Liveris Tells It Like It Is

Before winter set in last November, Andrew N. Liveris, Dow Chemical's president and chief executive officer, went to Washington, D.C., to speak before a congressional hearing on the U.S. natural gas crisis. He was there, he said, not only to testify for Dow, but also for a chemical and plastics industry "that accounts for $500 billion in U.S. sales and employs 900,000 people."

The products the industry churns out are used in 96% of U.S.-manufactured goods, Liveris said. But steep increases in the cost of natural gas, the industry's chief source of power and raw materials, made it difficult for U.S. companies to compete with firms in other parts of the world where energy and raw material costs are lower, he said.

To cope, U.S. chemical makers shut down plants in some instances and increased energy efficiency in others. Since 1990, Dow, the largest U.S. chemical maker with more than $46 billion in 2005 global chemical sales, improved energy efficiency by 92%. And as energy costs rose, the company shut down 23 plants in North America and shifted production overseas to regions where energy prices were lower, Liveris said at the hearing.

And then Dow's CEO said what few would say in such a public forum: "There is no doubt that our company will continue to grow and thrive-it is simply a question of where." If U.S. energy policy did not change to allow development of oil and gas resources that Congress has put off limits, Dow would have to find attractively priced energy and raw material elsewhere, Liveris said.

"It amazes me," he said at the hearing, "to think that Congress, by its policies, would encourage our industry to move elsewhere, taking significant investment, jobs, technology, community contributions, and tax revenue to other countries."

And then he wrapped up his remarks with a somewhat conciliatory statement. "Make no mistake," he said. "I want our company and our industry to invest here. The decisions you make over the next days and weeks will determine if we are able to do so."

Liveris, an Australian native who earned a B.S. in chemical engineering from the University of Queensland, recently talked to C&EN about energy, innovation, and Dow's future. A 51-year-old who, since November, has taken on the additional role of Dow's chairman, he displayed the same combination of charm and combativeness that he did on Capitol Hill.

The Dow executive has spent a large part of his 30-year career in Asia. And like DuPont's Charles O. Holliday Jr., another major chemical industry CEO who sharpened his management skills outside of the U.S., Liveris has headed AsiaPacific operations for his firm.

Also like Holliday, Liveris has promoted a technology- and market-focused approach for his firm. Unlike the DuPont CEO, though, Liveris is a champion of the vertically integrated chemical firm that makes everything from basic feedstocks such as chlorine and ethylene to specialized products such as house wrap, reverse osmosis membranes, and plant-derived vaccines. In an era of specialization, only Germany's BASF matches Dow in diversity and size.

Despite huge feedstock and energy costs, Dow is riding high. Net income in 2005 was $4.5 billion, up more than 60% compared with the year before. And because of strong worldwide demand, led by AsiaPacific and Latin America, Dow predicts an even stronger 2006. In the first quarter of this year, Dow had sales of $12 billion, up 3% from a year ago, while net income was the company's second highest ever at $1.2 billion.

These earnings are an improvement over those in 2002 and 2003, points out Don Carson, a research analyst with brokerage firm Merrill Lynch. In those years, Dow did not earn enough money for the dividend it paid out to shareholders.

Jeffrey J. Zekauskas, an analyst with the investment banking firm J.P. Morgan Securities, points out in a recent report that Dow is among the stronger U.S. petrochemical companies. Its diverse product chains and its ability to translate low-cost commodities into specialty profits "position it well to weather softer patches in the global economy." But additions to capacity, softening demand, and rising energy and feedstock costs pose a threat to profits in the coming months, he suggests.

As a global company, Dow is particularly vulnerable to energy and other policies in countries where it has significant operations. Meeting with investors in New York City in March, Liveris again made clear his view that the U.S. and Europe are not necessarily the best places to operate a chemical business.

Regulatory measures in the U.S. and Europe increase the costs and risks of doing business compared with the Middle East and Asia, Liveris said. In the European Union, Dow will soon have to deal with the new policy for the Registration, Evaluation & Authorization of Chemicals, known as REACH. In the U.S., Dow continues to encounter a tangle of state and federal regulations.

Legal systems that expose Dow to massive lawsuits and large punitive damage awards take management attention away from the business of chemistry. Dow faces billions of dollars in asbestos-related liabilities inherited from its acquisition of Union Carbide in 2001. This was part of the reason that Dow took an $828 million pretax charge against earnings in the fourth quarter of 2002. "We are frightened by the money we spend on litigation versus R&D in the U.S.," Liveris told the investors.

