The U.S. Chemical Industry 1

OFFICE OF TECHNOLOGY POLICY

MEETING THE CHALLENGE:

U.S. INDUSTRY FACES THE 21ST CENTURY

THE CHEMICAL INDUSTRY

Dr. Allen J. Lenz

Director, Economics

Chemical Manufacturers Association

and

Dr. John Lafrance

Office of Technology Policy

Technology Administration

U.S. Department of Commerce

U.S. Department of Commerce

Office of Technology Policy

January 1996
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U.S. CHEMICAL INDUSTRY FACES THE 21ST CENTURY OFFICE OF TECHNOLOGY POLICY

TABLE OF CONTENTS

PAGE

FOREWORD .......................................................................................... 5

ACKNOWLEDGMENTS ........................................................................... 7

EXECUTIVE SUMMARY .......................................................................... 9

I. INDUSTRY CONDITION ......................................................................... 13

Structure and Characteristics of the Industry ..................................... 13

A Keystone Industry ........................................................................ 13

Huge, High-Tech, and Dynamic ..................................................... 19

Over 1 Million U.S. Jobs ................................................................... 22

A Global Industry ............................................................................. 23

Capital Intensive ............................................................................... 24

Environmentally Committed .......................................................... 25

Position in World Markets and Trade Performance ........................... 30

Trade Performance and Competition ............................................. 30

Trade Composition by Product ....................................................... 34

Geographic Composition of Trade ................................................. 36

Foreign Investment Performance ................................................... 36

Economic Performance and Financial Position .................................. 40

Revenues and Assets ........................................................................ 40

Investment Trends ............................................................................. 41

Profits .................................................................................................. 43

Rates of Return .................................................................................. 44

II. FORCES SHAPING THE INDUSTRY ........................................................ 47

Infrastructure and Sources of Current Strengths ................................ 47

Global Supply-Demand Relationships ................................................. 50

U.S. Economic Performance ................................................................... 52

World Economic Performance ............................................................... 55

Access to Foreign Markets and Protection of Intellectual Property...... 56

Government Policies ............................................................................... 57

III. COMPETING IN A DYNAMIC WORLD ECONOMY ................................. 59

The Advance of Technology ................................................................... 60

Environmental Costs and Product Restrictions .................................. 66

The Availability of Energy ...................................................................... 71

Changing Geographic Composition of Production

and Consumption .............................................................................. 73

U.S. Chemical Industry Competitiveness and

Foreign Investments ......................................................................... 73

New Foreign Investment Strategies and Problems ............................ 75
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OFFICE OF TECHNOLOGY POLICY

IV. MAJOR DETERMINANTS OF FUTURE COMPETITIVENESS ...................... 79

Defining “Success” in the Next Decade ............................................... 79

Critical Industry Choices Affecting International Competitiveness ..... 81

Growth Strategies .................................................................................... 81

Costs of Production ................................................................................. 82

Making the Right Investment Amount and Location Choices ......... 83

Making the Right R&D Amount and Composition Choices ............ 83

External Factors Determining Chemical Industry Competitiveness .... 84

The Domestic Economy and U.S. Policies ........................................... 85

The World Economy ................................................................................ 85

Export and Investment Access to Foreign Markets ............................ 86

Global Protection for Intellectual Property .......................................... 86

U.S. Regulatory Policies .......................................................................... 86

Peering into the Future ........................................................................... 87

BIBLIOGRAPHY .................................................................................... 89
The U.S. Chemical Industry 5

OFFICE OF TECHNOLOGY POLICY

FOREWORD

For more than a decade, there has been widespread and increasing

concern over the ability of the United States to achieve sustained

economic growth and long-term prosperity. Since 1980, successive Congresses and Presidents, in a bipartisan response, have introduced a wide

range of programs and policies directed toward improving U.S. competitiveness. Such policies — whether focused on building a 21st-century

infrastructure, stimulating technological innovation and commercialization, improving the business climate for investment and growth, emphasizing opportunities for education and training, or promoting trade —

start with assumptions, often implicit, about the competitive position

of U.S. industry.

The Office of Technology Policy commissioned the series, “Meeting the

Challenge: U.S. Industry Faces the 21st Century,” in order to solicit the

view of different segments of the private sector concerning what

policymakers should know about them — their strengths and weaknesses, opportunities and obstacles. Drawing principally from the experience and insight of the private sector, some 150 experts from over 30

organizations in industry, academia, and government have contributed

to the drafting and review of the series. These studies provide a framework for government policy that explicitly reflects the concerns and

perspectives of U.S. industry.

The subject of the first report in this series is the Chemical Industry. It

was prepared under the auspices of the Chemical Manufacturers Association and was broadly reviewed within the industry. It discusses (1) the

structure of the chemical industry; (2) the forces currently shaping the

industry; (3) anticipated industry evolution over the next five to ten

years; and (4) the major factors affecting the chemical industry’s competitiveness. While there is a rich literature concerning the industry, this

is the first collective effort by its members to describe its competitive

status and the first time that so many different aspects of its posture have

been treated together.

Several important insights emerge from this effort. First, it is clear that as

the domestic and other developed markets mature, the chemical industry

will find its greatest opportunities for growth in developing countries.

While this outward focus will involve exporting, it will also make overseas investment increasingly important to the industry’s profit base.
6 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

Second, to remain competitive in this global industry, chemical manufacturers must maintain a technological edge. Thus, the industry must

continue to invest heavily in research and development.

Third, while most of the decisions that ultimately determine growth and

profitability fall to individual firms, government policies will directly

affect the U.S. chemical industry in several areas, including:

■ lowering of trade barriers;

■ access to, and protection for, investments in developing

countries;

■ protection of intellectual property; and

■ maintenance of a climate conducive to innovation, including a

strong U.S. R&D base.

The views expressed are those of the authors and reviewers, and not

necessarily those of the Department of Commerce.

Graham R. Mitchell

Assistant Secretary of Commerce for Technology Policy
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ACKNOWLEDGMENTS

As a part of the fact-finding process leading to the publication of this

report, the Chemical Manufacturers Association (CMA) organized a

roundtable discussion with representatives of the chemical industry.

This discussion was held on July 25, 1995, in New York City.

The roundtable was chaired jointly by Commerce and CMA.

The cochairs were:

Mary L. Good, Under Secretary of Commerce for Technology

Allen J. Lenz, Director of Economic Analysis, CMA

The industry representatives in attendance were:

Harvey E. Bale, Jr., Ph.D., Senior Vice President, International, PhRMA

David J. Deutsch, Chemical Bank

Dr. J. Michael Fitzpatrick, Vice President and Director, Corporation

Research, Rohm and Haas Company

Jasper Ho, Business Analyst, Air Products & Chemicals, Inc.

Frederick M. Peterson, President, Probe Economics

John Roberts, Merrill Lynch

George Sabino, Jr., Ph.D., Director, Business Marketing & Economic

Research, Union Carbide Chemicals & Plastics

Robert Shrouds, Chief Economist, DuPont Co.

Peter H. Spitz, Director, ChemSystems, Inc.

Ronald M. Whitfield, Vice President, Charles River Associates, Inc.

Andrew Wood, Deputy Editor, Chemical Week

In addition, the following individuals generously contributed their

knowledge and insights in the preparation of the report, under

the leadership of Dr. Lenz:

Harvey E. Bale, Jr., Ph.D., Pharmaceuticals Research and Manufacturers

Association

Joel D. Bobula, Pharmaceuticals Research and Manufacturers Association

David J. Deutsch, Chemical Bank

John W. Duren, The Dow Chemical Company

Dr. J. Michael Fitzpatrick, Rohm and Haas Company

Jasper Ho, Air Products & Chemicals, Inc.

Dr. Ralph Landau, Stanford University

Frederick M. Peterson, Probe Economics, Inc.

George Sabino, Jr., Ph.D., Union Carbide Chemicals & Plastics

Ted Semegran, Lehman Brothers
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OFFICE OF TECHNOLOGY POLICY

Roger E. Shamel, Consulting Resources Corporation

Robert Shrouds, DuPont Co.

Peter H. Spitz, ChemSystems, Inc.

Ronald M. Whitfield, Charles River Associates, Inc.

Andrew Wood, Chemical Week

The Department of Commerce gratefully acknowledges the participation

and contributions of these individuals.
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OFFICE OF TECHNOLOGY POLICY

EXECUTIVE SUMMARY

The Chemical Industry Today

The U.S. chemical industry is vital to the U.S. economy. It produces 1.9

percent of U.S. gross domestic product (GDP). It is the nation’s

number one exporter. It supplies more than $1 out of every $10 of U.S.

exports and consistently runs large international trade surpluses. It is a

high-tech, research and development (R&D) oriented industry that is

awarded about one out of every eight U.S. patents. It employs over one

million people at wages well above the U.S. manufacturing average, and

it produces over 70,000 different products.

Most importantly, chemicals is a “keystone” industry — one critical to

the global competitiveness of other U.S. industries. Because so many

modern products depend on chemicals, the international competitiveness of other U.S. industries requires a high-tech, globally competitive

U.S. chemical industry that can supply new products at prices that give

U.S. producers an edge.

Globalization

Critical to the future competitiveness of the U.S. chemical industry will

be its ability to maintain its technological edge. To do so it must continue

and increase already high levels of investment in R&D and new plants

and equipment (P&E). But in a seeming anomaly, maintaining the competitiveness of U.S.-based R&D and production will require that rising

amounts — and rising portions — of U.S. chemical industry P&E investment go to foreign countries.

As the chemical markets throughout the developed world mature,

developing countries offer the greatest growth opportunities for U.S.

chemical companies. Foreign markets can be served either by exports or

by investments in production facilities in these markets. Exports from the

U.S. are likely to expand, but increased foreign investments will be vital

to continued U.S. competitiveness in three key ways:

(1) Many important markets cannot be served adequately or

competitively solely by exporting from the United States. To

compete successfully in many foreign markets, companies often

must now produce in those markets, a trend that is likely to

increase.
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(2) Producing some products in a foreign market opens the door to

exporting other products to that market and so actually expands

export opportunities.

(3) Ultimately, foreign production and sales expand total sales and

profits, and hence, the base against which R&D and other fixed

costs of U.S.-based companies can be amortized.

The tougher global competition that lies ahead need not signal either the

demise or decline of U.S.-based chemicals R&D and production or a

slippage in the U.S. industry’s exports and trade surpluses.

Rather, a shift in the locus of chemical manufacturing may be the inevitable result of rising living standards and rapidly growing production

and consumption of goods in many developing countries. Individual

multinational companies will configure the amount and location of their

production to global market conditions. In a world of increasing capital

mobility, investment capital will flow to those locations that offer the

most attractive investment opportunities. Continued globalization and

expanding foreign demand offer many opportunities, but diversification

of production and expanding global supplies signal a tougher, more

competitive world for the U.S. chemical industry.

Internal and External Factors Affecting Competitiveness

Meeting the rising R&D and P&E investment needs of the future will

require a chemical industry that is profitable and attractive to investors.

While the industry’s profitability will be determined primarily by individual company decisions, government decisions that influence the

environment in which U.S. producers compete will also be increasingly

critical to the industry’s continued growth and competitiveness.

Individual companies’ decisions, or internal factors, include growth

strategies, costs of production, and the amounts, strategies, and locations

of both P&E and R&D investments. External factors that affect the industry include:

■ U.S. economic and trade policies;

■ changing international political and economic conditions;

■ export and investment access to foreign markets;
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OFFICE OF TECHNOLOGY POLICY

■ global protection for intellectual property; and

■ U.S. regulatory policies.

This report seeks to identify the most important of the many interacting

factors that will determine the future competitiveness of U.S.-based

chemicals R&D and production. To that end, it describes the contributions of the U.S. chemical industry to the U.S. economy, the structure and

competitiveness of the industry, the key determinants of its current

strength, and the factors most likely to determine its future performance.
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The U.S. Chemical Industry 13

OFFICE OF TECHNOLOGY POLICY

I. INDUSTRY CONDITION

Structure and Characteristics of the Industry

The U.S. chemical industry is a vital element of the U.S. economy.1

 The

chemical industry is:

■ a “keystone” or enabling industry, critical to the global

competitiveness of other U.S. industries;

■ huge, high-tech, and dynamic;

■ a large employer;

■ a global industry; and

■ capital-intensive and environmentally committed.

A Keystone Industry

The chemical industry is defined by Standard Industry Code (SIC) 28,

Chemicals and Allied Products. Chemicals, as defined by SIC 28, is a

broad, complex industry that produces over 70,000 different products.2

These products range from the chemicals first derived from the initial

processing of organic or inorganic raw materials — chemicals such as

benzene, toluene, and chlorine that are vital to other production — to

finished consumer products such as medicines, soap, and toothpaste that

are seldom associated with the chemical industry. Production is thus

very diverse. In volume terms, however, most of the industry’s outputs

are basic chemicals little known to consumers. For the most part, its

1

 For the purposes of this report, unless otherwise noted, the “U.S. chemical

industry” refers to U.S.-based chemical research and development (R&D) and

U.S.-based production of chemicals. Thus, all the R&D and production facilities

located in the United States, regardless of the nationality of their ownership,

are part of the U.S. chemical industry. The interests of U.S.-based R&D and

production may differ from the interests of individual multinational companies

that have foreign investments. The basic goal of multinational companies is

maximizing global profits, not maximizing their contribution to the U.S.

economy or the economy of any particular nation. But this report’s focus on

U.S.-based R&D and production is consistent with an evaluation of how U.S.

policies affect the industry’s contributions to the U.S. economy and living

standards and to the nation’s competitiveness in world markets.

2 Unless otherwise noted, aggregate data cited in this report cover all of SIC 28.
14 The U.S. Chemical Industry

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products are used by other chemical producers to make other chemicals

or by other industries to make or grow things that serve society —

products ranging from apples and autos to zippers and zithers. Nevertheless, much of the public is unaware of the vital role of the chemical

industry in everyday life and modern products.

The many different products and processes of the chemical industry

make a concise but meaningful description difficult. In essence, however,

at the base of the chemical industry are companies that combine organic

and inorganic materials from the earth with heat, air, and water to make

chemicals that, in turn, are essential to products used in everyday life in

modern economies (Figure 1). Box 1 outlines the major components of

the industry.

The production of basic industrial chemicals falls into two broad categories, organic and inorganic chemicals. Organic chemicals production

begins with raw materials containing hydrocarbons such as oil, natural

gas, and coal. Inorganic chemicals do not contain carbon but are made

from the air and from minerals taken from the earth, such as salt.

The chemical industry’s manufacturing processes, however, extend far

beyond the making of basic industrial chemicals. One useful way to

describe the industry is vertically — by the layers or sequences of production it embraces. As noted above, some chemical companies are

involved in the initial transformation of inorganic and organic raw

materials into basic industrial or “building block” chemicals (for example, chlorine, benzene, ethylene, propylene, xylene, toluene, butadiene, methane, and butylene). Other chemical companies use these basic

or “commodity” chemicals to make more highly refined “intermediate”

chemicals that are essential inputs to everyday consumer products made

by other industries — products such as glass, paper, steel, etc. Another

group of chemical companies may take these intermediate chemicals

and, through combinations and further processing, make “specialty”

chemicals — such as water treatment chemicals — and other products,

such as paints, fertilizers, plastics, artificial fibers, etc.

The immediate economic interests of firms at different “layers” of the

production process may sometimes conflict. For example, an oversupply

of production that leads to depressed prices for some basic chemicals

would be bad news for the producing companies but could be good

news for other chemical companies that must use basic chemicals in

producing their own, more highly refined products.

The chemical industry’s

manufacturing processes

extend far beyond the

making of basic

industrial chemicals.
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The industry can also be defined in rough terms by product groups.

Approached this way, the chemical industry is made up of a number of

subindustries, such as basic petrochemicals, basic inorganic chemicals,

plastics, man-made fibers, industrial gases, fertilizers and agricultural

chemicals, and pharmaceuticals. The Bureau of Labor Statistics maintains

employment data for the industry in an eight-way breakout: industrial

inorganic chemicals; plastics materials and synthetics; drugs; soap,

cleaners, and toilet goods; paints and allied products; industrial organic

chemicals; agricultural chemicals; and miscellaneous chemical products.

None of these descriptions alone adequately conveys the industry’s

complexity or the relationships of chemical production and consumption

within the industry. But noting the tiers or “layers” of production, it

should be recognized that for many chemical producers, other chemical

companies are their best customers. That is, a large portion of the

Figure 1. What Is Chemistry?

A large portion of the

industry’s shipments

goes to other chemical

companies for further

refinement into other

chemical products.
16 The U.S. Chemical Industry

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industry’s shipments goes to other chemical companies for further

refinement into other chemical products. And another large portion —

almost half of the industry’s total output — goes to other manufacturing

industries to enable production of other manufactured goods (Figure 2).

The chemical industry is an enabling industry, a supplier to virtually

every other industry. In fact, the food, clothing, construction, health care,

and transportation industries are dependent on chemical industry inputs

(Figures 3A and 3B). Every automobile, for example, contains about

$2,200 of chemical processing and products. Thus the chemical industry

supports and makes possible millions of jobs in other industries —

beyond the million-plus jobs it generates directly — by supplying the

products and technologies that enable other U.S. industries to perform

their services, make their products, and develop new ones.

Box 1. Major Components of the U.S. Chemical Industry

The U.S. chemicals and allied products industry consists of some 9,125

corporations whose primary business is the development, manufacturing,

and marketing of industrial chemicals, pharmaceuticals, and other chemical products.

The industrial chemicals segment (SICs 281, 282, and 286) of the industry

consists of some 1,725 corporations whose primary business is the manufacturing and marketing of alkalis and chlorine, inorganic pigments, industrial gases, and other industrial inorganic chemicals; plastic resins,

synthetic rubber, and man-made fibers; and petrochemicals and other industrial organic chemicals.

