p.1 

OAR Box 1669 

Prepped by Charmelle Mathews 

Document Number: 

ffijto) 11-1-4 

Docket Number: 

A-98-13 

Printed 9/23/2008 9:36:49 AM Sheet 96 of 110 
- i . •* 

//-fJrJ? 

P.2 

Chemical) I'M 

Chemical Bond Archive I SOCMA Home Page 

The Changing Competitive 

Landscape ofthe Chemical 

Industry 

By Phillip J. Speed 

Corporate Finance, 

The Dow Chemical Company 

The chemical industry faces significant challenges as it enters the 

new century. The once almost collegial competitive atmosphere has 

become a fierce battleground as companies strive to stake out 

profitable positions in the emerging global marketplace. Intense 

merger and acquisition activity, ultra-competitive pricing policies, 

and heightened customer power over business terms and conditions 

all have become facts of life. A number of trends continue to shape 

the competitive landscape and drive the behavior of individual 

chemical manufacturers. Yet, as the industry struggles with difficult 

current business dynamics, chemical manufacturers are poised to 

take on the stiffest challenges facing the world's societies in the 

new century — human health, the environment, population, 

nutrition and more. To appreciate the challenges faced by the 

industry today, it is helpful to look back and consider how much the 

competitive landscape has changed in the past 30 years. 

Contrasts With The Past 

In the late 1960s and early 1970s, the world's economies were local 

or regional, as were the customers for chemicals and most other raw 

materials. The chemical suppliers who served these customers also 

were mostly regional and were organized to serve their local 

geographies. Even companies thought of as large and international 

actually were multi-domestic companies serving local markets with 

local organizations. 

Within individual companies, organizational structures were 

geographic and local management had a great deal of authority and 

autonomy. Since most competition was local, markets rarely were 

affected by price levels and market conditions in other geographies. 

Back then, most competitors operated in much the same way, 

purchasing raw materials, processing them in country, and selling 

them in the local marketplace. Growth rates were positive, with 

many consumer products and durable goods converting from 

http://www.socma.org/bond/archive/Julyl.html 12/12/00 

L 
many consumer products and durable goods converting from 

natural and traditional materials to synthetic materials and 

composites. Technology innovation was high and new product 

introductions flourished. 

Also in the late 1960s and early 1970s, profitability ofthe chemical 

industry was respectable and the outlook was good because 

everyone expected more ofthe same. Although much ofthe 

industry was cyclical, the peaks more than made up for the valleys 

and the prospect for growth kept tendencies toward excess 

conservatism at bay. Although the marketplace was competitive, 

most companies played the game well and found arenas and 

product technologies in which they were comfortably positioned. 

Finally, environmental activism was in its infancy and many 

thought the industry could proceed with improvements at its own 

pace without a lot of help from governments or special interest 

groups. 

The Landscape Today 

Things have changed a lot in the past three decades. Although the 

chemical industry remains an essential source of raw materials for 

manufacturers, it is challenged to consistently make enough money 

to meet the expectations of investors and shareholders. Let's 

examine these challenges one by one. 

The first challenge is a result of changes in the world in which we 

do business. The structural dynamics have changed and so has the 

competitive arena. 

Globalization 

Today, the chemical industry is truly global. There is high 

international trade in our industry, much more trade than in most 

other industries. One measure ofthis global trade is the dollar value 

of chemical exports from all countries. In 1970, the dollar value of 

these exports was about $20 billion. In 1998, the figure was nearly 

$500 billion. This globalization not only has opened new markets 

fbr chemical companies, but it also has forced them to become 

global enterprises themselves in order to compete. 

For example, consider the global customers the chemical industry 

now serves. Mergers in the automotive industry have created global 

companies in place of several regional firms. The very large 

personal care companies are expanding rapidly internationally. And 

as the chemical industry itself becomes more global, another major 

market for its members also is globalized. Even distributors are 

consolidating and becoming global. 

F_3_ 

rage _ ol 8 

Today..a Global Economy 

Ch»mle**l I AlH»d Product* 

Global Export* .Allcountries 

http://www.socma.org/bond/archive/Julyl .html 12/12/00 
P.4 

cuvci siviy Page 3 of 8 

1998«st 

As the customer base becomes more global, customers are looking 

for ways to standardize manufacturing processes, obtain consistent 

quality, and reduce costs. They require global suppliers whose 

products are consistent regardless of where they are made. The 

global purchase agreements that govern these customer/supplier 

relationships give customers greater buying power while lowering 

pricing levels for chemical suppliers. 

The top chemical manufacturers have responded to customer 

globalization with globalization of their own. Today, a survey of 

the these companies show that sales outside of their home regions 

are both large and growing. In the case of The Dow Chemical 

Company, for example, almost 60 percent of 1998 sales were 

outside of North America. With globalization has come intensified 

competition as more global players vie for the same business with 

the same customers. 