"If your industry is overregulated, whether on the energy or the tort side, it's a risk of doing business" even if it is not directly analogous to the risk of doing business in a politically unstable country, Liveris said. As he sees it, "the U.S. is as risky as anywhere else." On the other hand, Dow has projects in the Middle East and China "with partners who desire us."

Elaborating on his public pronouncements in recent months, Liveris tells C&EN, "We in the industry know the facts of energy use." For example, the industry takes ethane, "often just 3% of natural gas content," and converts it into chemicals and plastics that are 20 times the value of burning the ethane for energy.

This activity, in turn, generates taxes and almost 1 million jobs in the U.S., Liveris says. Yet in encouraging electricity generators to burn natural gas, "U.S. government policy has somehow concluded that natural gas should be the burned fuel of choice. That is something equivalent to burning rare mahogany rather than common pine."

Renewable fuels and feedstocks are not the answer for at least another 10 to 20 years, Liveris argues. First, "there isn't enough ethanol to replace the feedstock stream of a single chemical plant," he says. And producing corn- and sugar-based ethanol is viable only if the government provides subsidies. If a government subsidy assumes that oil will average about $50 a barrel for the next 20 years, "what will happen if oil goes down to $10 a barrel again?" he asks.

In addition, he points out, "we don't have enough land in America to produce corn-based ethanol and feed the people." But if technology can be developed to produce competitively priced cellulosic-based ethanol from wood chips, stalks, or switch grass, as President George W. Bush proposed in his State of the Union address, "that's a different deal," Liveris says.

Liveris is not against the development of renewable alternatives to fossil fuels and feedstocks, and he agrees that they will play a part in the chemical industry and the world economy over the next 50 years. "We are confident we will be a part of that. But let's not be starry-eyed about an imminent silver bullet," he says. "Progress will be evolutionary."

In the meantime, policymakers ignore the benefits of coal and nuclear energy because they are considered "bad" forms of energy, Liveris says. Nuclear energy has a long record of safe use in the U.S., he argues. Other countries forge ahead with nuclear power, but in the U.S., it is not on the agenda "due to its so-called danger," Liveris complains.

"Has anyone noticed that coal not only has an integral role as a source of power, but that coal-burning technology over the past 30 years has dramatically lessened its pollution content?" Liveris asks. "I guarantee you that the Chinese have noticed. They want to harness the wealth of industrialization without its 19th-century penalties."

For the U.S. to turn its back on nuclear energy and coal "is not only illogical, but it defies the power of economic reason that has made the U.S. the greatest and most powerful country in the history of civilization," the Dow chairman says. In limiting the development of such alternatives, the U.S., which Liveris considers the world model of economic development and freedom, is abandoning that very model.

Liveris is particularly bullish on coal. The U.S. alone has a 250-year supply of the mineral, and in China it is the primary indigenous fuel, he notes. Many alternative energy advocates, including some in the environmental community, see coal gasification as a source of both energy and raw materials for chemicals, Liveris says. Still to be worked out are the technical details of carbon capture and sequestration.

Energy legislation passed by Congress last summer provides loan guarantees and tax credits as incentives to furthering such gasification technology. But if coal is to mature as a viable fuel and feedstock, then carbon capture and sequestration are "key to the sustainability of coal," Liveris says.

Since 2004, Dow has been studying the economic feasibility of a coal-to-olefins project in China with the state-owned Shenhua Group, China's largest coal miner. "The Chinese have been very forward-thinking," he says. "They have recognized they don't want to be dependent just on the import of gas and oil for their petrochemicals. They want an indigenous base." At the same time, Dow is researching catalyst improvements to make the conversion process more efficient.

To take advantage of low-cost Middle Eastern energy, Dow has enlarged its footprint in Kuwait. Already partners in the Equate ethylene glycol and polyethylene joint venture, Dow and Petrochemical Industries Co. (PIC) of Kuwait are building Olefins II, a complex that includes a world-scale ethane cracker, an ethylene oxide/ethylene glycol plant, and an aromatics plant to start up in 2008.

In Oman, Dow plans to take advantage of cheap natural gas and build an olefins complex that includes three world-scale polyethylene units. Dow will own half of the venture, and the government of Oman and the state-owned Oman Oil Co. will own the other half.

As it enters new markets with new partners and new customers, Dow is also enlarging its R&D presence in two of these markets: China and India. These countries have their own set of problems, including clean water, Liveris notes. Helping to provide clean water "is a natural market for Dow," he says.