The pharmaceuticals segment (SIC 283) consists of some 1,225 corporations whose primary business is the development, manufacturing and marketing of medicinal chemicals and botanicals; in vitro and other diagnostic

substances to diagnose or monitor the state of human or veterinary health;

bacterial and virus vaccines, toxoids, serums, plasmas, and other biological

products for human and veterinary health; and vitamins and other pharmaceutical preparations for both human and veterinary use.

Other chemical products (SICs 284, 285, 287, and 289) consist of some

6,175 corporations whose primary business is the manufacturing and marketing of soaps and detergents; surfactants; specialty cleaning, polishing,

and sanitary preparations; perfumes, cosmetics, and other toilet preparations; paints, varnishes, enamels, and other allied products; fertilizers, pesticides, and other agricultural chemicals; and adhesives and sealants,

explosives, printing ink, and other specialty chemicals and chemical preparations.

The chemical industry

supports and makes

possible millions of jobs

in other industries.
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Developing countries invariably give high priority to building their own

chemical industries because they recognize the keystone nature of this

industry in modern economies. This emphasis on chemicals in the

development plans of industrializing countries has significant implications for the U.S. chemical industry.

Despite its keystone importance to manufacturing, the contributions of

the chemical industry to the economy are often not apparent to the

general public, probably because most chemical companies are not

directly involved in the production of consumer goods.

It should also be noted that most chemical companies do not fit neatly

into just one of the tiers or product groups described above. Some large

Figure 2. U.S. Chemical Industry Flow Chart, 1994

This emphasis on

chemicals in the

development plans

of industrializing

countries has significant

implications for the U.S.

chemical industry.
18 The U.S. Chemical Industry

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Figure 3A. Role of Chemicals in Everyday Products

Autos and Trucks Rely on Chemicals

Homes and Offices Rely on Chemicals
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companies produce many — if not most — of the full range of chemical

products. Some may produce not only basic chemicals, intermediates,

and specialty chemicals but consumer products as well. Most companies,

however, produce only a relatively narrow range of products.

This layering of production, the diversity of products, and the differing

product orientations of individual companies complicate the collection

and interpretation of data about the chemical industry. For purposes of

this report, however, the chemical industry is generally described in data

presented for three subsectors: industrial chemicals, pharmaceuticals,

and other chemical products.

Huge, High-Tech, and Dynamic

The U.S. chemical industry is the world’s largest. Production by plants in the

U.S. provides about 24 percent of world chemical production (Figure 4).

Japan is the second-largest producer — about 16.6 percent of the world total

— followed by Germany and France with 7.9 and 5.2 percent, respectively, of

total world output. U.S. chemical industry shipments of more than 70,000

different products reached $341 billion in 1994. On a value-added basis the

industry provides about 1.9 percent of U.S. gross domestic product (GDP).

The huge size of the U.S. market and U.S. chemical production dictates

that major foreign companies need a U.S. presence. This motivates large

amounts of foreign investment in the U.S. chemical industry and adds to

U.S. production, technology, and the international competitiveness of

U.S.-based research and development (R&D) and production.

Chemicals is a very dynamic industry, with large expenditures for R&D

providing a constant flow of new products and processes. The U.S. chemical

industry is R&D-intensive, employing over 89,000 R&D chemists, engineers,

and technicians in the constant search for innovations. The role of chemistry

in modern life is ubiquitous and growing. Before World War I, only 3 patents

of every 100 issued by the U.S. Patent Office were in the chemicals field. In

the 1980s, chemical patents accounted for about 15 percent of each year’s total.

The chemicals industry is the nation’s top industry R&D spender — an

estimated $18 billion in 1994 (Figure 5). Chemical industry R&D spending has been growing rapidly, increasing from 3.7 percent of sales in 1983

to 5.0 percent in 1994. Over half of the industry’s R&D spending is by the

pharmaceutical sector of the industry. But the continuing search for new

materials, agricultural chemicals, adhesives, sealants, coatings and

preservatives, and a variety of chemicals to meet environmental and

Production by plants in

the U.S. provides about

24 percent of world

chemical production.
20 The U.S. Chemical Industry

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Figure 3B. Role of Chemicals in Everyday Products

Electronics Rely on Chemicals

Agriculture and Food Production Rely on Chemicals
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Figure 4. Total Output and Exports of Major Chemical

Producing Countries, 1993

other needs motivates heavy R&D spending by other sectors of the

industry as well.

Chemical industry R&D has traditionally been funded almost solely by

the industry. Although the U.S. government has funded about one-fourth

of the R&D performed by U.S. manufacturing, less than 2 percent of

chemical industry research is U.S. government sponsored. However, the

U.S. government has made important historical investments in basic

chemical research at universities, which have helped to educate the

chemists and chemical engineers employed by the industry. For example,

in 1992, the U.S. government funded $0.316 billion in basic and applied

chemical research (approximately 4.2 percent of industry’s spending that

year). The basic research thus funded, mainly at universities, was equivalent to 14 percent of the basic research funded by industry that year.

Federally funded research has been particularly important in the health

care field, where programs such as the Human Genome project have

benefited both the pharmaceutical and biotechnology industries. In 1992,

U.S. government funding for basic biological and medical science research was $0.005 billion compared to $1.2 billion in basic research

funded by industry. During 1992, federal funding for applied research in

this area totaled $4.0 billion in contrast to industry funding of $3.3

billion. While much larger sums are spent by industry in the developThe U.S. government

has made important

historical investments

in basic chemical

research at universities.
22 The U.S. Chemical Industry

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ment of new products ($4.25 billion), the U.S. government has made a

seminal contribution to the development of basic knowledge and to

education of scientific and technical personnel in these areas.

Over 1 Million U.S. Jobs

The chemical industry directly employs a large number of workers.

Industry employment has been quite stable and the industry’s employees are well-paid. Employment in 1994 averaged 1.054 million, about 5

percent below the peak 1981 level. Over the same 1981–94 period, industry output increased by 44.8 percent, indicating productivity gains of

about 3.3 percent annually. The 5 percent decline in total chemical industry employment from 1981 levels was modest compared to the 10.4

percent drop for total manufacturing sector employment. This difference

mirrors the chemical industry’s strong international trade performance

compared to manufacturing as a whole.

About 8.5 percent of chemical industry employees are R&D scientists

and engineers. Another 53 percent are production workers who earn

about one-third more than the manufacturing average and who experience injury and illness rates about one-half the manufacturing average.

Figure 5. U.S. Chemical Industry

Research and Development Spending

The U.S. government

has made a seminal

contribution to the

development of basic

knowledge and to

education of scientific

and technical personnel.
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Although total chemical industry employment has been quite stable,

there has been significant restructuring within the industry. In the 1980s,

competition forced the closing of a number of inefficient and obsolete

plants and the modernizing of production processes. Also, many companies during the 1980s put more emphasis on specialty chemicals, expecting them to yield higher profit margins than basic industrial chemicals.

The economic downturn of the early 1990s and a continuing increase in

global competition have brought additional changes. Many companies

have “downsized,” often significantly reducing their nonproduction

workers. The sectoral composition of employment within the industry

has also changed. Of eight industry segments, six have lower employment

than in 1981. But “Soap, Cleaners, and Toilet Goods” employment increased

by 4.4 percent to 152,400, and pharmaceuticals employment increased by

33.0 percent to 264,600. Only 22,100 of the pharmaceuticals employment

increase was in production workers, probably signaling increases in the

number of persons devoted to R&D and to compliance with regulations.

A Global Industry

The chemical industry is perhaps the nation’s most global major manufacturing industry. Globalization is manifested in worldwide diversification of production, high levels of foreign investment, rapidly rising

levels of foreign trade, and increasingly intense competition for U.S. and

foreign markets. Chemical markets around the world are now sufficiently integrated that world supply-demand relationships determine

world prices for many basic products that can readily be transported

across oceans and over great distances.

Many developing countries are pursuing export-led growth strategies

that rely on industrializing — on building their own manufacturing

industries. Industrializing countries want their own chemical production

capabilities to support their other manufacturing industries, to build

their own technology bases, and to obtain the value added by the production process. At the same time, well-established producers in many

countries are motivated to invest in foreign markets — particularly in

developing countries — as a means to continued growth and international competitiveness. Large U.S. companies have investments in production facilities around the world, and foreign companies have similar

investments in the U.S. and other countries.

The end-1994 book value of U.S. direct investments in foreign chemical

companies was $51.6 billion. The comparable value of foreign compaAlthough total chemical

industry employment

has been quite stable,

there has been significant

restructuring within

the industry.
24 The U.S. Chemical Industry

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nies’ investments in the U.S. chemical industry was $67.3 billion. But

these data do not fully convey the globalization of business activity. U.S.

chemical companies in 1992 controlled assets of $194 billion in foreign

countries; foreign companies controlled assets of $162 billion in the

United States (Figure 6). U.S.-owned companies in foreign countries

employed 740,000 persons and generated $186 billion of sales; foreign

companies employed 515,000 persons in the United States and generated

sales of $123 billion. Some U.S. companies derive half or more of their

total revenues and profits from foreign operations. For the 171 U.S.

parent chemical companies as a whole, however, $8.6 billion — 35 percent —

of the $24.7 billion of 1992 profits came from their foreign affiliates.

New chemical production sites include some countries that have the

competitive advantage of low-cost energy. Energy costs are important

because hydrocarbons — oil, natural gas, coal — are used both for raw

materials (termed “feedstocks” by the industry) and to power the production process. Countries that do not have access to low-cost energy

often provide aid to their new producers by various forms of government assistance and subsidies.

As a result of globalization, the number of chemicals whose prices are set

by global supply-demand relationships is likely to increase steadily.

Capital Intensive

There are about 12,085 chemical production establishments in the United

States. Total chemical company assets at the end of 1994 were about $442

billion, 14.6 percent of the manufacturing total. Shareholder’s equity was

about $160 billion.

Chemicals is a capital-intensive industry, with large economies of scale in

production. This is particularly true for the producers of basic industrial

chemicals. For the chemical industry as a whole, companies with assets

under $25 million account for less than 3 percent of total industry assets.

Invested capital is around $148,200 per employee, about twice the manufacturing average.

Large accumulated stocks of physical capital and the advanced technologies created by earlier research are critical factors in the U.S. industry’s

international competitiveness and its ability to pay high wages. But a

continuing flow of new investment in plant and equipment and R&D is

necessary to increase U.S. production, to meet changing environmental

standards, and to improve productivity in the never-ending struggle to

A continuing flow of new

investment in plant and

equipment and R&D is

necessary to increase

U.S. production, to meet

changing environmental

standards, and to

improve productivity

in the never-ending

struggle to maintain

U.S. competitiveness.
The U.S. Chemical Industry 25

OFFICE OF TECHNOLOGY POLICY

maintain U.S. competitiveness. New plant and equipment investment

reached $23.4 billion in 1994, double the 1983 total (Figure 7).

Environmentally Committed

The chemical industry is one of the nation’s most regulated industries.

It is subject to numerous environmental regulations as well as the voluntary obligations imposed by the industry’s Responsible Care® program

— its environmental, health, and safety improvement initiative. Sixteen

major federal statutes, as well as numerous state laws, impose significant

compliance and reporting requirements on the industry (see Box 2). The

costs of meeting mandated and self-imposed environmental requirements

are large and continue to grow. Indeed, about one-sixth of new P&E

investment is for environmental improvement purposes rather than to

improve productivity or increase output.

According to U.S. government data the chemical industry spent $5.4

billion in 1993 operating costs to meet government requirements for

pollution abatement and control, up from $2.8 billion in the six years

from 1987. The bulk of these costs — $4.1 billion in 1993 — was borne by

the manufacturers of industrial chemicals who convert raw materials

such as oil, coal, and natural gas to basic chemicals for industrial uses.

These pollution control costs have been rising faster than sales. U.S.

government-measured pollution abatement and control costs for industrial

Figure 6. Globalization of the Chemical Industry
26 The U.S. Chemical Industry

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chemical producers rose from 1.9 cents per dollar of sales in 1983 to 3.3

cents in 1993.

These data, however, reflect only a fraction of total industry environmental costs. The data cited above essentially capture only operating costs

(including depreciation) of equipment intended to reduce the generation

of air pollutants, water pollutants, or solid/contained wastes. Not included

are the costs of cleanup of areas designated as hazardous waste sites under

the Superfund law and the large personnel costs involved in environmental compliance and reporting. For example, using EPA estimates of

the number of reports, labor hours, and labor costs, the 1995 chemical

industry labor costs of preparation of toxic release inventory (TRI)

reporting — just one of many required reports — will be about $132

million.

Also not included in pollution abatement and control costs as measured

by government data are the substantial costs of the voluntary commitment by the chemical industry’s major producers to continuous improvement in performance in accordance with ten guiding principles and six

performance codes set out in the Responsible Care® initiative (see Box 3).

The Responsible Care® initiative, which originated in Canada, is internaFigure 7. U.S. Chemical Industry

Plant and Equipment Spending

The 1995 chemical

industry labor costs of

preparation of toxic

release inventory (TRI)

reporting will be about

$132 million.
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OFFICE OF TECHNOLOGY POLICY

Box 2. Major Health, Safety, and Environmental Legislation

Toxic Substances Control Act (TSCA) of 1976 gives the Environmental Protection Agency (EPA) comprehensive authority to regulate any chemical

substance whose manufacture, processing, distribution in commerce, use,

or disposal may present an unreasonable risk of injury to health or the

environment.

Clean Air Act (CAA) was first passed in 1955 as the Air Pollution Control,

Research and Technical Assistance Act and amended in 1963 to become the

CAA. A more significant statute was passed in 1970 and amended in 1977

and 1990. It provides EPA authority to regulate air pollutants from a wide

variety of sources including automobiles, electric power plants, chemical

plants, and other industrial sources.

Clean Water Act (CWA) was first enacted in 1948 as the Federal Water Pollution Control Act. Subsequent extensive amendments defined the statute

to be known as the CWA in 1972; it was further amended in 1977 and 1987.

The CWA provides EPA authority to regulate effluents from sewage treatment works, chemical plants, and other industry sources into U.S. waterways. EPA has recently undertaken control efforts in non-point source

pollution as well.

Comprehensive Environmental Response Compensation and Liability Act

of 1980 (CERCLA) and the Superfund Amendments and Reauthorization

Act of 1986 (SARA) provide the basic legal framework for the Federal

“Superfund” program to clean up abandoned hazardous waste sites.

Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) provides EPA

authority to register and assess the risks of agricultural pesticides, industrial biocides, and other nonagricultural pesticides. It was first enacted in

1947 and last amended in 1988.

Federal Food, Drug and Cosmetics Act (FDCA) provides the Food and Drug

Administration (FDA) authority to regulate the manufacturing of drugs and

pharmaceuticals and the use of packaging and additives in food and cosmetics.

Emergency Planning and Community Right-to-Know Act of 1986, also

known as SARA Title III, mandates state and community development of

emergency preparedness plans and also establishes an annual manufacturing-sector emissions reporting program.

Resource Conservation and Recovery Act (RCRA) of 1976 provides EPA

with authority to establish standards and regulations for handling and

disposing of solid and hazardous wastes.

Occupational Safety and Health Act (OSHA) provides the Department of

Labor authority to set comprehensive workplace safety and health standards, including permissible exposures to chemicals in the workplace, and

authority to conduct inspections and issue citations for violations of safety

and health regulations.

Safe Drinking Water Act, enacted in 1974 and amended in 1977 and again

in 1986, establishes standards for public drinking water supplies.
28 The U.S. Chemical Industry

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Box 2. Continued

Hazardous Materials Transportation Act (HMTA) provides the Department

of Transportation the authority to regulate the packaging and movement of

hazardous materials.

Chemical Diversion and Trafficking Act (CDTA) of 1988 is designed to

prevent the diversion of chemicals to illegal drug producers.

Pollution Prevention Act of 1990 makes it the national policy of the United

States to reduce or eliminate the generation of waste at the source whenever feasible and directs the EPA to undertake a multimedia program of

information collection, technology transfer, and financial assistance to the

states to implement this policy and to promote the use of source reduction

techniques.

Flammable Fabrics Act, enacted in 1970 and last amended in 1983, gives

the Consumer Product Safety Commission the authority to set flammability

standards for fabrics that protect against an unreasonable risk of the occurrence of a fire.

Poison Packaging Prevention Act of 1953, and last amended in 1990, provides the Consumer Product Safety Commission authority to set standards

for the special packaging of any household product to protect children

from a hazard.

Consumer Product Safety Act, enabled in 1972 created the Consumer Product Safety Commission, and gives the Commission authority to issue mandatory safety standards, ban hazardous products, investigate safety of

products, and use other forms of corrective action.

State Regulations. State governments are increasingly active in the environmental and safety areas.

tional in scope. It is now being implemented in 38 countries and is

growing rapidly. It commands attention and resources from every part of

the chemical production process, requiring substantial investment by

those companies that have embraced its requirements.

Commitment to the U.S. Chemical Manufacturers Association Responsible Care® program is a condition of membership in the Association,

whose 186 member companies provide 90 percent of the U.S. production

of industrial chemicals. Partner memberships include some 23 additional

companies and 19 associations.

The extensive, goal-oriented health, safety, and environmental performance improvement efforts of the Responsible Care® initiative have

proven to be an effective, efficient way to achieve advances. Responsible

Care® participants believe a key to the strength of this approach is that it
The U.S. Chemical Industry 29

OFFICE OF TECHNOLOGY POLICY

Box 3. Responsible Care® Initiative

In 1988, the Chemical Manufacturers Association (CMA) launched Responsible Care® to respond to public concerns about the safe management of

chemicals. Through Responsible Care®, more than 200 member and Partner

companies are committed to continuously improving their health, safety,

and environmental performance in a manner that is responsive to public

concerns.