Today . . Global Suppliers 

Percentage of Sales by Region of 

Top Chemical Manufacturers 

Americas Europe Rest of the World 

Bayer 

BASF 

Hoechst 

Dow 

Rhone 

Poulenc 

31% 

25% 

34% 

40% 

34% 

57% 

63% 

55% 

34% 

52% 

12% 

12% 

11% 

26% 

14% 

New Business Models 

While most chemical producers thirty years ago operated in much 

the same manner, chemical companies today are pursuing diverse 

strategies to achieve global leadership positions in their chosen 

fields. 

http://www.socma.org/bond/archive/July 1 .html 12/12/00 3 
P.5 

cover story Page 4 of 8 

Some companies, including Asian producers, Exxon, BP, and Shell, 

have chosen to focus solely on basic chemicals. Others are focusing 

on chemical specialties, for example: ICI, Clariant, and Ciba. Still 

others have moved away from chemicals entirely to focus on life 

sciences. These include Monsanto, Hoechst and Novartis. Then, 

there are the diversified companies — Dow is one — who have 

sought to balance their portfolios between cyclical commodities and 

less cyclical differentiated and specialty businesses. 

In all cases, these firms are trying to focus their talents and 

resources to be more market-driven instead of driven solely by their 

own manufacturing technology. All are strongly motivated by the 

need to grow and stabilize profitability. 

This refocusing has contributed to expansion into global markets, to 

mergers and acquisitions, and to general industry consolidation. In 

the end, the market will be comprised of fewer but larger 

companies, global in scope, and more focused in their business 

pursuits. 

Excess Capacity 

Excess capacity is a serious problem for most manufacturing 

sectors. In 1999, the chemical industry in the United States will 

have the lowest operating rate in the past ten years. A number of 

factors have contributed to this. Industry consolidation, fierce 

competition, the rush to be global, and the quest for world-scale and 

world-competitive economics has led to high capacity in many 

products and generally lower profitability than in the past. 

Today.. Excessive Capacity 

Capacity Utilisation (% ) Chemical4 Allied 

Products 

Globalization, consolidation, fewer and more powerful customers, 

and industry excess capacity, all suggest that we now operate in a 

much different and much more competitive environment. Adding 

more pressure are trends toward product standardization; market 

maturation; the emergence of lean, hungry competitors; improved 

customer purchasing competencies; and the ease and economy with 

which customers can switch from one competitor to another. 

http://www.socma.org/bond/archive/Julyl.html 12/12/00 4 
P.6 

uuvci aiui^ Page 5 of 8 

Looking To The Future 

So, how will the industry evolve in the future? 

Tomorrow... 

Globalization/consolidation continue 

What* WW Executives Oo Business 

In the Future? 

10 M 40 «0 «0 

OtMt* « Toock* Sarty 

Spending for Acquisitions is at a 

Record Pace 

I § i s i 

97H and 98H are Juu-ery tnroo gh June ontj 

(peals jf eotef than $25 mBon) 

Source: Young A P»rw«f» 

a Globalization will continue, supported by the shift from 

managed to market economies worldwide. 

a Consolidation also will continue. The industry saw a record 

level of merger activity in 1998 and there continues to be 

considerable activity in 1999 as companies combine or 

reposition themselves to pursue new business models. 

a Relentless pursuit of higher productivity to achieve a low 

cost-to-serve position will be a major driving force ofthe 

industry. Improving productivity always has been crucial, but 

the types of productivity gains being sought are changing. As 

companies complete efforts to streamline their organizations 

and internal processes, they are turning to supply chain 

integration for both cost- to-serve and quality-of-service 

improvements. 

a Increased outsourcing is being done for everything from 

manufacturing to process development to internal 

administration functions in an effort to control costs. This 

trend has translated into a business growth opportunity for 

http://www.socma.org/bond/archive/Julyl.html 12/12/00 <r 
P.7 

trend has translated into a business growth opportunity for 

some chemical companies. The Dow Chemical Company, for 

example, has formed a contract manufacturing business that 

offers engineering and manufacturing services to other 

chemical and pharmaceutical companies interested in 

reducing these costs internally. At the same time, Dow has 

investigated outsourcing of administrative functions, such as 

accounts payable, to control its own costs. 

a Re-engineering of internal processes is becoming popular as 

companies emphasize centralization and standardization and 

seek to avoid duplicated efforts. 

• Knowledge management seeks to ensure that all of a 

company's expertise, know-how and technology are fully 

leveraged to the benefit ofthe business. 

a Investments are being made in information technology that 

can be used to achieve higher productivity, greater operating 

efficiency, and improved customer service. 

a Spending is being increased for research and development 

(R&D). Although R&D spending has been essentially flat for 

the past seven or eight years-and down in real terms during 

the same period-it appears that 1998 was a turning point year 

with higher real spending. Even higher spending was 

forecasted for 1999. Investment will grow further as 

companies enter new fields, such as biotechnology, in search 

of higher value and more profitable business. 