As a leader in materials science, separation technology, and distillation, Dow can help provide clean water to those countries. But, Liveris asks: "Can I do that out of a lab in Freeport, Texas, or in Midland, Mich.? No. We have to bring the intellect to the location of the problem. That is the new world order for research," he says.

Last fall, Dow outlined one such plan to bring intellectual firepower to China. The company said it would build an information technology and R&D center in Shanghai's Zhangjiagang Hi-Tech Park that would employ 600 people by the end of 2007. Liveris said at a meeting of the American Section of the Société de Chimie Industrielle in March that Dow was also looking to open a large R&D center in India. "We are going to where the scientists and mathematicians are. Scientists in the U.S. are joining Wall Street firms and are analyzing us," he joked.

In fact, Liveris says he is pushing an effort to reinvigorate research, on which Dow spends $1.1 billion annually. In the 1990s, most chemical firms concentrated on productivity improvement, and as a result, their "focus on the D of R&D was high and their focus on R was less. R costs, and there is no immediate return," Liveris says. "But we have to relearn to focus on the R."

"Innovation," Liveris explains, "is the domain of the CEO, because from innovation will come growth. And that is the ultimate responsibility of the leader of a corporation. A leader has to look around the second and third corners and figure out how the company is going to manage them before the turns come. To me, this is the most important thing I have to do."

An overarching leader of Dow research has been missing since Richard M. Gross retired at the end of 2004. To invigorate R&D, last July, Liveris hired William F. Banholzer as corporate vice president and chief technology officer (CTO). Banholzer, formerly vice president of global technology for General Electric Advanced Materials, is also part of the Office of the Chief Executive.

Liveris says, "I hired a CTO from outside Dow to bring in fresh thinking and fresh approaches to research." Banholzer is charged with investing in far-flung research so Dow can achieve technology breakthroughs that solve market problems. "We won't do research in isolation," Liveris says.

One of Banholzer's jobs will be directing a corporate-level research program on next-generation olefin supply, an area of interest to businesses all across Dow. According to Liveris: "No business unit is going to say, 'You know what, I can't get ethylene at the right price anymore. Therefore we need to invest in the next way to get ethylene.' They can't afford it. So we are initiating a corporate program to work on new technologies to find new pathways to ethylene."

Half of Dow's product mix is based on ethylene, Liveris explains, so a problem with ethylene is a corporate problem. "That is an investment that I will be accountable for as part of my corporate metric to my board. It is my office that has to review it and manage the milestones. I can't delegate that away," he says.

Another corporate metric for Liveris will be how well Dow weathers the business cycle. At the March investor conference, Michael R. Gambrell, Dow's executive vice president for basic plastics and chemicals, outlined a joint-venture strategy to free up cash invested in Dow's massive commodity chemical installations. "We won't do joint ventures to consolidate, but to grow," he said.

Dow already has 75 joint ventures. Analyst John Roberts with Buckingham Research Group, an investment advisory firm, estimates those ventures contribute nearly $1 billion to Dow's earnings before taxes. Gambrell pointed to the Equate joint venture as an example of Dow's "asset light" strategy, whereby the company can invest a combination of intellectual property and cash for a stake in a world-scale petrochemical complex.

And Dow can also partner existing assets, as it did in 2004 in the MEGlobal ethylene glycol venture and the Equipolymers polyethylene terephthalate and purified terephthalic acid joint ventures, both with PIC. Dow contributed assets and received $563 million from PIC to form both ventures.

Gambrell suggested that Dow would be willing to sell stakes in existing ethylene, propylene, styrene, and chlor-alkali assets to free up cash. Liveris tells C&EN that the asset-light strategy is part of a plan to allow the firm "to grow earnings at a robust rate from one end of the cycle to the other, and to have more consistent earnings on a year-to-year basis."

An asset-light strategy reduces capital investments, retains Dow's traditional advantage of site and product integration, and allows Dow to venture with partners who "bring advantages such as low-cost feedstocks and market expertise," Liveris says. Engaging in joint ventures, as Dow sees it, does not mean giving up control. At the New York investors' meeting, Liveris explained, "We are looking for joint ventures where we have 100% control. Our strategy is always to own the channel and the enterprise."

Control, in the end, is what Dow is after. Whether it is control over its earnings through the business cycle, control over the innovation process, or control over fuel and feedstock costs, Liveris hopes to have a solution in hand. "I'd like to think of us as a science company that is excellent at solving problems," he says.