Responsible Care® covers the entire life cycle of the chemical process, from

initial research through recycling and disposal. CMA’s members account

for 90% of the productive capacity for basic chemicals in the United States,

so the initiative has an impact on chemical operations around the country.

And through the Responsible Care® Partnership Program, members from

all levels of the chain of commerce are committed to continuously improving their health, safety, and environmental performance.

The key to Responsible Care® is industry’s commitment to continuously

improve health, safety, and environmental performance by fully implementing the six Responsible Care® Codes of Management Practices. The six

Codes promote continuous improvement by focusing on management

practices in all areas of chemical operations. CMA member and Partner

companies must make good faith efforts to attain the goals of the six

Codes: Community Awareness and Emergency Response (CAER), Pollution Prevention, Process Safety, Distribution, Employee Health and Safety,

and Product Stewardship.

Like continuous improvement, openness and dialogue with the public are

vital to the success of the initiative. Through the National Public Advisory

Panel, the public is directly involved in helping to shape the Responsible

Care® initiative. The National Public Advisory Panel acts as a sounding

board for public concerns and is made up of a cross section of environmental, health, and safety thought leaders. Members and Partners also respond

to public concerns more directly by engaging in a dialogue with their local

communities through Community Advisory Panels around the country.

These local panels, established in the communities near chemical sites,

provide a valuable means of establishing a dialogue with the public.

The Guiding Principles of Responsible Care® outline the philosophy of the

initiative. Member and Partner companies pledge to manage their businesses according to these principles:

■ To recognize and respond to community concerns about chemicals

and our operations.

■ To develop and produce chemicals that can be manufactured, transported, used, and disposed of safely.

■ To make health, safety, and environmental considerations a priority in

our planning for all existing and new products and processes.

■ To report promptly to officials, employees, customers, and the public,

information on chemical-related health or environmental hazards and

to recommend protective measures.
30 The U.S. Chemical Industry

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Box 3. Continued

■ To counsel customers on the safe use, transportation, and disposal of

chemical products.

■ To operate our plant and facilities in a manner that protects the environment and the health and safety of our employees and the public.

■ To extend knowledge by conducting or supporting research on the

health, safety, and environmental effects of our products, processes,

and waste materials.

■ To work with others to resolve problems created by past handling and

disposal of hazardous substances.

■ To participate with government and others in creating responsible

laws, regulations, and standards to safeguard the community, workplace, and environment.

■ To promote the principles and practices of Responsible Care® by sharing experiences and offering assistance to others who produce,

handle, use, transport, or dispose of chemicals.

allows flexibility in how improvements are achieved and that the program offers a viable, more efficient alternative to the “command and

control” regulations that governments have traditionally relied upon.

Position in World Markets and Trade Performance

Trade Performance and Competition

International trade is rapidly growing in importance to the U.S. chemical

industry, and the industry’s trade performance is becoming a more

important indicator of its competitiveness. Trade data show that the

chemical industry is the nation’s biggest exporter and one of the most

internationally competitive. Indeed, chemical industry exports have

consistently provided more than $1 out of every $10 of U.S. goods exports in recent years. Exports of chemicals and related products reached

$51.5 billion in 1994, substantially topping second-ranking total U.S.

agricultural exports of $46 billion. Exports in 1995 will approach — and

possibly top — $60 billion. Chemicals trade has also consistently provided substantial U.S. surpluses, $18.4 billion in 1994 and a cumulative

total of $140 billion over the 10-year period 1985–94 (Figure 8).

Trade’s growing importance to the chemical industry is evident from the

fact that exports rose from 10.5 percent of total industry shipments in

1983 to 15.1 percent in 1994 (Figure 9).

Chemical industry

exports have consistently

provided more than $1

out of every $10 of U.S.

goods exports in recent

years.
The U.S. Chemical Industry 31

OFFICE OF TECHNOLOGY POLICY

U.S. chemical imports have also risen relative to U.S. production — from

5.7 percent of industry shipments in 1983 to 9.9 percent in 1994. Although the U.S. industry is increasingly dependent on trade, it is much

less so than the chemical industries of several other major producer

nations. Including its shipments to other European Union countries,

Germany in 1993 exported 58 percent of its total chemical output, the

United Kingdom, 53 percent, and France, 43.2 percent. On the other hand,

Japan’s chemical industry — the world’s second largest — exported less

than 10 percent of its output.

The large role of chemicals in U.S. trade and the increasing importance of

trade to the U.S. chemical industry parallels the role and growth of

chemicals in world trade. World trade in chemicals and allied products

was $312 billion in 1992, about 9.1 percent of total world goods trade and

12.9 percent of total world manufactures trade. World chemical trade has

grown much more rapidly than world chemical production, increasing

by 153 percent over the 1981 to 1992 period, compared to a growth of

only 66 percent in world chemical production.

The U.S. plays a large role in world chemical trade, but not so large as

Germany. In 1992 — the latest data available — the United States had a

14.0 percent share of world chemical exports. Germany had a larger

share — 17.2 percent (Figure 10). However, over half — about 53 percent —

of Germany’s total chemical exports went to other European Union countries.

The 14.0 percent U.S. share of 1992 world chemical exports is down

substantially from the 18.6 percent share of 1981 (Figure 11). In a world

where many developing countries are becoming producers, a declining

U.S. share of world output and trade is probably inevitable. But although

the U.S. share of world chemical exports declined over the 1981–92

period, its share of world imports rose from 7.7 percent to 8.9 percent. As

a result, the margin of U.S. export shares over import shares narrowed

from 10.9 percentage points in 1981 to 5.1 percent in 1992, indicating a

relative decline in the competitive position of U.S.-based chemical production in international markets.

Germany’s export and import shares have remained relatively more stable.

Its share of world exports was 17.8 percent in 1981 and 17.2 percent in

1992. Its share of world imports increased by only one percentage point,

from 9.7 percent in 1981 to 10.7 percent in 1992. Moreover, more often

than not, since the beginning of the 1980s German trade surpluses have

topped those of the United States. But market shares and trade balances

Although the U.S.

industry is increasingly

dependent on trade, it

is much less so than the

chemical industries of

several other major

producer nations.

In a world where many

developing countries are

becoming producers, a

declining U.S. share of

world output and trade

is probably inevitable.
32 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

Figure 8. U.S. Chemical Trade, 1981–1994

are not complete measures of the domestic industry’s strength and its

longer term international competitiveness. Other critically important

factors include the profitability of domestic operations, the amounts and

profitability of foreign investments, rates of return, and amounts and

trends of new investment in plant and equipment and R&D.

By most standards the international competitiveness position of U.S.-

based R&D and chemical production today is probably stronger than

that of the other major chemical producer nations — the several major

European producer countries, Japan, and Canada. But these countries are

not the only competitors for world markets, and indeed, they may not be

the fiercest competitors in the years ahead. Like the United States, the

major European producer countries and Japan and Canada have become

mature markets for chemicals. Growth in domestic demand for chemicals

in these mature markets will probably increase at only about the same

pace as their GDP growth, which is likely to be modest compared to the

growth rates of several developing countries. Increasingly, faster-growth

developing countries and regions are likely to provide the largest future

opportunities for sales gains.

These new markets will offer expanding opportunities for exports of

chemicals and direct investments by established producers. But as part of

their efforts to industrialize, developing nations will strive to build their

own production capabilities. Some of this new production will be used to

The international

competitiveness position

of U.S.-based R&D and

chemical production

today is probably

stronger than that of

the other major chemical

producer nations.

As part of their efforts to

industrialize, developing

nations will strive to

build their own

production capabilities.
The U.S. Chemical Industry 33

OFFICE OF TECHNOLOGY POLICY

reduce their import needs. But some of it will be exported, increasing the

level of competition in global markets. To cite one example, from 1981 to

1992, the Asian newly industrializing countries (NICs) (Taiwan, Hong

Kong, Singapore, and South Korea) share of world imports increased

Figure 9. U.S. Chemical Trade Shares of Total Shipments

Figure 10. World Chemical Export Shares, 1992
34 The U.S. Chemical Industry

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from 4.3 to 7.9 percent. But over the same period their share of world

exports rose from 0.6 percent to 2.8 percent. Continuing new investment

in these countries indicates their production capacity and their share of

world export markets will continue to grow, and they may soon become

net exporters in many chemical products, if not net exporters in their

total chemical trade.

Trade Composition by Product

U.S. implementation of the Harmonized System of trade data provides

the finest level of detail available for trade information. Applying the

nomenclature of this system, the United States in 1994 exported 1,054

different chemical and related product items and imported 1,700 chemical items. In fact, however, a relatively few items account for the major

portion of U.S. chemicals trade. For example, the top 100 chemical exports alone accounted for 58.3 percent of total exports; the top 100 imports accounted for 49.4 percent of the import total.

U.S. chemical trade continues to include substantial portions of basic

industrial chemicals such as styrene, vinyl chloride, and disodium

carbonate. Overall, the composition of the trade among major product

categories has been relatively stable but is, nevertheless, undergoing

some changes. Exports of organic chemicals, for example, were 24.7

percent of total 1994 exports, down only modestly from a 26.7 percent share

in 1983 (Figure 12). Mirroring a change in world trade composition, however, inorganic chemicals declined from 14.9 percent of the 1983 total to 7.9

percent in 1994.

Plastics are also a large component in the U.S. trade. Together, primary

and non-primary plastics make up 24.3 percent of 1994 U.S. exports, up

from the 20.0 percent share of 1983.

The pharmaceuticals segment of the industry is somewhat less exportoriented than the rest of the chemical industry. Pharmaceuticals exports

were only about 11.8 percent of that segment’s sales in 1994 compared to

15.1 percent for the industry as a whole. Pharmaceuticals are thus a

relatively modest portion of U.S. chemical trade, 11.1 percent of U.S.

exports in 1983, 11.8 percent in 1994. The pharmaceuticals share of U.S.

chemical imports, however, increased from 7.4 percent in 1983 to 14.7

percent in 1994.

Trade in oils and perfumes has been fast-growing but remains a modest

portion of the whole — 6.9 percent of exports and 5.5 percent of imports.

The United States

typically achieves

trade surpluses in each

of the nine categories

identified by Standard

International Trade

Classification codes.
The U.S. Chemical Industry 35

OFFICE OF TECHNOLOGY POLICY

Figure 11. U.S. Share of World Chemical Exports and Imports

Figure 12. Product Composition of U.S. Chemical Industry
36 The U.S. Chemical Industry

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The United States typically achieves trade surpluses in each of the nine

categories identified by Standard International Trade Classification

(SITC) codes. In 1994, however, a small inorganic chemicals deficit was

the first in that category in many years. In contrast, however, the relatively modest dyeing and coloring material trade has moved in the last

10 years from consistent small deficits to small but increasing surpluses,

$574 million in 1994.

Geographic Composition of Trade

The geographic distribution of U.S. chemical trade has also been relatively stable, though changes mirroring those in world trade patterns

and changes relating to trade agreements have been occurring. The major

portion of U.S. chemical trade continues to be with other developed

countries — Western Europe, Canada, Japan, and Australia. In 1994, for

example, 58.8 percent of U.S. exports went to developed countries, down

only modestly from 60.7 percent in 1983. Disaggregation of the data,

however, shows an increasing importance of first-ranking Canada —

from 12.9 percent of U.S. exports in 1983 to 17.2 percent in 1994 — and a

decline in the importance of second-ranking Japan, from 13.0 percent to

9.5 percent. The Asian NICs and Mexico were important contributors to

the increase of the developing countries’ share of U.S. exports, which

moved from 35.6 percent in 1983 to 37.9 percent in 1994 (Figure 13).

U.S. imports (Figure 13) are even more dominated by the developed

countries, although their share of imports declined from 83.4 percent in

1983 to 79.8 percent in 1994. Western Europe supplied 25.3 percent of

1994 U.S. imports, Canada 20.1 percent, and Japan 12.6 percent. Among

developing countries, the Asian NICs increased their share of U.S. imports, as did a small group of countries — China and countries of the

former Soviet Union — not included in the “developing country”

classification.

Although the major portion of U.S. chemical trade is with developed

countries — 59 percent of 1994 U.S. exports, 80 percent of imports — U.S.

trade surpluses come increasingly from trade with the developing countries. In 1994 the U.S. surplus on trade with the developed countries was

only $3.6 billion, while the surplus on the much smaller trade with

developing countries was $14.2 billion.

Foreign Investment Performance

Foreign investments play a critical and positive role in the competitiveness and viability of the U.S. chemical industry, both through the returns

from foreign production and sales and through expanded U.S. exports.

Although the major

portion of U.S. chemical

trade is with developed

countries, U.S. trade

surpluses come

increasingly from trade

with the developing

countries.
The U.S. Chemical Industry 37

OFFICE OF TECHNOLOGY POLICY

As competition for markets becomes tougher, R&D to produce new

products and processes becomes a more important competitive factor.

But to be affordable, fast-growing R&D costs must be amortized over

enlarging sales that often can be realized only by selling beyond the

United States and into global markets. Exporting is one way to tap global

markets. But production and transportation costs, the need for prompt

delivery, foreign needs for tailor-made products, the service requirements

that many chemicals pose, and myriad other factors often make it impossible to compete successfully in significant foreign markets solely by

exporting from the United States. Often, to be competitive in an important foreign market, companies must produce in that market. But once

U.S. chemical companies invest in foreign affiliate production facilities,

those foreign affiliate companies provide natural channels for exports

from the United States.

Direct investments in the United States by foreign companies and direct

investments abroad by U.S. chemical companies have generated a substantial trade between U.S. parent companies and their foreign affiliates

and between U.S. affiliates and their foreign parents. U.S. government

data show that in 1992, U.S. chemical companies with foreign investments

exported $31.5 billion of merchandise; $21.5 billion of that — 68 percent

Figure 13. Geographic Composition of U.S. Chemical Trade

Foreign investments

play a critical and

positive role in the

competitiveness and

viability of the U.S.

chemical industry.
38 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

of the total — went to their foreign affiliates (Figure 14). Also, of $12.5

billion of 1992 exports by U.S. affiliates of foreign chemical company parents, $7.0 billion — 56 percent of the total — went to foreign parents and

affiliates.

The effects of foreign investment on U.S. imports are even more dramatic. U.S. parent chemical companies imported $15.2 billion of goods in

1992 (Figure 15). Of that, $10.1 billion — 66 percent — came from their

foreign affiliates. The U.S. affiliates of foreign companies imported $11.8

billion, $9.4 billion of that from foreign parents and affiliates. Nevertheless, both U.S. parent chemical companies and the U.S. affiliates of

foreign companies generate U.S. trade surpluses on their foreign trade.

Chemical industry contributions to U.S. trade accounts and the role of

foreign investments in the industry’s performance are not limited to

goods exports and surpluses. The profits of foreign affiliates, service

charges levied by U.S. parents on their foreign affiliates, and the licensing of U.S. technology (mostly to foreign affiliates) are classified as

“services exports” in U.S. international accounts. These exports total

about $9 billion annually. Imports of similar services from foreign countries (mostly by the U.S. affiliates of foreign companies) typically total

Figure 14. 1992 Exports of Multinational

Chemical Companies in the U.S.

Both U.S. parent

chemical companies

and the U.S. affiliates

of foreign companies

generate U.S. trade

surpluses on their

foreign trade.
The U.S. Chemical Industry 39

OFFICE OF TECHNOLOGY POLICY

Figure 15. 1992 Imports of Multinational

Chemical Companies in the U.S.

Figure 16. Net Income from Chemical

Industry Direct Investment
40 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

about $6 to $7 billion, leaving the United States with an annual chemical

industry “services” trade balance of some $2 to $4 billion (Figure 16).

Foreign direct investments thus not only add to parent company sales

and profits, but in addition, foreign plants typically become markets for

inputs from U.S.-based production and channels for sales of products not

made in the foreign plant. Clearly, foreign investments are a very important factor in the U.S. chemical industry’s strong international competitive position. The U.S. chemical industry gained advantage by investing

abroad early. The large growth in foreign investment in the U.S. chemical

industry has been more recent (Figure 17). As a result, although the 1994

book value of foreign investment in the U.S. ($67.3 billion) now exceeds

the book value of U.S. chemical investments abroad ($51.6 billion), the

real worth and the earning power of the U.S. investments abroad still

exceeds that of foreign investment in the United States. But the more

important question, discussed later in this paper, is whether the recent

pace of the U.S. industry’s investment abroad and the investments in the

years ahead will be adequate to maintain the longer term competitiveness of U.S.-based R&D and production.

Economic Performance and Financial Position

The U.S. chemical industry consists of some 9,125 corporations whose

primary business is the development, manufacturing, and marketing of

chemicals. U.S. government financial data disaggregates the industry

into three segments: industrial chemicals, pharmaceuticals, and other

chemical products. The industrial chemicals and other chemical products

segments of the industry are often similar in economic and financial

performance, but the pharmaceuticals (drugs) industry often differs in

profits, rates of return, and other important measures (Table 1).

Revenues and Assets

Chemical industry revenues have grown rapidly, rising from $201 billion

in 1983 to almost $357 billion in 1994, a 77 percent increase (Table 1). A

rising portion of this revenue stream, however, appears to be going to

pharmaceuticals companies. The pharmaceuticals share rose from 14.4

percent in 1983 to 25.2 percent in 1994.

Total industry assets over the same period increased from $187.6 billion

to almost $464 billion (Table 1), with the pharmaceuticals share growing

from 17.6 percent in 1983 to 29.5 percent in 1994.

Foreign investments are

a very important factor

in the U.S. chemical

industry’s strong

international competitive

position.
The U.S. Chemical Industry 41

OFFICE OF TECHNOLOGY POLICY

Net fixed capital (total fixed capital less accumulated depreciation and

amortization) increased from $78.3 billion in 1983 to $156.2 billion in

1994. As of 1994, 55.1 percent of net fixed capital was in industrial chemicals, 20.0 percent in pharmaceuticals, and 24.9 percent in other chemical

products.

