as globalization and the environment. But business models and communications are tremendously important to the day-to-day operations of chemical companies. And there are few resources outside of this book that delve into these aspects in such detail. This book-within-a-book should be a feast for M.B.A. types.
"The specialty industry needs to go back to the basics that made it the darling of the investment community for 40 years."
John Roberts, chemical equity analyst for Buckingham Research Group, contributes an essay on how Wall Street views the chemical industry and why it gives the industry low stock market valuations. In fact, if all the publicly traded chemical companies were combined into a single company, that company would only be ranked fifth on the Fortune 500 list of market capitalization. Roberts points out, as others have, that this situation discourages investments in chemical companies by mutual fund managers who don't like to have big investments in smaller firms.
In another critical essay, Andrew Boccone of Kline & Co. says lack of innovation in R&D is costing the specialty chemicals industry the growth in sales it enjoyed through the 1980s. Sometimes, costly mergers used to form megacompanies such as Ciba Specialty Chemicals and ICI, have failed to deliver the financial results originally expected. "The specialty industry needs to go back to the basics that made it the darling of the investment community for 40 years and apply those tools and techniques in the context of the new global marketplace," Boccone says.
The book does have a few shortcomings. Spitz's essay on globalization is superficial, and a disclaimer at the end, which begins, "This chapter could be much longer," admits as much. An entire book could be written about the globalization of the chemical industry. The chapter is also approximately 18 months out of date, but that's understandable. For example, the state of the chemical industry in Latin America--which experiences new crises and hatches new plans for growth every year--is difficult even for periodicals to pin down.
Nor is there much in the book on technical innovation, outside of a single chapter on petrochemical technology developments written by Chem System's Jeffrey S. Plotkin. It is a good primer on the subject, even if it doesn't drill down quite to the level of detail needed to get the full picture. For instance, the paragraphs on propane dehydrogenation to propylene don't mention how dependent the process is on a cheap source of propane, an important aspect in understanding the technology's viability.
Also, the authors are rarely willing to go out on a limb with their theses. The conclusion of Spitz's environmental essay is an example: "It therefore seems unlikely that the chemical industry will ever gain a really warm place in the hearts of a certain part of the public," he writes, referring to environmental groups. That remark can be interpreted as ironic understatement, but in a literal reading, it leaves open the possibility of a social revolution where environmentalists adore chemical companies.
But giving a lot of controversial opinions and bold predictions isn't the purpose of the book, and Spitz writes as much in the concluding chapter: "There are no proven formulas for success, although it is hoped that this book has provided some ideas for new and creative thinking, as well as to identify outdated strategies that have not worked in the past and are even less likely to work in the future." This, indeed, "The Chemical Industry at the Millennium" accomplishes.
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