A Near-Term Financial Forecast 

In the next two years the U.S. economy will slow down, but 

no one can predict when the downturn will occur and how 

severe it will be. The sooner the slowdown occurs, the more 

gradual the adjustment will be. But, the longer the current 

period of rapid growth continues, the larger and more 

dramatic the correction is likely to be. The major 

vulnerabilities in the U.S. economy are a stock market 

correction, the low savings/high personal credit levels, and a 

high trade deficit. On average, the industry will grow at GDP 

growth rates. Heavy price competition will remain a fact of 

life. 1999 will be a tough year and recovery may be slow 

because ofthe possibility of a double dip of over supply 

followed by a drop in demand. Industry repositioning, 

globalization, industry consolidation, and the drive for 

improved productivity will continue. 

World Business Cycle -1999 

The world Business Cycle 

in 1999 

Asia Pacific «_,,,, 

J*fn Hon*

 TKyiXS'r!

S\ ^ ^ J 

Ottmr 

^ ,_ Eurofw

 l ! 

Page b ol 8 

http://www.socma.org/bond/archive/July 1 .html 12/12/00 * 

0? 
P.8 

coyer story l**age 7 ol 8 

Th« 

, /~\ Ainoikas 

•~VW*WM 

gowtto-wn fioceMido Recovery Expattdoni 

Internationally, financial crises- characterized by currency 

devaluations, commodity price deflation, increased market 

volatility, and a capital flight to quality-have lowered nearterm growth prospects for the global economy. Japan is mired 

in deep recession and China's growth has slowed somewhat. 

Economies in the remainder of Asia appear to have stabilized 

and perhaps are improving. The region probably will return 

to growth, but not robust growth as in the past. 

In Latin America, Brazil is in recession following its 

currency devaluation. Other parts ofthe region also are 

sliding into recession due to being hurt by low commodity 

prices for oil and other exports. 

In North America, Canada and Mexico are slowing down, but 

continue to grow. In Western Europe, growth also is slowing 

yet it has some momentum. Russia remains in depression. 

The Long-Term Outlook Is Robust 

Despite the challenges and pitfalls faced today and in the near 

future, the long-term outlook for the chemical industry is 

bright. The industrialization ofthe world provides an 

enormous opportunity as basic human needs and 

infrastructure requirements must be met. There are 1.2 billion 

people in the world today without clean drinking water, two 

billion without electricity, and three billion without adequate 

sanitation. Housing, doming, personal care, and 

transportation all represent enormous opportunities for the 

chemical industry to provide products that contribute to 

upgraded living standards for the world's population. "* 

Population growth will be both a challenge and an 

opportunity. With the world population expected to increase 

up to 50 percent by the year 2040, demand for greater food 

production, fertilizers, herbicides, and pesticides, bioengineered foods, medical care, health services, and 

pharmaceuticals also will increase. 

Concern for environmental issues will grow, including 

pollution, waste disposal, acid rain, ozone layer concerns, 

greenhouse gases, global warming, toxic chemicals in food 

and water, mass extinction of species, human health, and 

sustainable growth. The next ten years will require major new 

investments in effluent-abatement technologies. And, 

locating new chemical processing plants is likely to become 

more difficult. 

Continued customer efforts to reduce pollution, waste, and 

http://www.socma.org/bond/archive/Julyl.html 12/12/00 —p 
. e^a. 

cover story Page 8 of 8 

_\ 

Continued customer efforts to reduce pollution, waste, and 

cost will affect the chemical business as a customer's more 

efficient use of raw materials often will come at the expense 

of its chemical supplier. However, this type of evolution is 

inevitable and it makes sense to address these issues jointly 

with customers in the interest of building a stronger, longterm partnership. 

While 20 percent ofthe world's population currently enjoys 

the material benefits of industrialization, the rest-about 2.5 

billion people - do not. As developing countries progress and 

industrialization spreads, there will be considerable strain 

placed on the world's resources and on the environment. The 

demand for wood, for example, is expected to increase by 50 

percent in the next ten years. Companies with the 

technological prowess and vision to develop products capable 

of solving environmental problems stand to thrive in the new 

ecologically sensitive global marketplace. 

Advances in technology will have a huge effect on the 

chemical industry. The pace of technological change will 

accelerate, resulting in shorter product life cycles. Those who 

adopt state-of-the-art methods to quickly identify and take 

advantage of emerging opportunities will prosper. 

Information technology and e-commerce will have a 

significant effect on how business is conducted in the 

chemical industry. Dr. P. Bindra, vice president of IBM P&P, 

states that "e-business will transform every institution and 

industry, create new winners and losers, and generate 

competitive forces that will threaten the world's most 

entrenched brands." 

Biotechnology will become formidable and extraordinary 

with such products as plants that emit their own pesticides, 

plastics from plants, foods as medicines or vaccines, high 

protein trout, ultra-lean meats, and "quicken"-a transgenic 

hybrid of quail and chicken. 

History has proven that the challenges that come with change 

can be daunting. But there are huge rewards available to 

those who can properly manage change and take advantage of 

the new opportunities it offers. Alan Kay states that "the best 

way to predict the future is to invent it." This is another way 

of saying that the way to prosper in the future is to take 

control and create that future. Despite the challenges we face 

today, the global chemical industry is in an excellent position 

to do just that. 

Chemical Bond Archive I SOCMA Home Page 

http://www.socma.org/bond/archive/July 1 .html 12/12/00 8