According to the U.S. Commerce Department’s Bureau of Economic

Analysis, the average age of the industry’s net capital stock in 1994 was

5.34 years, down modestly from the 1987 high of 5.87 years but well

above the 1977 low of 4.55 years.

The debt-to-equity ratios of the chemical industry doubled from 1983 to

1994, rising from 0.93 to 1.85 (Table 1). Over the same period the ratio for

manufacturing as a whole rose from 1.04 to 1.67. The ratio for the industrial chemicals sector (2.12) is significantly higher than those of pharmaceuticals (1.63) and other chemical products (1.73).

Investment Trends

Investments in R&D and new plant and equipment are critical to the

industry’s competitiveness. Industry R&D funding rose from $6.8 billion

in 1983 to an estimated $18 billion in 1994, a 165 percent increase. The

pharmaceuticals sector accounts for a rising portion of the total, 57.4

percent in 1994.

Figure 17. Continuing Globalization

through Direct Investment
42 The U.S. Chemical Industry

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Table 1. Chemical Industry Revenue and Assets

Revenues (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Total 201,319 209,627 202,804 205,778 225,200 261,616 278,300 287,457 297,841 315,534 325,074 356,876

Industrial 94,698 98,078 79,292 81,400 96,548 115,394 111,391 112,088 113,310 122,545 122,667 140,480

Pharmaceuticals 29,088 30,900 35,124 37,768 42,903 46,205 51,251 58,993 67,147 73,645 82,012 90,106

Other 77,533 80,649 88,388 86,610 86,749 100,017 115,658 116,376 117,384 119,344 120,394 126,291

Total Assets (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Total 187,572 193,089 205,339 217,166 244,446 277,582 293,317 325,370 357,665 385,374 418,285 463,973

Industrial 92,162 93,612 88,854 90,986 109,927 122,966 120,760 136,015 161,484 176,333 184,345 197,090

Pharmaceuticals 32,947 35,509 40,295 48,621 53,208 55,894 62,206 73,223 80,219 91,947 112,049 136,857

Other 62,464 63,970 76,190 79,560 81,311 98,724 110,353 116,132 115,963 117,094 121,891 129,846

Net Fixed Capital (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Total 78,227 77,281 77,166 77,547 82,766 92,835 100,219 114,586 129,785 141,857 147,292 156,150

Industrial 44,251 43,905 39,004 38,777 43,402 47,729 46,606 56,396 68,607 78,109 80,512 86,071

Pharmaceuticals 9,639 10,711 12,092 12,845 14,266 15,772 17,671 20,309 24,088 26,566 29,288 31,215

Other 24,387 22,666 26,072 25,926 25,099 29,334 35,943 37,881 37,390 37,182 37,493 38,864

Debt to Equity Ratio

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Total 0.93 0.92 1.05 1.15 1.29 1.30 1.30 1.35 1.39 1.58 1.74 1.85

Industrial 1.04 1.01 1.18 1.19 1.42 1.38 1.21 1.35 1.51 2.03 2.04 2.12

Pharmaceuticals 0.70 0.72 0.77 1.04 1.24 1.18 1.03 1.02 0.99 1.07 1.30 1.63

Other 0.92 0.93 1.07 1.19 1.15 1.28 1.60 1.63 1.58 1.51 1.81 1.73

Chemical industry R&D spending is higher relative to sales than in most

industries, reaching 5.3 percent in 1993 before declining modestly relative to 1994’s very strong sales gains. R&D has grown relative to sales in

all three segments but is highest in the pharmaceuticals segment, averaging 10.4 percent over the 1983–94 period (Figure 18).

Capital equipment expenditures have also been increasing rapidly,

reaching an estimated $25.6 billion in 1994. Capital spending, however,

continues to be dominated by industrial chemicals, with 1994 expenditures of $13.9 billion, 54 percent of the total.

Capital spending is also a higher portion of total revenues for industrial

chemicals than for the other two segments. For the 1983–94 period,

industrial chemicals capital expenditures averaged 9.1 percent of rev-
The U.S. Chemical Industry 43

OFFICE OF TECHNOLOGY POLICY

enues compared to 6.2 percent for pharmaceuticals and 3.1 percent for

other chemical products (Table 2).

Profits

As is often the case with capital-intensive manufacturing industries,

chemical industry profits fluctuate markedly with the business cycle,

rising when demand, capacity utilization, and prices increase, declining

rather sharply when demand, prices, and capacity utilization fall. These

tendencies apply primarily to industrial and other chemical products,

however. Pharmaceuticals profit performance has been consistently

strong in recent years, much less affected by business cycles and global

competition (Table 3). Rather, consistent growth in the demand for

pharmaceutical products is closely correlated with increasing health

care expenditures that accompany rising incomes and living

standards.

Chemical industry profits hit a new high of $30.4 billion in 1994, 17.3

percent of the manufacturing sector total, a portion close to the 17.0

percent 1983–94 average. Pharmaceuticals profits were $13.2 billion, a

new record and 43.5 percent of the industry total — well above the 39.9

percent average contribution for 1983–94. Industrial chemicals profits

were $8.4 billion in 1994, the best performance since 1989 but well below

the $10.2 billion record high of 1988. Industrial chemicals profits were

27.8 percent of the 1994 industry total, somewhat below the 30.7 average

for the 1983–94 period. The other chemical products segment also set a

Figure 18. R&D Percent of Sales

Pharmaceuticals profit

performance has been

consistently strong in

recent years, much less

affected by business

cycles and global

competition.
44 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

Income After Taxes (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Total 11,643 13,883 9,541 12,901 16,559 23,661 24,523 23,418 19,997 12,996 15,550 30,412

Industrial 3,517 5,309 1,741 4,920 7,150 10,243 9,320 7,842 4,744 −2,582 4,218 8,458

Pharmaceuticals 3,856 4,112 3,456 5,504 4,411 7,378 7,744 9,336 10,198 9,482 10,199 13,229

Other 4,720 4,462 4,344 2,477 4,999 6,029 7,458 6,240 5,055 6,096 1,133 8,724

Percent of Total

Average

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–1994

Industrial 30.2 38.2 18.2 38.1 43.2 43.3 38.0 33.5 23.7 −19.9 27.1 27.8 28.3

Pharmaceuticals 33.1 29.6 36.2 42.7 26.6 31.2 31.6 39.9 51.0 73.0 65.6 43.5 42.8

Other 36.7 32.1 45.5 19.2 30.2 26.5 30.4 26.6 25.3 46.9 7.3 28.7 28.9

new profit record, $8.7 billion, 28.8 percent of the 1994 industry total,

compared to the 29.4 percent average for the 1983–94 period.

Rates of Return

There are also significant differences among the three industry segments

in some key indicators of longer term performance. For example, the

Table 2. Capital Equipment Investment Trends

Capital Equipment (In millions of dollars)

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Total 9,154 9,825 10,852 10,179 11,890 14,558 18,849 19,350 24,188 24,585 23,902 25,633

Industrial 5,635 5,552 6,221 5,861 6,956 8,860 11,828 12,960 15,373 13,748 13,057 13,860

Pharmaceuticals 1,539 1,842 1,946 1,713 2,387 2,759 3,345 2,902 4,033 5,842 5,977 6,438

Other 1,980 2,431 2,685 2,604 2,547 2,939 3,676 3,488 4,782 4,995 4,868 5,335

Capital Equipment as a Percent of Sales

Average

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–94

Total 11.7 4.7 5.4 4.9 5.3 5.6 6.8 6.7 8.1 7.8 7.4 7.2 6.8

Industrial 6.0 5.7 7.8 7.2 7.3 7.7 10.6 11.6 13.6 11.2 10.6 9.9 9.1

Pharmaceuticals 5.3 6.0 5.5 4.5 5.6 8.1 6.5 4.9 6.0 7.9 7.3 7.1 6.2

Other 1.4 1.7 3.0 3.0 2.9 2.9 3.2 3.0 4.1 4.2 4.0 4.2 3.1

Table 3. After-Tax Profits
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OFFICE OF TECHNOLOGY POLICY

1983–94 average return on revenues for the industry as a whole was 6.7

percent, compared to a 3.9 percent return for manufacturing as a whole.

But within the chemical industry, the return on revenues was 5.1 percent

for industrial chemicals and 5.0 percent for other chemical products, but

13.6 percent for pharmaceuticals. Similarly, the return on assets for 1983–

94 was 4.4 percent for industrial chemicals and 5.4 percent for other

chemical products, but 11.0 percent for pharmaceuticals. The average

return on equity for the twelve-year period was 10.4 percent for industrial chemicals, 12.4 percent for other chemical products, and 22.5 percent

for pharmaceuticals (Table 4).

The high rates of return enjoyed by pharmaceuticals companies have

allowed high levels of new investment, particularly in R&D. This investment has, in turn, increased the pace of new product introductions,

increased sales, and helped to make the U.S. pharmaceutical industry a

world leader.

Table 4. Rates of Return

Profit of Sales (Percent)

Average

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–1994

Total 5.8 6.6 4.7 6.3 7.4 9.0 8.8 8.1 6.7 4.1 4.8 8.5 6.7

Industrial 3.7 5.4 2.2 6.0 7.5 8.9 8.4 7.0 4.2 −2.1 3.4 6.0 5.1

Pharmaceuticals 13.3 13.3 9.8 14.6 10.3 16.0 15.1 15.8 15.2 12.9 12.4 14.7 13.6

Other 5.5 5.5 4.9 2.9 5.8 6.0 6.4 5.4 4.3 5.1 0.9 6.9 5.0

Return on Assets (Percent)

Average

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–1994

Total 6.2 7.2 4.6 5.9 6.8 8.5 8.4 7.2 5.6 3.4 3.7 6.6 6.2

Industrial 3.8 5.7 2.0 5.4 6.5 8.3 7.7 5.8 2.9 −1.5 2.3 4.3 4.4

Pharmaceuticals 11.7 11.6 8.6 11.8 8.3 13.2 12.4 12.8 12.7 10.3 9.1 9.7 11.0

Other 6.8 7.0 5.7 3.1 6.1 6.1 6.8 5.4 4.4 5.2 0.9 6.7 5.4

Return on Equity (Percent)

Average

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1983–1994

Total 12.0 13.8 9.5 12.8 15.5 19.6 19.2 16.9 13.4 8.7 10.2 18.7 14.2

Industrial 7.8 11.4 4.3 11.8 15.8 19.8 17.0 13.6 7.4 −4.4 7.0 13.4 10.4

Pharmaceuticals 19.9 19.9 15.2 24.1 18.6 28.8 25.3 25.8 25.4 21.4 20.9 25.4 22.5

Other 13.1 13.5 11.8 6.8 13.2 13.9 17.6 14.1 11.2 13.0 2.6 18.4 12.4

The high rates of

return enjoyed by

pharmaceuticals

companies have allowed

high levels of new

investment, particularly

in R&D.
46 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

Rates of return have not only been much lower for the other segments of

the industry, but may also be more vulnerable to competition. Arguably,

rates of return for the industrial chemicals group may be falling, perhaps

at least in part because environmental compliance costs in that segment

have been rising relative to sales. Over the longer 14-year period 1981 to

1994, the pharmaceutical group’s return on equity (ROE) fluctuated

between 15.2 percent and 28.8 percent, and the 1994 ROE of 25.4 percent

was not far below the 1988 high of 28.8 percent. ROE for other chemical

products companies over the same 14-year period ranged from 2.6

percent to a 1994 record of 18.4 percent.

The industrial chemicals ROE, however, ranged from the –4.4 percent

low of 1992 to the 1988 high of 19.8 percent. For the cyclical industrial

chemicals segment, 1994 was a very good year — one of the best in

recent history. The U.S. economy was strong and growth rates in much of

the global economy were good. As a result, demand for several basic

chemicals was strong and prices were firm, though not at record levels.

Indeed, 1994 may well represent the peak — or near-peak — of the

current cycle and a match of favorable conditions unlikely to be sustained for long. Yet, industrial chemicals profits did not rise to new

highs, and the 13.4 percent return on equity for 1994 was well below the

levels of other recent cycle peaks. This may be a signal that if global

competition continues to intensify, it will be difficult to sustain industrial

chemical ROE around the 10.4 percent 1981–94 average, let alone to raise

it.

Thus, a key question is whether the long-term returns for industrial

chemicals and for other chemical products are sufficiently high to merit

the new investment in both U.S.-based and foreign production facilities

necessary to motivate and fund their international competitiveness

needs. Unfortunately, when global investment requirements are considered, investment capital needs for industrial chemicals and other chemical products segments of the industry are likely to be much larger than

those needed by the less capital-intensive pharmaceuticals companies.

Construction of some industrial chemical production facilities may

require investments of hundreds of millions of dollars, but new pharmaceutical production facilities are typically much less costly. Direct investments in foreign markets by the pharmaceutical industry will thus typically

require relatively less capital than investments by the more capitalintensive industrial chemicals and other chemical product companies.

A key question is

whether the long-term

returns for industrial

chemicals and for other

chemical products are

sufficiently high to merit

the new investment in

both U.S.-based and

foreign production

facilities necessary

to motivate and fund

their international

competitiveness needs.
The U.S. Chemical Industry 47

OFFICE OF TECHNOLOGY POLICY

II. FORCES SHAPING THE INDUSTRY

Many factors shape the international competitiveness of U.S.-based

chemical production. A well-developed research and production

infrastructure, access to competitively priced energy, and a variety of

other factors discussed below currently allow the United States to be a

low-cost production base for many chemicals. But in a fast-changing

world these strengths are not immutable. Central to maintaining competitiveness are continued high and growing levels of R&D to develop

new products and processes, and high levels of P&E spending to implement the new technologies and make the new products. In turn, however, high levels of R&D and growing P&E spending are in the longer

term dependent on high and growing revenues and profits. The amounts

and locations of investments in R&D and P&E respond to the signals

provided by profits and rates of return. Profits and rates of return inadequate to motivate needed investments in R&D and P&E would ultimately jeopardize the longer term competitiveness of U.S.-based production.

Profitability of the industry will be shaped by many forces, including the

existing infrastructure and competitive advantages, U.S. access to foreign

markets, the U.S. and world economic climates, and the resulting global

chemical supply-demand relationships. Clearly, however, as the number

of global suppliers increases, competition gets tougher. U.S. government

regulatory and other policies that directly affect the chemical industry’s

U.S. costs of production and its profitability will become much more

important in determining the industry’s international competitiveness

than in earlier years when the U.S. industry and producers in a few other

countries were dominant in world markets.

Infrastructure and Sources of Current Strengths

The strong current international competitive position of the U.S. chemical industry stems from many factors, including the following:

The U.S. chemicals market is the world’s largest. Although foreign

trade is growing in importance, most of U.S. chemical production —

about 85 percent of the total — still goes to U.S. markets. U.S. chemical

producers thus are still less susceptible to foreign economic fluctuations,

currency exchange rates, and the trade policies of other countries than

are producers in most other countries.

Central to maintaining

competitiveness are

continued high and

growing levels of R&D

to develop new products

and processes, and high

levels of P&E spending

to implement the new

technologies and make

the new products.
48 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

The U.S. is the world’s largest chemical producer country. The world’s

largest chemical market provides economies of scale for production of

large volumes of a wide range of chemical products.

Investment in R&D and P&E is large. Large domestic markets, foreign

markets accessed by direct investments, and a strong international trade

competitive position over several decades have led to sustained high

levels of R&D and P&E spending and development of an efficient U.S.

research and production infrastructure that will be difficult for new

foreign competitors to match.

Energy — a vital input to chemical production — is generally competitively priced in U.S. markets. Energy — for both feedstocks and power

— is vital to chemical production. Chemical industry energy consumption is about 7 percent of the U.S. total.

An excellent port and internal transportation system effectively moves

both energy inputs and industry products. This transportation system

— including pipelines, inland waterways, railroads, and trucking —

facilitates efficient production and distribution and the competitiveness

of U.S.-based production in both domestic and foreign markets.

Large, well-established foreign direct investments are a major competitive asset. Direct investments abroad provide additional sales against

which rising R&D and other costs can be amortized. The profits from

foreign operations, license fees, and other charges levied on their foreign

affiliates add to the strength of U.S. parent companies. Moreover, foreign

investments also provide critical access to foreign markets via exports

from U.S. parent companies to their foreign affiliates. At the same time,

the large U.S. market attracts significant amounts of foreign investment

and foreign technologies that also help to keep U.S. production competitive.

The dollar exchange rate provides a current but perhaps only temporary advantage. The dollar at mid-1995 was weak against the German

mark and the Japanese yen. Given the linkages of the mark to other

European currencies and the importance of the yen in Asian markets, the

dollar was thus weak against the currencies of the majority of major

chemical-producing nations. This provides U.S. producers with new

advantages in the markets of major producer countries and in third

country markets as well. In the longer term, however, neither industry

competitive advantage nor increased U.S. living standards can be

achieved by currency depreciation. A stronger dollar is desirable from

Foreign investments

provide critical access

to foreign markets via

exports from U.S. parent

companies to their

foreign affiliates.
The U.S. Chemical Industry 49

OFFICE OF TECHNOLOGY POLICY

the standpoint of members of the economy, and at least some near-term

dollar recovery from mid-1995 levels vis-a-vis the Japanese yen and the

German mark is seen as likely.

The educational and business environment has helped to shape the

industry’s dynamism. Many intangible factors that will be difficult for

other producer countries to replicate have contributed to the growth and

advanced state of the U.S. chemical industry. A science-based industry,

chemicals has benefited enormously from the research done in U.S.

universities and from the skills imparted to graduates of chemistry that

do the R&D in individual companies. Moreover, the United States is

widely considered to have outstanding chemical engineers who can

implement and bring into production the discoveries of laboratory

scientists.

For example, U.S. chemical engineers and U.S. chemical engineering

construction companies, widely judged to be among the best in the

world, have been critical factors in the rapid development and global

leadership of the U.S. petrochemical industry.

In addition, the U.S. business environment in several instances has been

favorable, allowing the U.S. industry to develop its comparative advantages. For example, the United States is generally seen as now providing

more favorable conditions for the growth of biotechnologies than some

European countries. And, in earlier decades, the rapid growth of the auto

and chemical industries was mutually reinforcing. The auto industry’s

rapid growth stimulated the demand for many basic chemicals and

many new chemical products, and in turn, new chemical products

promoted the advance of auto technology and stimulated increasing

demand for autos. The interaction between the two industries continues

today. Also important, the United States remains a dynamic society,

generally open to new discoveries and products, an attitude that facilitates the growth and progress of science-based industries.

The factors noted above and other strengths typically make U.S. chemical companies both innovative and relatively low-cost producers of

many products in today’s world economy. But a growing number of new

producers, such as Saudi Arabia and some other producers in energyrich countries, may now have lower costs than U.S. producers. And, in a

fast-changing world, existing U.S. competitive advantages could erode

over time, perhaps more rapidly than they accrued.

Chemicals has benefited

enormously from the

research done in U.S.

universities and from

the skills imparted to

graduates of chemistry

that do the R&D in

individual companies.
50 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

Global Supply-Demand Relationships

Countries that are industrializing aspire to have their own chemical

industries. The role that chemicals play in enabling other manufacturing

(and the value added by this role) makes the development of a chemical

industry a critical step in the industrialization process. These characteristics have made the chemical industry highly globally dispersed; this

dispersal can be expected to increase as more countries develop indigenous chemical production capabilities.

As has been noted above, the pharmaceutical portion of the chemical

industry is more R&D-intensive and less capital-intensive than the other

two segments. Moreover, pharmaceutical sales and profits are less susceptible to business cycles, tending to expand with the growth of living

standards and health care in individual countries. And product differentiation and patent protection provide some insulation from business

cycles and supply-demand mismatches. But the profits of the more

capital-intensive industrial chemicals and other chemical products

companies are sensitive to changes in prices and volumes. Their profitability has long been strongly affected by supply-demand imbalances

resulting from mismatches in investment patterns and business cycles.

Industrial chemical companies have long lived with a boom-bust cycle,

but in earlier years the domestic economy’s business cycle was more

dominant in determining their profitability than it is today. In earlier

years prices were set primarily by the balance between U.S. supplies and

U.S. demands. But in today’s global economy, global supply-demand

balances set prices for many chemicals. Moreover, in a global market the

supply-demand imbalances in some basic industrial chemicals need only

be relatively small to have significant effects on global prices and hence,

on profits. Thus, a relatively modest global supply shortfall can produce

sharp price and profit increases. But a similarly modest oversupply can

significantly depress prices and profits in a global marketplace.

Thus, in an era where industry prices — and profits — are more and

more set by global forces, the relationship between the global supply of

chemicals and global demand will be an increasingly important determinant of the long-term profitability and competitiveness of U.S.-based

R&D and production of industrial chemicals and other chemical products. This globalization of supply-demand relationships significantly

complicates company investment, marketing, and competitiveness

strategies — strategies that now must consider both global and national

supply-demand trends.

In a global market

the supply-demand

imbalances in some basic

industrial chemicals need

only be relatively small

to have significant effects

on global prices and

hence, on profits.
The U.S. Chemical Industry 51

OFFICE OF TECHNOLOGY POLICY

Forecasting national supply-demand relationships is itself difficult and

uncertain. But projecting global supply-demand relationships is fraught

with so many uncertainties that the forecasts must be seen as highly

uncertain at best. Forecasts of the supply side of the equation are tenuous.

Plants announced as scheduled to be built may not be built, or construction schedules may be stretched out. On the other hand, continuous

improvements and debottlenecking not reflected in supply projections

can significantly raise the capacity of existing plants. And plants said to

be scheduled for shutdown may instead continue to operate. As the

number of suppliers increases, difficulties in forecasting and adapting to

supply growth will increase.

Projections of global demand levels are also highly uncertain. The demand for chemicals fluctuates with and is amplified by the business

cycle. Business cycles and resulting chemical needs of developed countries with established historical relationships of chemical demand to

GDP growth ratios are difficult enough to forecast. But the chemical

needs of rapidly industrializing countries highly dependent on exports

for their economic growth are even more difficult to forecast. Moreover,

in a number of developing countries where the growth in demand for

chemicals will be high relative to economic growth rates, market assessments will be complicated by political volatility and/or the economic

problems and difficulties inherent in the transition to a market-based

economy.

Such volatility in developing countries may result in rather wide fluctuations in their economic growth rates and, hence, even wider fluctuations

in their consumption of chemicals. As developing countries represent an

increasing share of world output and consumption, global demand may

thus not only become even more difficult to forecast but may also be

subject to wider fluctuations.

Whether an increasingly integrated and more industrialized world

economy will tend to aggravate or mitigate the effects of business cycles

on a capital-intensive chemical industry with global production remains

to be seen. In an environment of “rolling” business cycles — where

different economies tend to be in different phases of the business cycle —

fluctuations in the demand for chemicals would be smoothed by the

offsetting effects of expansion in some economies concurrent with slow

growth or contractions in others. But to the extent that the growing

interconnection of economies resulting from increasing international

flows of trade and capital brings more unison in business cycles, the

effects on demand fluctuations will be aggravated.
52 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

Forecasts of global supply-demand relationships are thus problematic.

But it may be rationally argued that the world supply of many basic

industrial chemicals will — from the standpoint of producers — too

often tend toward oversupply in the years ahead. Every developing

country wants to build its own chemical industry. Other things being

equal, more suppliers generally means tougher competition and a tendency toward overcapacity. If so, as the number of producers grows, the

tendencies toward global oversupply will increase, and competition will

intensify. Perhaps aggravating this tendency, developing countries intent

on building their own chemical industries may not be guided solely by

supply-demand relationships and short-term rates of return on investment but instead may be tempted to continue to increase their domestic

production and to protect it from foreign competition.

In an ever more competitive global economy, a persisting global oversupply of basic chemicals could perhaps undermine the U.S. industry’s

profits for several years, and average rates of return could decline.

Without strong profits and adequate rates of return, high levels of R&D

and P&E investments at home and abroad may be difficult to maintain.

U.S. Economic Performance

As noted above, the U.S. chemical industry’s profits and its international

competitiveness are substantially affected not just by U.S. economic

performance but also by global supply-demand relationships that are set

by trends and events in the world economy. Even so, the U.S. market for

chemicals remains the world’s largest, and, notwithstanding the growing

importance of foreign markets, almost 85 percent of 1994 U.S. output

was sold to U.S. customers. The single most important factor in the U.S.

chemical industry’s output and profitability therefore remains the state

of the U.S. economy. Fluctuations in economic growth rates particularly

affect the industrial and other chemical products segments, but all of the

chemical industry has a vital stake in the long-term performance of the

U.S. economy.

In addition, excepting pharmaceuticals, the chemical industry has a

particular interest in the overall trade performance of its largest domestic

customer. Other U.S. manufacturing industries provide the largest single

market for U.S. chemicals, purchasing almost half of the chemical

industry’s total output. But taken as a whole, the international competitiveness of U.S. manufacturing has not been strong since the early 1980s.

The last U.S. manufactures trade surplus was in 1981. Excluding the

The single most

important factor in the

U.S. chemical industry’s

output and profitability

remains the state of the

U.S. economy.
The U.S. Chemical Industry 53

OFFICE OF TECHNOLOGY POLICY

chemical industry surplus, the 1994 U.S. manufactures trade deficit was

$145 billion, about 2.1 percent of U.S. GDP. The cumulative manufactures

trade deficit for the twelve years from 1983 through 1994 was $1.15

trillion despite cumulative chemicals trade surpluses that totaled $157

billion (Figure 19). Had the U.S. achieved balance in its manufactures

trade in recent years, the U.S. production of manufactured goods — and

the manufacturing sector ’s consumption of U.S.-produced chemicals —

would have been markedly higher. In a real sense then, large U.S. manufactures trade deficits represent significant sales losses to U.S. chemical

producers.

According to widely accepted economic theory, the continuing large U.S.

goods trade deficits manifest a low U.S. savings rate that in turn generates a need to import capital to finance government deficits and private

sector investment. But major private savings rate changes are likely to be

achieved only from significant and difficult-to-achieve changes in tax

laws and/or from equally difficult major reductions in government

deficits. Thus, large U.S. manufactures trade deficits, with their implicit

losses to U.S. chemical production, will likely continue for some time.

Figure 19. U.S. Chemical and Manufacturing

Trade, 1983–1994
54 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

Notwithstanding continuing trade deficits, the near-term outlook for the

U.S. economy appears good. But cyclical downturns and their effects on

the U.S. demand for chemicals cannot be ruled out. Also, the sustainable

long-term noninflationary growth rate of the U.S. economy is generally

considered to be, at best, in the 2.5 to 3.0 percent range, well below the

growth rates expected for a number of developing countries.

Moreover, the U.S. market for chemicals has matured and will not likely

exhibit the rapid growth typical of earlier decades. During the 1960s each

1 percent of growth in U.S. GDP resulted in about 2.2 percent of U.S.

chemical industry output growth. In the 1970s it was 1.7 percent. During

the 1990s each 1 percent of GDP growth will likely generate about a 1.2

percent increase in U.S. chemicals output (Figure 20).

Why the diminishing chemicals-to-GDP growth relationship? Manufacturing and construction are two of the U.S. chemical industry’s largest

customers. The slowdown in chemicals demand growth relative to U.S.

GDP growth in large measure reflects these industries’ diminished

shares of U.S. GDP and the growing share of “service” industries that are

less chemical intensive, a trend unlikely to change. The discovery of

major new chemical industry products or new uses for existing products

could, of course, increase the ratio of chemicals output growth to U.S.

Figure 20. Production Growth in U.S. Chemical Industry

Production for Each 1 Percent GDP Growth

The slowdown in

chemicals demand

growth relative to U.S.

GDP growth in large

measure reflects the

growing share of

“service” industries

that are less chemical

intensive, a trend

unlikely to change.
The U.S. Chemical Industry 55

OFFICE OF TECHNOLOGY POLICY

GDP growth. Significant increases in the ratio appear unlikely in the

foreseeable future, however.

Faced with a maturing domestic market, several chemical companies

sought increased growth and profitability during the 1980s by diversification — often by acquiring companies that would broaden their product

lines. That strategy now appears to have been generally unsuccessful.

Indeed, the recent trend has been toward divesting operations “outside

the core competencies” of a company.

“Restructuring” and “re-engineering” and various other terms cover

continuing efforts to increase efficiency, productivity, and profits. But in a

world of rapid communications and fast technology transfer, efficiency

gains and product improvements from new technologies can soon be

copied by competitors. And, to the extent that efficiency gains involve

more or less arbitrary non-production personnel cuts, they cannot be

continued indefinitely. Continued growth in size and profits, therefore,

typically requires expansion into global markets, particularly fast-growing developing country markets.

World Economic Performance

Concurrent with maturing of the domestic market is the rapid growth in

many developing country markets and the resultant growth in world

chemical trade. Exports in 1994 were a record 15.1 percent of the chemical industry’s shipments, and the exports portion will likely continue to

increase. Moreover, increasing foreign production and competitive

strengths are reflected in a growing foreign penetration of the U.S.

market, with imports reaching a record 9.7 percent of U.S. shipments in

1994.

These factors and the major portion of the U.S. industry’s sales and

earnings that accrue from foreign investments point to a growing reliance on foreign markets for chemical industry growth and profitability.

As noted earlier, profits of the capital-intensive industrial and other

chemical products parts of the industry are strongly affected by capacity

utilization rates and product prices. Strong global economic performance

will be required to increase the global demand for chemicals in parallel

with the expected growth of supplies. Slow global growth or a global

recession, however, may let supply significantly outrun demand, putting

pressure on profits. The future profitability of the U.S. chemical industry

Continued growth in

size and profits typically

requires expansion

into global markets,

particularly fast-growing

developing country

markets.
56 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

will thus be increasingly dependent on foreign economic growth and the

resulting increases in demand for chemicals.

There will, of course, be major differences in the demand growth rates of

individual countries. Just as the demand for chemicals has matured in

the United States, so has it matured in other developed countries. While

demand and production will continue to increase in the United States,

Japan, the European Union, and other developed countries, growth there

will be slower than in many developing countries in Latin America and

Asia. Increasingly, a number of countries in those two regions will likely

provide the most rapid growth in both export and investment opportunities.

These actual and projected demand growth differences are shaping the

global marketing and investment strategies and decisions of both U.S.

chemical companies and companies in other major producer countries.

Investment decisions have always been difficult and uncertain in the

chemical industry; they are likely to be even more so in the future.

Access to Foreign Markets and Protection of Intellectual Property

As noted earlier, the current strong foreign investment position is one of

the major competitive strengths of the U.S. industry. Foreign investments

not only add significantly to parent company income through foreign

sales but also increase the parent company’s exports from the United

States. Looking ahead, foreign markets will become ever more important

to U.S. chemical producers, both for exports and as locations for investments in production facilities.

The growing importance of foreign markets — particularly those in

developing countries — underscores the importance of U.S. efforts to

improve access for U.S. goods exports and direct investments in foreign

markets. Completion of the GATT Uruguay round and the North American Free Trade Agreement provided major new opportunities for the

chemical industry. But full implementation of these agreements will take

several years and, even then, many barriers to U.S. trade and investment

and to the protection of intellectual property will remain. This is particularly the case in a number of developing countries, some of which are

fast becoming major chemical producers. Continued progress in opening

access to exports and direct investments in these new markets is essential

to the future strength and international competitiveness of the U.S.

chemical industry.
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OFFICE OF TECHNOLOGY POLICY

Also particularly important is the protection of intellectual property —

the honoring of patents and copyrights by foreign producers. While this

protection is important to all of the science-based chemical industry, it is

particularly critical to the highly R&D-intensive pharmaceuticals industry, whose high product development costs must often be recouped by

global sales over extended time periods.

Government Policies

Setting aside the near-term effects of business cycles, existing strengths

make the longer term outlook for U.S.-based chemicals production

generally positive, perhaps as good as for any major U.S. manufacturing

industry. Indeed, at this point in time U.S.-based chemical R&D and

production is generally competitive with that of the other major producer countries. However, there will be many new competitors in the

years ahead. Indeed, the greatest competitive threats may well come

from production in countries that are not major producers today.

Whatever may happen globally, the strengths and competitive advantages of the U.S. chemical industry are many and will not fade quickly.

But in a fast-changing global economy, neither are they permanent or

immutable. In large measure the industry’s future will be determined by

management’s ability to anticipate and adapt to change. The industry’s

ability to achieve optimal allocations of investment capital between U.S.

and foreign investments, to maintain high levels of productive R&D, and

to meet changing global conditions with new products and processes

that are competitively priced will clearly be critical.

But in growing measure, the competitive position of the industry will

also be determined by a wide range of U.S. government policies. As

previously noted, improved access to foreign markets, including protection of intellectual property, is a necessary condition to future U.S.

chemical industry international competitiveness. But it is not a sufficient

condition. In a world of intensifying competition, improved access is of

little value if U.S.-based production and the products of U.S. research are

not price competitive in both U.S. and foreign markets. U.S. economic

and regulatory policies can and do significantly affect the costs and the

rewards of U.S.-based R&D and production. Indeed, as globalization of

the industry continues, the effects and importance of U.S. government

policies will become more and more important. In earlier decades, when

U.S. producers were often dominant, the effects of U.S. economic policies

In large measure the

industry’s future will

be determined by

management’s ability

to anticipate and adapt

to change.
58 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

usually did not significantly affect U.S. international competitiveness.

Cost increases could, for the most part, simply be passed on to buyers. In

this earlier era, the industry’s costs in large measure often determined its

prices.

But in a new, increasingly competitive world economy, U.S. producers

will be markedly less able to pass on cost increases that may result from

domestic economic and regulatory policies — cost increases that competitors do not have to bear. Now, it has been said, prices often determine costs. That is, to remain competitive and to maintain performance

levels that satisfy stockholders, costs may have to be cut to levels set by

market conditions. But cost-cutting has its limits and some cost cutting

— for example, reducing investments in R&D and new P&E — though

good for short-term profits, may be bad for longer term competitiveness.

In this new era, U.S. economic policymaking must recognize that U.S.

manufacturing is no longer invincible — or even dominant — in world

markets and is no longer able to shrug off the effects of U.S. policies.

Today, the U.S. economy and the U.S. home market are much less insulated from foreign competition than before.

U.S. policymaking does not always recognize that many U.S. industries

now compete in a world economy and that U.S. consumers draw from

global suppliers. For example, the implementation of U.S. antitrust laws

may discriminate in favor of foreign companies. Much of the foreign

investment in the U.S. chemical industry that has taken place has been

via acquisitions of existing U.S. assets by foreign companies. Many of

these acquisitions might have been completed by U.S. companies but for

antitrust laws designed to prevent unacceptable “concentration” of the

domestic industry in the hands of fewer U.S. companies.

In a global economy, however, the unintended consequence of such

restrictions may be to increase the global market power of foreign firms

and the degree of concentration in global markets. It is certainly not clear

in today’s global economy that this kind of antitrust enforcement benefits U.S. consumers.
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OFFICE OF TECHNOLOGY POLICY

Environmental improvement regulatory measures have become ever

more costly. The costs of further improvements will often be even higher

and the benefits less certain. Greater environmental quality gains can be

made at lower costs to members of our society, while maintaining the

competitiveness of U.S. industry, by the consistent use of risk assessments, risk prioritization, and cost-benefit analyses. These techniques

can be used to determine the societal costs and benefits of proposed

regulatory measures and to identify the largest gains that can be had

from the best use of our society’s limited resources.

Many chemical companies are now truly global. Many chemicals are

globally traded, and a growing number of firms operate around the

world and purchase globally. Investment capital will flow to the most

favorable production and distribution sites. Government economic and

social policies directly shape a country’s environment for production.

The profits and rates of return of industries that are capital-intensive,

R&D-intensive, subject to high degrees of government regulation, and

exposed to global competition are particularly vulnerable to the effects of

government economic and regulatory policies. Few U.S. industries meet

this description more perfectly than the chemical industry.

III. COMPETING IN A DYNAMIC WORLD ECONOMY

The decade ahead is likely to be one of rapid changes for the chemical

industry. Some trends affecting the industry seem evident and basic.

But unanticipated political and economic events can wreak havoc with

the accuracy of visions of the future. Forecasts of the competitiveness

environment five to fifteen years hence are admittedly highly imperfect.

Nevertheless, in an ever-changing world, several key factors in addition

to the performance of the U.S. economy and the world economy will

almost certainly have important effects on the U.S. chemical industry.

These include the continuing advance of technology, environmental costs

and product restrictions, the availability of energy, and continuing

changes in the international geography of the consumption and production of chemicals. In turn, these factors will shape the amounts of new

investment and the balance between domestic and foreign investments

by the U.S. chemical industry.
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The Advance of Technology

As the accumulated body of knowledge and technology increases, the

pace of technological change is also expected to speed up. New information technologies and global competitive pressures will likely drive a

more rapid rate of product and process innovations. In addition, pressures to conquer diseases and improve health, create new processes that

reduce emissions, produce environmentally friendly products, and

reduce production costs will almost certainly continue to grow. Given

these health and environmental concerns and global competitive forces,

R&D will become an even more important factor in determining the

competitive strengths of individual companies than it is today.

Product and process advances will continue in every area of chemistry,

with particularly rapid change in biotechnologies and the creation of

new materials to be expected.

Advances in basic science in the fields of chemistry, biotechnology, and

material technology will continue to be the foundation for growth in the

chemical industry. The decade ahead will see new products and processes arising from the intersection of chemical sciences, biology, and

physics, and integration with the enabling technologies of measurement

and computation. The industry will use advanced process science and

engineering to accelerate the commercialization of new technologies and

radically improve existing ones.

Chemical Science, and specifically chemical synthesis, will focus on

unique molecules and the improvement of chemistry and processes

presently used in the industry. The existing chemistries and processes

will be made more environmentally friendly and efficient. Catalysis will

continue to be a major driver for new routes to new and exciting molecules, and new processes. The new or unique molecules will broaden

the functionality of available chemicals and materials, enabling a more

rapid rate of product and process innovation.

Biotechnology will expand in its practical use in industry. Biocatalysts,

produced from enzymes, will provide routes to higher performance

products. Biochemical Engineering will advance in parallel with technology. Efficient processes to convert biomass or purpose-grown feedstock

crops into useful products will develop. The process will be cost effective

for producing chemicals such as unique oils and polymers.

R&D will become an

even more important

factor in determining

the competitive strengths

of individual companies

than it is today.
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OFFICE OF TECHNOLOGY POLICY

Material Science will also experience significant technology advances.

Predication of material properties from the molecular level through the

macroscopic level will lead to new synthesis techniques that will allow

the manipulation of material structures with enhanced products properties. Enhanced performance materials structures will result in categories

such as smart materials, higher temperature materials, biocompatible

systems, and additives for polymers with reduced toxicity.

Process Science and Engineering will provide technology advancements

resulting in reduced cycle times for product and process commercialization, more economic and environmentally friendly processes and products, supply chain integration and operations, agile manufacturing and

delivery capability, integration of process units into common control and

operating schemes, and process technology in reactors, separations, and

other operating units.

Both Basic Science and Process Science and Engineering are supported by

significant advances in enabling technology of Chemical Measurements

and Computational Technology.

Advances in chemical measurements will allow more in-depth understanding that supports developments in chemistry, biotechnology, material science, and process science and engineering. Advances in this area

will result in more precision, accuracy, and sensitivity. Measurements

that were sophisticated a few years ago will be robust enough to be used

routinely in a manufacturing setting with high reliability.

Advances in information and computational technology, with emphasis on

integrated and transactionally current information systems will enhance

operational effectiveness across the supply chains of the chemical industry. It will enable the rapid development of new products and processes

through integration, modeling, and simulation. Computational technology will be advanced for use in areas such as fluid dynamics, molecular

science, process modeling and optimization, and supply chain simulation.

Data sharing and collaboration will occur across geographic locations.

Basic science, coupled with process science and engineering, will provide

the chemical industry with its innovative growth. The enabling technology of measurements and information/computation will play a lead role

in making it happen.

Quantum jumps in these and other technologies that would create whole

new ranges of products and major increases in the demand for basic

Whether by quantum

advances or via a

continuing series of

smaller discoveries,

strong R&D performances

have long been an

important means by

which the U.S. chemical

industry has achieved

both growth rates above

those of the U.S.

economy as a whole and

strong international

competitiveness.
62 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

chemicals — advances comparable to the discovery of plastics — are

possible but not evident at this time.

But whether by quantum advances or via a continuing series of smaller

discoveries, strong R&D performances have long been an important means

by which the U.S. chemical industry has achieved both growth rates above

those of the U.S. economy as a whole and strong international competitiveness. R&D will continue to be a key factor in determining the industry’s

future. There are, however, significant differences in R&D spending trends

within the industry. Pharmaceuticals R&D spending now accounts for over

half (57 percent) of the chemical industry’s R&D spending, which totaled

$18.0 billion in 1994 (Table 5). Pharmaceuticals R&D reached $10.3 billion in

1994, nearly five times the 1981 level of $2.1 billion, advancing at a growth

rate far exceeding the pace of inflation. Over the 1981–94 period pharmaceuticals R&D has ranged from 8.1 cents per sales dollar in 1981 to a high of

12.0 percent in 1992 and a 1994 rate of 11.5 percent.3

The dominance of pharmaceuticals in chemical industry R&D is quite

new. The industrial chemicals segment outspent pharmaceuticals in R&D

in earlier years. But by 1983 rapid pharmaceuticals increases put it in the

lead, and the margin has since continued to widen. R&D spending for

industrial chemicals rose from $2.4 billion in 1981 to $5.1 billion in 1994,

a 113 percent gain. Even so, it was only 28 percent of the industry total,

down dramatically from the 46.0 percent share of 1981. Notwithstanding

its share decline, industrial chemicals R&D spending has increased

relative to sales revenues — from 2.5 percent in 1981 to 4.6 percent in

1991 and 3.6 percent in 1994.

R&D spending by the other chemical products group is relatively small,

14 percent of the industry total. Relative to sales, however, its R&D

spending has risen from 1.1 percent in 1981 to 2.0 percent in 1994.

The fast growth in pharmaceuticals R&D is part of “a virtuous circle.”

High R&D spending has both contributed to, and been facilitated by,

strong profit performance. High R&D investment has produced remarkable product advances that have benefited society and has been a major

factor in the pharmaceutical industry’s strong profit performance. In

High R&D investment

has produced remarkable

product advances that

have benefited society

and has been a major

factor in the

pharmaceutical

industry’s strong

profit performance.

3

 In a more narrowly defined sample, the 1994 annual survey of research-based

pharmaceutical companies conducted by the Pharmaceutical Research and

Manufacturers of America (PhRMA) reports that U.S. pharmaceutical research

and development expenditures were an estimated 19.2 percent of domestic

U.S. pharmaceutical sales plus exports for its member companies.
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OFFICE OF TECHNOLOGY POLICY

turn, strong profit performance has motivated further increases in its

R&D spending. The U.S. pharmaceutical industry leads the world in the

discovery, development, production, and sales of medicinal drugs and is

responsible for about one-half of all new patented drugs reaching the

global market since 1970. The U.S. also holds a commanding lead in

innovation in biotechnology medicines, surpassing both Japan and the

European Union in the number of biotechnology patents and marketed

products.4

Many of the resulting new pharmaceutical products have proven to be

highly cost-effective for society in improving human health. The lives of

an estimated 670,000 patients with coronary heart disease in the U.S.

were saved over the last two decades with the assistance of new cardiovascular medicines. Pharmaceuticals also helped to prevent nearly

Table 5. Research and Development

Research and Development (R&D) Expenditures (In millions of dollars)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Total Chemicals 5,204 6,197 6,792 7,736 8,310 8,664 9,445 10,573 11,383 12,276 14,439 16,421 17,176 17,999

& Allied Products

Industrial 2,393 2,810 2,828 3,057 3,281 3,374 3,531 3,763 3,960 4,272 5,225 5,152 5,004 5,105

Chemicals

Pharmaceuticals 2,064 2,473 2,896 3,310 3,481 3,657 4,095 4,743 5,164 5,366 6,947 8,822 9,653 10,326

Other Chemical 747 914 1,068 1,369 1,548 1,633 1,819 2,067 2,259 2,638 2,267 2,447 2,519 2,568

& Allied Products

R&D Expenditures Relative to Revenues (Percent)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Average

Total Chemicals 2.8 3.3 3.4 3.7 4.1 4.2 4.2 4.0 4.1 4.3 4.8 5.2 5.3 5.0 4.5

& Allied Products

Industrial 2.5 3.2 3.0 3.1 4.1 4.1 3.7 3.3 3.6 3.8 4.6 4.2 4.1 3.6 3.9

Chemicals

Pharmaceuticals 8.1 9.2 10.0 10.7 9.9 9.7 9.5 10.3 10.1 9.1 10.3 12.0 11.8 11.5 10.4

Other Chemical 1.1 1.3 1.4 1.7 1.8 1.9 2.1 2.1 2.0 2.3 1.9 2.1 2.1 2.0 2.0

Products

Source: National Science Foundation, CMA Estimates

4

 Redwood, Heinz. Price Regulation and Pharmaceutical Research. (Suffolk,

England: Oldwicks Press). 1993.
64 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

500,000 stroke deaths and as many as 6 million nonfatal strokes in the

U.S. over this same period.5

 At the same time, outpatient prescription

drugs as a percentage of national health expenditures declined from 7.4

percent in 1970 to 5.5 percent in 1993.6

This virtuous circle of expanding R&D leading to health and costeffectiveness advances will likely continue until broken by a reduction

in profits and rates of return from R&D that causes a slowdown or

reversal in the growth of R&D spending.

Such a reduction in rates of return on R&D could occur through the

natural working of market forces if spending rises to the point where

the pace of new discoveries simply does not merit further increases in

spending. This could happen in a situation where more and more spending is applied to projects with smaller and smaller potential returns until

the incremental additions to R&D costs begin to match or exceed the

resulting increases in profits. But the growth of R&D spending can also

be slowed — or even reversed — by government policies that reduce or

limit profits and rates of return from R&D. Indeed, there is ample evidence to indicate that the caps placed on pharmaceutical prices by

several European governments have lowered returns and markedly

slowed R&D and the pace of new discoveries in several European Union

countries that formerly had strong pharmaceutical industries.7

Research in the industrial chemicals sector also provides breakthroughs

in a very wide range of products and processes that benefit society.

Indeed, many advances in the formulation of new materials emanating

from basic chemical research have been critical to the progress of medical

science. But the profit payoffs to individual industrial chemical companies have not been as large, perhaps because the advances typically make

small, incremental contributions to other products rather than providing

new breakthrough, patentable finished products for delivery directly to

the public. In any event, faced with more intensive global competition

and lower levels of profits and rates of return, industrial chemical proFrom a societal

viewpoint, market

forces alone are

unlikely to produce

optimum levels of

R&D.

5 Brown, Ruth E. and Luce, Bryan R. The Value of Pharmaceuticals: A Study of

Selected Conditions to Measure the Contribution of Pharmaceuticals to Health Status.

(Battelle Medical Technology and Policy Research Center, Washington, D.C.).

March 1990.

6 Health Care Financing Administration. Office of the Actuary, 1995.

7

 U.S. International Trade Commission. Global Competitiveness of U.S. AdvancedTechnology Manufacturing Industries: Pharmaceuticals. (Report to the Committee

of Finance, U.S. Senate, on Investigation No. 332-302 Under Section 332(g) of

the Tariff Act of 1930). September 1991.
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OFFICE OF TECHNOLOGY POLICY

ducers have not expanded their R&D at rates comparable to pharmaceutical industry growth.

It is widely accepted that the returns to society from R&D are generally

greater than the private returns to those who perform it. From a societal

viewpoint, market forces alone are therefore unlikely to produce optimum levels of R&D. If this is so, R&D should be generally encouraged

by governments, not discouraged. There is, however, no practical way to

determine optimum levels of R&D or how government incentives might

reach such an optimum.

Unfortunately, there are some signs that a longer term slowing of both

the growth in industrial chemical R&D spending and changes in research

strategies may well occur. For example, development research may be

seen to offer quicker, more certain payoffs than basic research. In periods

of tough competition and lean profits, companies may put more emphasis on product development expected to yield quick payoffs. This increase is typically at the expense of reduced attention to basic research

that is not related to immediate customer needs and is not expected to

produce profits in the near term.

There is evidence that such a move away from basic research may already be occurring. According to a 1994 CMA survey, its member companies (mostly industrial chemical producers) in 1995 planned to spend

some 74.5 percent of their R&D budgets in “development,” up from the

71.4 percent programmed for 1994 in the 1993 survey. Should this trend

continue to develop, the short-term effects on profitability and competitiveness could be positive, but at the expense of foregone major fundamental breakthroughs and longer term profit and competitiveness gains.

In addition, there is concern that adapting to mounting environmental

and product substitution regulatory requirements drains off financial

and human R&D resources from other more productive uses. This could

particularly affect the industrial chemical sector and contribute to a

decline in international competitiveness.

There are some signs

that a longer term

slowing of both the

growth in industrial

chemical R&D spending

and changes in research

strategies may well

occur.
66 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

Environmental Costs and Product Restrictions

A large, productive R&D establishment is a key component in the longterm competitiveness of the U.S. chemical industry. But successful R&D

programs alone are not enough. U.S.-based chemical production must be

cost competitive. Rising environmental costs pose a threat to the competitiveness of U.S. chemical production, particularly for the industrial

chemicals segment. Pollution abatement and control operating costs —

only a fraction of total environmental costs — have risen dramatically in

recent years and have become a significant drain on profits and rates of

return. Industrial chemical companies’ pollution abatement and control

costs rose from 1.9 cents per sales dollar in 1984 to 3.3 cents in 1993

(Figure 21). For the years 1989–93, total pollution abatement and control

costs for industrial chemicals companies of $14.3 billion slightly exceeded their $14.2 billion total after-tax profits.

Although the rising costs of environmental controls may not yet have

caused major plant shutdowns, environmental costs have been a key

factor in displacing the production of some chemicals — including a

number of dyes and organic chemicals used in dye manufacturing —

exclusively to non-U.S. locations.

Completing the implementation of existing regulations — examples

include the Clean Air Act Amendments of 1990 and corrective actions

under the Resource Conservation and Recovery Act — is likely to push

these pollution abatement and control costs still higher and lead to other

product migrations. In addition, the increasing difficulty and costs of

obtaining permits and satisfying myriad litigants and interest groups

may divert resources from new investments in U.S.-based production

and increase the portion of total investment moving to foreign locations.

New regulations would add to these burdens.

Proposals to ban or reduce the use of “toxic” chemicals embrace hundreds of chemicals, including both basic organic and inorganic chemicals

essential to chemical processes. Advocates presume that “toxic” chemicals can be made unnecessary — and hence eliminated — by the substitution of benign, nontoxic chemicals into products and chemical processes. But in fact, substitutions are often chemically impossible —

examples include the basic chemicals derived from crude oil and natural

gas — or are not economically viable.
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OFFICE OF TECHNOLOGY POLICY

For example, the several hundred chemicals cited by activists for

“reduction in use” typically include several of the eight basic building

block organic chemicals derived from the refining of oil, and from natural gas and coal. Each of these basic building block chemicals, however,

is not only an inevitable product of the refining process but is also an

essential component for the production of thousands of other more

highly refined “downstream” chemicals that, in turn, are essential to

other chemicals and other products. Indeed, there could be no petrochemical industry — nor its consumer products — without these basic

building block chemicals.

Chlorine, the primary inorganic building block chemical, has also

been labeled as “toxic” and is the target of very active efforts by

several groups who are calling for bans on its production and use.

Chlorine and chlorinated compounds, however, are an essential

family of chemicals in perhaps 50 to 60 percent of modern chemistry

and are used in the production of about 85 percent of pharmaceuticals

(Figure 22).

Figure 21. Increasing Cost of Pollution

Abatement (Percent of Sales)
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Figure 22. The Chlorine Chemistry and Product Tree
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Given the irreplaceable status of the chemicals involved, reductions in

the aggregate production or use of broad groups of “toxic” chemicals

from both organic and inorganic sources cannot be accomplished while

maintaining the growth in chemical industry production essential to

support the nation’s production, transportation, communication, and

living standards.

Were these movements to succeed in the United States, chemical production would be forced to shift to other countries. Such reduction or elimination and the dislocation of production from the United States would

result in enormous costs to our society.

Gradual changes in the composition of chemical production are likely,

however. Continuing research, mostly sponsored by the chemical industry, may identify some individual chemicals meriting tighter controls or

may even identify some chemicals that should not be manufactured or

used. And ongoing research may also discover some new alternative

products that are more environmentally friendly than products currently

in use. Over time, environmental factors and the advance of knowledge

may alter to some degree the composition and global locations of production. But the changes resulting from continued expansion of sciencebased knowledge about chemicals will be evolutionary and will not

displace modern chemical production and its benefits from the United

States.

A less dramatic, more subtle, but no less important threat to the

industry’s competitiveness is the future course of the nation’s efforts to

improve the environment through additional new regulations. The

industry sees itself at a crossroads. The American public and American

industry have spent billions of dollars for environmental improvement

— much of that spending by the chemical industry. The governmental

approach to environmental improvement has often been uncoordinated,

responding to each new concern without much consideration of the

benefits to be achieved and the costs to be borne.

Nevertheless, much has been accomplished. Emissions of chemicals to

the air, land, and water have been sharply reduced, pollution prevention

strategies have been adopted, and many other gains have been made.

Although there have been numerous mistakes and inefficiencies, air,

land, and water that were unquestionably polluted often offered obvious

cleanup targets, and the cleanup measures taken provided equally

apparent demonstrations of improvements.
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Now, however, government and industry face a time when the easier,

less-costly innovations with the largest payoffs have largely been accomplished. The cost curve for added improvements gets steeper from here

on. Further pursuit of emission reductions and some other environmental goals will be increasingly costly but will yield smaller and smaller

gains of uncertain benefit to human health and the environment. Moreover, these increasing costs and declining returns will be encountered in

an era of an intensifying struggle among producers for world chemical

markets.

There is, of course, no identifiable “correct level” of spending for environmental, health, and safety improvements through government regulation and industry initiatives such as the Responsible Care® program. But

given the progressively higher costs of further regulatory measures, the

industry believes it is now critical — as never before — that careful

assessments be given to new environmental regulations that are intended to continue the advances that have been made. The goal must be

to focus scarce resources on the greatest threats and to preserve and

enhance a high standard of environmental protection while providing

balance and efficiency.

New measures should not be implemented absent a careful assessment

to establish that the societal benefits justify, or are at least reasonably

related to, the societal costs. These assessments should provide realistic

estimates of the expected economic and social benefits, including the

reductions of risks to human health and the environment. The assessments should also identify the offsetting costs — both economic and

social — to society. Measures that yield a net benefit to our society and

make effective use of our society’s limited resources should be adopted,

giving industry the maximum flexibility in deciding how to achieve the

objectives most efficiently. Measures that do not yield a net benefit to our

society and do not make the most effective use of its limited resources

should not be adopted.

With few exceptions, environmental regulatory measures increase the

chemical industry’s operating costs and lower its ability to fund R&D

and P&E investments. In the end, of course, these environmental compliance costs are not borne by “chemical companies” but inevitably are

passed on to individual members of our society in a variety of ways.

These include higher prices to consumers, lower wages to workers,

lower profits that lead to diminished investment, lower productivity

growth, and lessened international competitiveness for U.S.-based

production that, in turn, results in job displacements.

Measures that yield a

net benefit to our society

and make effective use

of our society’s limited

resources should be

adopted, giving industry

the maximum flexibility

in deciding how to

achieve the objectives

most efficiently.
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But when environmental measures do yield a cost-effective net benefit to

our society, the chemical industry must consider the resulting cost increases and competitiveness effects to be a necessary part of the cost of

doing business. Moreover, environmental improvement is a global

problem. When the United States adopts sensible, cost-effective measures that benefit U.S. society, sooner or later, other nations will likely

adopt something similar, improving world standards while keeping

some degree of international parity in environmental costs. Governments

in competitor countries are, however, much less likely to follow a U.S.

lead that is costly but provides little or no net benefit to our society.

Moreover, it should be recognized that environmental advances do not

come solely from regulation by governments. The Responsible Care®

initiative, first developed by the Canadian chemical industry, is now

being implemented in 38 countries. The U.S. chemical industry and the

chemical industries of other major chemical producing countries are

active in advancing international acceptance of the Responsible Care®

initiative as an effective, efficient way to achieve international environmental, health, and safety gains.

Effective, efficient use of limited resources to improve the environment

is not just a matter of interest to the chemical industry and other U.S.

industries. According to U.S. government data, the nation in 1993 spent

about 1.72 percent of its GDP on pollution abatement and control — only

one part of environmental costs. Pollution abatement and control costs

have been projected by EPA to reach 2.83 percent of GDP by the year

2000, a significant portion of the nation’s total output of goods and

services. Every member of the economy has a stake in ensuring that the

costs to our society of new environmental initiatives are merited by the

benefits.

The Availability of Energy

Chemicals is an energy-intensive industry. Global supplies of energy in

1995 are ample and prices are relatively low. A marked increase in world

energy prices relative to other goods and services would raise the costs

and prices of chemicals relative to other products, with resulting downward pressures on chemical production and profits. Higher energy prices

would also increase the competitive advantages of those producers that

have access to inexpensive energy supplies and thus encourage additional chemical industry investment in energy-rich countries.

Every member of the

economy has a stake in

ensuring that the costs

to our society of new

environmental initiatives

are merited by the

benefits.
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A dramatic increase in energy prices in the decade ahead cannot be ruled

out but does not now seem likely. There is, however, another energyrelated potential threat to U.S. chemical production because of fears

about “global warming.” There is worldwide concern that global temperatures may be rising as a result of man’s activities. The potential

threat is from carbon dioxide emissions from the burning of fossil fuels

and from other emissions. Although it is uncertain that global warming

will actually occur, as a member of the UN Framework Convention on

Climate Change, the United States has pledged to reduce its “greenhouse

gas” emissions to 1990 levels by the year 2000. Moreover, should the

existence of a global warming problem and the linkage of fossil fuel

consumption to that problem be confirmed, it may be seen as necessary

to continue to control carbon emissions and perhaps to further reduce

them below 1990 levels.

The chemical industry is a major consumer of energy. Powering chemical

industry production processes, an activity that generates carbon emissions, accounts for about 3.5 percent of total U.S. energy consumption.

Efforts to reduce U.S. carbon emissions would likely have significant

effects on U.S. chemical production. In a favorable domestic and world

economic climate, the volume of U.S. chemical industry output needed

to satisfy domestic and export needs should increase about 3 percent

annually, perhaps more if major new chemical-based materials are

developed. In recent years the industry has made significant gains in

energy efficiency, decreasing the energy consumed for fuel and power

per unit of output by about 40.1 percent over the 1974–94 period. But the

potential for further efficiency gains is limited. It is highly unlikely that

energy efficiency gains would be able to offset the increased energy

consumption required to power the chemical production increases

foreseen in an environment of good U.S. and world economic growth

rates.

Determined action to constrain or reduce U.S. energy consumption and

carbon emissions through taxes or by other means would clearly have

dramatic effects, significantly reducing U.S.-based chemicals production.

Unilateral U.S. action — or actions that involved only developed countries — would simply act to stymie reinvestment in the United States and

other developed countries and to accelerate the growth of investment

and production in developing countries, without achieving global emission reductions. But a difficult-to-achieve global agreement that included

developing countries in emission reduction goals would also likely

sharply alter both the amount and the distribution of global chemical

production.
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Changing Geographic Composition of Production and

Consumption

The geography of world chemical consumption and production is changing rapidly. The markets for chemicals in major developed countries are

maturing. Economic growth in most developed countries is expected to

be only moderate, and their demand for chemicals is expected, on average, to grow only slightly faster than their relatively slow economic

growth rates. In contrast, many developing countries are industrializing

and growing rapidly. Moreover, the demand for chemicals in countries at

early stages of their economic development may increase at two or more

times their economic growth rates. Industrializing countries that may

experience rapid growth in consumption of chemicals include China,

India, Indonesia, the four “Asian Tigers” (South Korea, Taiwan,

Singapore, and Hong Kong) and several Latin American countries.

The needs of developing countries will provide growing export opportunities for developed countries. But every developing country wants to

build its own chemical industry for a variety of reasons noted earlier.

This implies a continuing global diffusion of chemical production and

consumption among new producers. As more and more countries industrialize, the shares of global chemical production and consumption held

by the current major producer countries — the United States, Western

Europe, Canada, and Japan — will likely decline.

In this kind of environment, how does the U.S. chemical industry —

defined as U.S.-based R&D and production, regardless of the nationality

of its ownership — survive, grow, and prosper? How can U.S.-based

R&D and production maintain strong global competitiveness?

U.S. Chemical Industry Competitiveness and Foreign

Investments

An important — though seemingly anomalous — conclusion of this

study is that a major factor in the current competitiveness of the U.S.

chemical industry is its existing strong foreign investment position.

There is every indication that foreign investment will be even more

critical to the industry’s future competitiveness. Why is this so? How can

foreign investment aid the competitiveness of U.S.-based R&D and

production?

Foreign investments

have provided economies

of scale to the U.S.

industry, allowing larger

efficiency gains and

R&D expenditures than

would otherwise be

possible.
74 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

As noted earlier, foreign investments now enhance U.S. competitiveness

by expanding export opportunities and by enlarging the sales and profits

base against which R&D and other fixed costs of U.S.-based companies

can be amortized. Foreign investments thus have provided economies of

scale to the U.S. industry, allowing larger efficiency gains and R&D

expenditures than would otherwise be possible.

What role will foreign investment play in the industry’s competitiveness

in the years ahead? Most of the foreign investments of U.S.-owned

chemical companies are now in other developed countries — Europe,

Canada, Japan — where chemical markets are maturing. The growth

potential of investments in these developed country markets is positive

but limited. Increased foreign investment in other new, fast-growing

markets is essential if the U.S. chemical industry is to maintain its future

competitiveness.

Looking to the future, the need for a geographic realignment of U.S.

company resources seems evident. More than three-fourths of the $51.3

billion total 1994 book value of the U.S. industry’s direct investments is

in Europe, Canada, and Japan. Less than 15 per cent is in 11 fast-growing

countries — Mexico, Brazil, Argentina, Venezuela, South Korea, Taiwan,

China, India, Indonesia, Philippines, Thailand — with high economic

growth potential that have some 2.8 billion people, more than half of the

world’s population.

A trend toward geographic reallocation of industry investment is already

evident. U.S.-based multinational chemical companies — those headquartered in the United States with affiliates in foreign countries —

continue to make the bulk of their new plant and equipment investments

at home. But changes in the distribution are occurring.

According to a 1994 CMA economic survey, the larger U.S.-based member companies — those with annual U.S. sales over $1 billion — put 72.6

percent of 1994 P&E spending in the United States but expect that by 1999

the U.S. share will decline to 64.8 percent. The smaller companies — those

with annual sales less than $1 billion — put 86.9 percent of their 1994 P&E

spending in the U.S. but see that declining to 80.5 percent in 1999.

The CMA survey also shows a projected decline in the portion of total

new investment going to the more mature foreign markets — Western

Europe, Canada, Japan — and increases in the faster growing markets,

including the Asian NICs (Singapore, Taiwan, Hong Kong, South Korea),

other Asian countries, Eastern Europe and countries of the former Soviet

Increased foreign

investment in new,

fast-growing markets

is essential if the U.S.

chemical industry is to

maintain its future

competitiveness.
The U.S. Chemical Industry 75

OFFICE OF TECHNOLOGY POLICY

Union, and Latin America. For example, according to the 1994 CMA

economic survey, the larger U.S. companies (those with annual U.S. sales

over $1 billion) put 12.2 percent of their total 1994 investment in Europe

and 1.9 percent in Canada. But the survey indicates that by 1999, Europe

would get only 8.5 percent, and Canada only 1.4 percent, amounts that

may maintain existing output levels but probably would not support

major production increases in those markets.

Major multinational chemical producers headquartered in other countries will likely make similar investment reallocations. Because of the

maturing of their own domestic markets, they will also shift increasing

portions of their total investment in new P&E from domestic production

to foreign production. For example, many analysts feel that few, if any,

new petrochemical plants will be built in Europe. Instead, major European companies will put an increased portion of their investment in

foreign production locations and markets. In the past, the bulk of the

foreign investments by European producers was in other developed

countries, much of it in the United States. But in the future, the flow of

investment between major producer countries will likely decline in

relative importance. That is, increasing portions of the total foreign

investment of other major producer countries will go to developing

countries, declining portions to the home country and to the U.S. and

other developed country markets in which they are already invested.

New Foreign Investment Strategies and Problems

Continuing rapid industrialization and strong economic growth rates in

many developing countries should cause world trade in chemicals to

continue to rise considerably faster than world chemical production,

perhaps twice or more as rapidly. This will provide export opportunities

for established producers. Export markets should be particularly strong

for specialty chemicals not yet produced in countries that are in the

earlier stages of developing their own chemical production capabilities.

But foreign investments will likely be even more critical than exports to

the longer term competitiveness of producers in developed countries.

How will foreign investments be allocated? How will choices be made?

What will be the limiting factors? Continuing the trends of recent years,

most analysts expect the highest economic growth rates — and the more

rapid growth of chemical needs — in Asian-Pacific countries. This rapid

growth is expected to result both from industrialization and from high

population growth rates. The population of the Asia-Pacific region, apart

As a result of population

gains, industrialization,

and rising per capita

consumption, the AsiaPacific demand for

chemicals is expected

to grow at twice the rate

of developed country

markets.
76 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

from Japan, is expected to increase by 15 percent — by some 270 million

people — in the decade ending with the year 2000, more than double the

percentage growth for the United States and Western Europe. Moreover,

growth in the high consumption 20–40 age group will account for much

of Asia’s population increases. As a result of population gains, industrialization, and rising per capita consumption, the Asia-Pacific demand for

chemicals is expected to grow at twice the rate of developed country

markets — perhaps significantly faster in some of these countries.

But the potential for more rapid economic growth in Latin American

countries is also high. In addition, there is significant economic recovery

potential in the Eastern European countries and the countries that formerly made up the Soviet Union.

Competition among established producers for export and investment

footholds in some of these developing country markets will likely grow.

The United States has strong economic and cultural ties with Latin

America and location advantages compared to some other producers.

These already existing U.S. export and investment advantages could be

further increased by expansions of the NAFTA to include countries in

Central and South America.

Japan may have similar cultural and locational advantages in exporting

to many developing Asian countries. To date, however, Japan’s large and

sophisticated chemical industry has not been as export-oriented as many

of its other manufacturing industries. Indeed, in 1994 only about 10

percent of Japan’s chemical production was exported, less than the 15

percent share exported by U.S. chemical manufacturers. In essence,

Japan’s chemical industry has focused primarily on supporting Japan’s

large manufacturing sector and on other domestic needs. Neither has the

Japanese chemical industry in the past been a very aggressive investor in

foreign markets. This may be changing, however.

Western European producers — particularly Germany — probably have

cultural and location advantages in Eastern Europe and countries of the

former Soviet Union and can be counted on to move aggressively to

export to and invest in those markets. European producers, however,

may be better able to serve growing needs of their eastern neighbors by

exports than can other suppliers. Recognizing this, they may choose to

use their limited direct investment capital primarily in other markets —

such as Asia — where they do not have similar export advantages.
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OFFICE OF TECHNOLOGY POLICY

Rapid growth and industrialization in many developing countries

should provide not only many opportunities for goods exports and direct

equity investments but will also create many opportunities for the sale

and licensing of technology to foreign affiliates.

Given these potential payoffs, competition may be stiff among established producers to be first with direct investments in the best new fastgrowth markets. Such competition could lead to a capital shortfall for

individual companies. But today many developing countries pose high

economic and political risks. These risks and the many other barriers to

foreign investments (e.g., flawed legal systems, lack of intellectual

property protection, export requirements, capital repatriation restrictions,

etc.), rather than lack of capital are probably the more important restraints on increased investments in most developing countries.

Clearly, the risks and barriers associated with investing in many of these

new markets remain high. Political upheavals and cyclical downturns or

faulty economic policies could cut or reverse economic growth rates and

jeopardize reform movements, discouraging new foreign investments.

Certainly, uninterrupted political and economic advances by all — or

even most — of these growth markets are not likely. But over the longer

term, if confidence increases in the political and economic futures of

even some of the larger countries such as China, Indonesia, and India,

the scale of capital requirements could exceed anything seen before. In

such a climate both financial and human capital for U.S. chemical industry investments would likely be strained and probably inadequate to fill

the needs of all the desirable projects.

Financial capital may be a particular problem. Funding expansions is

often difficult for capital-intensive industries. In recent years the growth

of U.S. chemical industry direct investment to all destinations abroad has

been quite modest — significantly slower than the growth of foreign

investments in the U.S. industry. The flow of new investment capital to

fast-growth developing countries has also been quite modest. For example, of the $6.85 billion 1992–94 gain in the book value of foreign

chemical investments by U.S. companies, only $406 million was in South

America and, excluding Japan, the book value of chemical direct investments in Asia actually declined by $266 million.

Moreover, most of the rather modest growth in U.S. chemical industry

foreign direct investments that actually did occur was through reinvested earnings — reinvestments in the host country of the profits made

in that country. Indeed, over the seven years 1987 through 1993, reinCompetition may be

stiff among established

producers to be first with

direct investments in the

best new fast-growth

markets.
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OFFICE OF TECHNOLOGY POLICY

vested earnings provided an amount equivalent to 84 percent of the net

increase in the book value of U.S. chemical industry foreign investments.

This heavy reliance on reinvested earnings tends to an expansion of

investments in existing foreign locations, rather than to investments in

new areas.

Given these tendencies, a shift of investment focus from developed to

developing countries will likely put increased demands on the reinvestment of industry profits, including the profits from domestic operations.

It will likely also lead to more partnering with local foreign operations —

more joint ventures, cooperation agreements, licensing, and other arrangements that reduce the need for U.S. investment capital. These

arrangements, however, also reduce downstream control and returns.

The industry’s investment capital problems are likely to be particularly

difficult for the highly capital-intensive industrial chemicals segment, which

in 1994 had $199,000 of fixed capital per employee, compared to $118,000 per

employee for pharmaceuticals and $109,000 for other chemical products.

New industrial chemical plant construction often requires very large

amounts of money — hundreds of millions of dollars — and several

years to complete. In addition, the return on investment has typically

been significantly lower for industrial chemicals than for pharmaceuticals.

Expanded foreign investments pose less of a potential problem for the

more R&D-intensive, more profitable pharmaceutical industry. Establishing foreign production for pharmaceuticals is typically less costly than

construction of major industrial chemical production facilities. Foreign

investments are a relatively more efficient way to leverage the returns

from existing levels of pharmaceutical R&D.

To summarize, the growing portion of total plant and equipment investment that is being allocated to foreign locations need not signal a coming

decline in U.S. competitiveness. On the contrary, it seems critical to

maintaining the competitiveness of U.S.-based production. Indeed, in a

period of sustained global economic advance, the global opportunities

for foreign direct investments in chemical production facilities may well

substantially exceed the financial capital and other resources available to

established, developed country chemical companies. In that situation,

finding the financial and human capital to provide the same investment

footholds in the new, fast-growing markets that it now enjoys in the

more mature, developed country markets is likely to be one of the U.S.

chemical industry’s most difficult and critical problems. These limitations are likely to particularly affect the capital-intensive, less profitable

industrial chemicals portion of the industry.

A shift of investment

focus from developed to

developing countries will

likely put increased

demands on the

reinvestment of industry

profits, including the

profits from domestic

operations.
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IV. MAJOR DETERMINANTS OF FUTURE

COMPETITIVENESS

This paper seeks to identify the most important of the many interact

ing factors that will determine the future competitiveness of U.S.-

based chemicals R&D and production. In the description that follows,

the determining factors are separated into those that are “internal” —

under the control of individual companies — and those that are “external” — those over which companies have no control. First, however, a

description of the characteristics of an internationally competitive U.S.

chemical industry in the period five to ten years hence is provided.

Defining “Success” in the Next Decade

In a world economy that is experiencing rapid change and a continued

“globalization” of production, what will likely be the indicators of an

“internationally competitive” U.S. chemical industry five to ten years

from now — in the years 2000 to 2005?

In a world of generally good economic growth rates, and one in which

many developing countries have high growth rates and are striving to

build their own production capabilities, the U.S. shares of world production and world exports of chemicals will likely be smaller than today’s

shares. A major shift in the locus of world chemical production may

well now be occurring, with diminishing portions in Europe and North

America and rising portions in Asia and, perhaps, in South America. This

need not, however, be indicative of a loss of international competitiveness of U.S.-based production by 2005. Rather, a shift in the locus of

chemical manufacturing may be the inevitable result of the rapid growth

of the production and consumption of goods and services and the rise of

living standards in many developing countries — events that U.S. policies have helped to forge.

In that kind of environment, the U.S. chemical industry will be even

more globally oriented than it is today, and a strong, internationally

competitive U.S. chemical industry — defined as U.S.-based chemicals

R&D and production — would likely be evidenced by:

■ domestic production volume growth averaging around 3.0

percent annually, modestly above the rate of real GDP growth;

■ relatively stable total chemical industry employment, with

productivity gains roughly equal to production growth;
80 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

■ export growth of about 8 to 12 percent per annum, well above

world economic growth rates, but reflecting strong participation

in the growth of world chemical trade;

■ continued strong trade performance, with trade surpluses

somewhat above current levels and growing modestly;

■ exports and imports both rising percentages of total U.S.

industry shipments;

■ U.S. shares of world chemical exports and imports that, while

gradually declining, are declining in parallel;

■ strong levels of domestic P&E spending to support continued future

domestic productivity growth and output expansion, but

coupled with more rapidly rising amounts of investment in

foreign locations, particularly in markets with high growth

potential;

■ rising portions of total U.S. industry income from foreign

investments and the licensing of U.S. technology, resulting in

continued, modestly growing U.S. surpluses on chemical

industry “services” trade;

■ increasing expenditures for R&D, with the bulk of R&D

continuing to be performed in the United States;

■ appropriate balance between basic and applied research,

resulting in an enlarging stream of new products and processes

and continued U.S. technological leadership;

■ environmental costs that, while continuing to rise in dollar terms

to meet increasing environmental standards, level off and begin

to decline relative to sales; the decline relative to sales occurs as a

result of improved regulatory policies and processes and through

increased flexibility and cost-effectiveness allowed companies in

meeting environmental goals.

There is one additional indicator of a strong U.S. industry that is necessary to achieving other key indicators:

■ profit levels and rates of return must be adequate to motivate the

required high levels of R&D and domestic investment, as well as to

provide the capital for growing amounts of foreign investments.
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The U.S. chemical industry’s profitability and its future competitiveness

will in large measure be determined by its own decisions — by decisions

on internal factors that are within the direct control of the industry. But

its competitiveness will also be very much determined by the external

environment — by factors that are not within its direct control.

Critical Industry Choices Affecting International

Competitiveness

Innumerable management choices made in thousands of U.S. companies

will in large measure shape the future competitiveness of the U.S. chemical industry. But a few factors seem particularly critical:

■ Industry growth strategies;

■ Costs of production;

■ P&E Investment amounts and locations; and

■ R&D amounts and strategies.

Growth Strategies

Faced with a maturing domestic market, some U.S. chemical companies

have sought growth by diversification — by acquiring other companies

to broaden their product lines and increase sales. Generally, the diversification strategy failed, and the recent trend has been to sell off many

components of businesses not closely related to a company’s central

product line to allow management to concentrate on the company’s “core

competencies.” In an evermore competitive global economy, it seems

likely that this concentration on enhancing core competencies will

continue.

Major technological breakthroughs that result in large increases in the

total domestic consumption of chemicals could provide dramatic new

growth opportunities in the decade ahead, but do not seem likely. In the

absence of such technological breakthroughs, although individual companies will battle for greater U.S. market share, the major source of future

growth for most companies — and the major source for the industry as a

whole — must be foreign markets. Such an expansion will be essential in

part to provide a growing revenue base over which to amortize the

The U.S. chemical

industry’s profitability

and its future

competitiveness will

in large measure be

determined by its own

decisions.
82 The U.S. Chemical Industry

OFFICE OF TECHNOLOGY POLICY

increasing cost of the R&D that, in turn, is essential to develop the new

products and processes necessary to maintain international competitiveness.

In part, this expansion into foreign markets can be accomplished by a

growth of exports from the United States. In the past, some U.S. chemical

producers have looked on export markets primarily as outlets for excess

production when the U.S. economy was slow but neglected these markets when strong U.S. economic growth kept the domestic demand for

chemicals high. In today’s global economy, however, foreign markets

cannot be seen as residuals but must be part of long-term strategies.

But many large foreign markets cannot be adequately served simply by

exporting from the United States. For the most part, competing successfully in major foreign markets will require investments in production

facilities in those key markets; investments that, in turn, will enhance

exports from the United States. There is thus a seeming anomaly — a

large expansion of U.S. foreign investments is essential to sustained

strong U.S. export performance and to the continued competitiveness of

the U.S. chemical industry.

Shortfalls of financial and human capital will likely make full representation in new foreign markets difficult. This may lead to increased use of

joint ventures and various forms of cooperation agreements with companies in the host countries.

Costs of Production

There are many reasons to believe that competition will continue to

intensify in the years ahead. Global competition is already tough and the

technology and efficiency of producers in other developed countries

continue to improve. Moreover, with the rapid addition of new producers in developing countries, if global supplies expand more rapidly than

global demand, producers in those countries that have low-cost energy

supplies, governmental subsidies, or other forms of production incentives will provide particularly difficult competition.

To survive, grow, and prosper in the global economy, the costs of U.S.-

based production will have to be favorable compared to producers

around the world. Only part of the costs of U.S.-based production are

controllable by individual companies. Many costs — taxes in many

forms, the cost of capital, costs of environmental controls — are determined by government or other external factors. But remaining a low-cost

In today’s global economy,

foreign markets cannot

be seen as residuals but

must be part of longterm strategies.
The U.S. Chemical Industry 83

OFFICE OF TECHNOLOGY POLICY

producer nevertheless will require that companies make many decisions

correctly about those factors that are under their control. Surviving and

prospering will, for example, likely require continuing “restructuring” or

“re-engineering” to cut costs and increase profitability as well as to adapt

to changes in customer needs and to changing competition.

Restructuring in the form of people-cutting to achieve profit enhancements can have strong immediate effects on profits. But personnel reductions cannot be pursued indefinitely. Moreover, other kinds of efficiency

gains usually can be copied by other producers and offer only temporary

competitiveness advantages. In today’s highly competitive environment,

adding greater value to the product than that added by competitors is

now a key strategy goal of many companies. R&D that provides new

products and processes is one route to adding greater value. Another is

evaluating and adapting to changes in the market place. Change is, of

course, not new to the chemical industry. But “globalization” implies

increased competition that generates a more rapid pace of change.

Moreover, it requires attention and response to global — not just domestic — changes in customer demands and competitor strategies.

Making the Right Investment Amount and Location Choices

Making the right investment choices — decisions about timing and

amounts, choices about adding new capacity vs. modernizing existing

capacity, and many other investment choices — have always been critical. Typically, the industry has invested when it had money — when

profits were high. Many companies thus invested at the same time, with

resulting capacity growth subsequently outpacing demand. But now the

choices also must often include the appropriate profit-maximizing split

between domestic and foreign investment. Difficult decisions must also

be made about the alternative locations of foreign investments. Some

foreign countries offer potentially higher rates of return but also may

involve larger economic and political risks than investments in the

United States or in other foreign locations. Again, the focus of investment strategies must be global — not just domestic. For some companies

this may require new information and skills.

Making the Right R&D Amount and Composition Choices

High levels of R&D investment have made the pharmaceutical segment

of the U.S. chemical industry a profitable one and a world leader in
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health-improving technical breakthroughs that have been cost-effective

for U.S. society. High levels of pharmaceutical R&D will continue as long

as rates of return are sufficient. But a nonstop flow of new products and

processes is also essential to continued strength of the other segments of

the U.S. chemical industry.

Ability to fund the escalating costs of R&D at levels necessary to retain

industry leadership is ultimately determined by industry profitability. R&D

spending is a form of investment and, as with investments in plant and

equipment, R&D budgets inevitably are affected by profits. Profit shortfalls

put downward pressure on total R&D budgets and tend to press the balance

of spending away from “pure” or fundamental research that offers large but

uncertain long-term payoffs and toward “applied” research that offers

less uncertainty in return for smaller, quicker results. Rising R&D costs may

also provide an important motivation for mergers and joint ventures and

other forms of cooperative arrangements among companies. The result

may be fewer but larger companies and perhaps some reduction in the

total amount of R&D resources as a result of the consolidation.

None of the three major segments of the U.S. chemical industry is likely

to remain internationally competitive without the technology leadership

provided by sustained global R&D leadership. But while strong R&D

performance is a necessary condition to continued competitiveness of the

U.S. chemical industry, it is not a sufficient condition. New technologies

are now easily transferred to foreign production locations. At best, new

technology typically provides only a brief advantage to production in the

technology-originating country. Strong R&D performance alone will not

sustain production in a country that has an unfavorable production cost

environment.

External Factors Determining Chemical Industry

Competitiveness

The ability of individual U.S. producers to compete successfully in a

global economy will be only partly determined by internal factors —

by individual company decisions. Many external factors beyond

management’s control will also be critical. These include:

■ the domestic U.S. economy and U.S. economic policies;

■ the world economy;

■ export and investment access to foreign markets;

Ability to fund the

escalating costs of R&D

at levels necessary to

retain industry

leadership is ultimately

determined by industry

profitability.
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OFFICE OF TECHNOLOGY POLICY

■ global protection for intellectual property; and

■ U.S. regulatory policies.

The Domestic Economy and U.S. Policies

Because the United States will remain its single largest market, strong

sustained economic growth in the United States and a resurgence of the

competitiveness of U.S. manufacturing are both important to the U.S.

chemical industry. Economic policies that promote those goals are therefore of great importance to the industry.

Domestic economic policies will also directly influence the competitiveness of U.S.-based chemicals production in both U.S. and foreign markets. For example, energy and tax policies will do much to affect U.S.

production costs, international competitiveness, profits, and rates of

return on investments in the United States and, therefore, company

choices between investments in U.S.- and foreign-based production.

Most important, however, is the overall business climate that results

from the web of government laws and policies. Only a profitable U.S.

chemical industry can generate the capital needed to fund the needed

R&D and domestic and foreign investment. Tax laws have particularly

powerful effects on the amounts and location of new investments and

R&D spending. Fundamental but difficult-to-achieve changes in U.S. tax

laws — changes that, for example, would eliminate the double taxation

of corporate earnings and raise U.S. savings rates — would do much to

stimulate the new investment and R&D spending required to maintain

the competitiveness of U.S.-based production in an increasingly competitive global economy.

The World Economy

Increasingly, success of the U.S. chemical industry will be determined by

its performance in the global marketplace. A rapidly growing world

economy will aid the competitiveness of U.S.-based production. Growth

that raises global demand in rough parallel with the growth of supplies

will help to maintain profitability at levels that facilitate additional

foreign investment. Good global growth rates will also encourage the

reduction of remaining barriers to trade and investment.
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OFFICE OF TECHNOLOGY POLICY

Export and Investment Access to Foreign Markets

As foreign markets become relatively more important to the success of

the domestic industry, the importance of access to foreign markets will

increase. Despite recent gains, many impediments to exports and investments remain — particularly in developing countries. Continued lowering of these barriers, achieved through global, regional, or bilateral

agreements, is essential to the continued strength of the U.S. chemical

industry.

Global Protection for Intellectual Property

In an intensely competitive world, successful R&D resulting in a continuing stream of new products is essential to U.S. competitiveness. But

the returns from R&D are reduced by unlicensed copying of innovative

products and processes — the theft of intellectual property that was

generated at high costs to those who initially performed the R&D. As

more countries increase their chemical production, the potential for

intellectual property theft will increase. As the science and technology

edge of U.S. companies becomes more and more important to their

international competitiveness, adequate global protection of intellectual

property will become ever more critical.

U.S. Regulatory Policies

As global competition becomes tougher and tougher, the costs of environmental and other U.S. regulatory policies will become more important. The burden of environmental costs has become particularly significant for the industrial chemicals segment of the chemical industry and

weighs heavily on profits and investment decisions. Continuation of the

trend of increases in environmental costs relative to sales will further

decrease the competitiveness of U.S.-based production and further

increase the portion of total investment allocated to foreign production,

particularly in the case of industrial chemicals.

In the pharmaceuticals segment, compliance with increased regulatory

requirements has lengthened the average drug development and approval time, increasing costs and delaying the introduction of beneficial

new products. The United States continues to lag behind other countries

in the timing of new drug approvals.

As the science and

technology edge of U.S.

companies becomes more

and more important to

their international competitiveness, adequate

global protection of

intellectual property

will become ever more

critical.
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OFFICE OF TECHNOLOGY POLICY

Rising regulatory costs have other effects as well. Beyond measured

dollar costs, there are also opportunity costs in regulatory compliance —

for example, diversions of limited company resources from other P&E

and R&D investments.

Two steps are essential to achieve the greatest environmental gains while

minimizing the effects on the competitiveness of domestic investment

and production. First, ensure that the economic and social benefits of

new regulations to our society exceed the economic and social costs.

Second, when additional regulation is merited by expected net gains to

society, avoid the use of “command and control” regulations that specify

how goals must be met. Instead, allow industry maximum flexibility in

determining how to meet the standards set by regulations. This will

enhance the efficiency of environmental improvement, minimize its cost

to our society, and help to maintain the international competitiveness of

U.S.-based chemical R&D and production.

Peering into the Future

The chemical industry is one of the nation’s strongest and most internationally competitive industries. Large accumulated investments in

technology and production facilities and several other major strengths

ensure that U.S.-based chemical R&D and production have significant

staying power and will not erode quickly.

The world is changing rapidly, however, and given the essential role of

chemicals in the production of modern goods and services, every developing nation gives high priority to building its own chemical industry.

Thus, the “globalization” of the chemical industry — the international

diversification of chemical R&D and production — will continue. As a

result, the competition for U.S. and world markets will continue to

intensify and the pace of technological change will likely increase. In

such an environment, complacency or self-satisfaction are likely preludes

to decline, if not demise. With the rapid industrialization of many developing economies, chemical production in the United States and other

current major producer countries will almost certainly be a smaller

portion of total world production ten years from now than it is today.

How much smaller is, however, a key question. A modestly declining

U.S. portion of world chemical production and trade need not signal a

decline in U.S. competitiveness but may simply represent a smaller U.S.

piece of a bigger world production and consumption pie, with larger

When additional

regulation is merited by

expected net gains to

society, avoid the use of

“command and control”

regulations that specify

how goals must be met.
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OFFICE OF TECHNOLOGY POLICY

production and consumption for the United States as well as its competitors.

To survive and grow, major U.S. and foreign chemical companies will

have to compete globally, selling — and often investing and producing

— in markets around the world. Increasingly, the United States will be

competing with other countries to host chemical R&D and production.

The benefits of an internationally competitive U.S. chemical industry to

the U.S. economy make it critical to keep the industry strong. In an era of

tightening competition, the margin for error in both company decisions

and government policies will be narrower than ever before.
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BIBLIOGRAPHY

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Selected Conditions to Measure the Contribution of Pharmaceuticals to Health

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Dimes, Joseph et al. New Drug Development in the United States from

1963–1964. Clinical Pharmacology and Therapeutics (55) 609–622, 1994.

Health Care Financing Administration. Office of the Actuary, 1995.

Redwood, Heinz. Price Regulation and Pharmaceutical Research. (Suffolk,

England: Oldwicks Press). 1993.

U.S. International Trade Commission. Global Competitiveness of U.S.

Advanced-Technology Manufacturing Industries: Pharmaceuticals. (Report to

the Committee of Finance, U.S. Senate, on Investigation No. 332-302

Under Section 332(g) of the Tariff Act of 1930). September 1991.