p. 1


# OAR Box 1669 Prepped by Charmelle Mathews



### Document

Number: 

# ffijto) 11-1- 4 Docket Number: 

# A-98-1 3

Printed 9/23/20089:36:49 AM

Sheet 96 of 110- i . • * 

# //-fJrJ? P. 2 

# Chemical ) I' M

Chemica l Bon d Archiv e I SOCM A Hom e Pag e 

## The Changin g Competitiv e Landscap e ofth e Chemica l Industr y By Phillip J. Speed Corporat e Finance , Th e Do w Chemica l Compan y The chemica

l industr y face s significan

t challenge s a s i t

enter s th e ne w century . Th

e onc e almos t

collegia l competitiv e atmospher

e ha s becom e afierce battlegroun d a s companie s striv e to stak e out profitabl e position s i n th e emerging globa l marketplace . Intens e merge r an d acquisitio n activity , ultra-competitiv e pricin g policies , an d heightene d custome

r powe r ove r busines s term s an

d condition s al l hav e becom

e fact s o f life . A numbe

r of trend s continu e to shap e th e competitiv e landscap e an d driv e th e behavior

of individua l chemica l manufacturers . Yet , a s th e industr y struggle s wit

h difficul t curren t busines s dynamics , chemica l manufacturer s ar

e poise d t o tak e on th e stiffes t

challenge s facin

g th e world' s societie s i

n th e ne w centur y —huma n health , th e environment , population , nutritio n an

d more . To appreciat

e th e challenge s face

d by th e industr y today , i t i s helpfu l t o loo k back an d conside r ho w much th e competitiv e landscap e ha s changed in th e pas t 3 0 years . Contrast s Wit h Th e Pas t In th e late 1960 s an d early 1970s , th e world' s economie s wer e loca l or regional , a s wer

e th e customer s fo

r chemical s and mos t

othe r ra w materials . The chemica

l supplier s who serve d thes e customer s als o wer e mostly regiona

l an d wer e organize d t o serv e thei r

loca l geographies . Eve

n companie s though

t o f a s larg e an

d internationa

l actually wer

e multi-domesti c companie s servin g loca l market s wit

h loca l organizations . Within individua

l companies , organizationa

l structure s wer

e geographi c an

d loca l managemen

t ha d agrea t dea l o f authorit y an d autonomy . Sinc e mos t

competitio n wa s local , market s rarely wer e affecte d b y pric e level s an

d marke t condition s in other

geographies . Bac k then , mos t

competitor s operate d i n muc h th e sam e way , purchasing ra

w materials , processing themin country , an d sellin g the min th e loca

l marketplace . Growt

h rate s wer

e positive , wit

h man y consume r product s an

d durable good s convertin g from http://www.socma.org/bond/archive/Julyl.htm l 12/12/00 

# Lman

y consume r product s an

d durabl e good s convertin

g fro m natura l an d traditiona

l material s t

o syntheti c material s an

d composites . Technology innovatio n wa s high an d ne w produc t introduction s flourished . Als o i n the lat e 1960 s an d earl y 1970s , profitabilit

y ofth e chemica

l industr y was respectabl e an

d th e outloo

k was good becaus e everyone expecte d mor

e ofth e same . Althoug

h muc h ofth e industr y was cyclical , th e peak s mor e tha n mad e u p fo r the valley s an d th e prospec t

fo r growt h kep t tendencie s towar

d exces s conservatis ma

t bay . Although th e marketplac e wa s competitive , mos t companie s played th e gam e wel l an d foun d arena s an

d produc t technologie s i

n which the

y wer e comfortabl

y positioned . Finally , environmenta

l activis mwa s in it s infanc

y an d man y though t th e industr

y coul d procee d wit

h improvements a

t it s own pac e withou

t alo t of hel p fromgovernment s o

r specia l interes t groups . Th e Landscap e Today Thing s hav e changed alo t

i n th e pas t thre e decades . Although th e chemica l industr y remain s a

n essentia l sourc e of ra w material s fo

r manufacturers , i t

i s challenge d t o consistently mak e enoug h mone y to mee t th e expectation s o f

investor s an

d shareholders . Let' s examine thes e challenge s one b y one . Th e first challeng e i s aresult

o f change s i n th e worl d in which w e d o business . Th

e structura l dynamic s have changed an d s o ha s th e competitiv e arena . Globalizatio n Today , th e chemica

l industr y i s trul y global . Ther

e i s high internationa

l trade in ou

r industry , much mor

e trade tha n in mos t othe r industries . On

e measur e ofthi s globa

l trad e i s th e dolla

r valu e of chemica l export s fromal l countries . I n 1970 , th e dolla

r valu e o f thes e export s wa s abou

t $2 0 billion . I

n 1998 , th e figure wa s nearly $50 0 billion . Thi s globalizatio n no t only ha s opened new market s fb r chemica l companies , but

i t als o ha s force

d the mt o becom

e globa l enterprise s themselve s in orde r to compete . For example , conside

r th e globa l customer s th e chemica

l industr y no w serves . Merger s i n th e automotiv e industr y hav e create d globa

l companie s in plac e o f

severa l regiona l firms. Th e ver y larg e persona l car e companie s ar

e expandin g rapidly internationally . An d a s th e chemica

l industr y itsel f become s mor

e global , anothe

r majo r marke t fo r it s members als o i s globalized . Eve n distributor s are consolidatin g and becoming global . F_3
_ rag e _o l 8

Today.. a Globa l Econom y Ch»mle** l I

AlH» d Product * Global Export * .Allcountrie s http://www.socma.org/bond/archive/July l .htm l 12/12/00P. 4

cuvc i siviy Pag e 3 o f 8

1998«s t

A s th e custome

r bas e become s mor

e global , customer s ar

e lookin g fo r way s t o standardiz e manufacturin

g processes , obtain consisten t quality , and reduc e costs . The y requir e globa l supplier s whos e product s ar

e consisten

t regardles s o f

wher e they ar e made . Th

e globa l purchas e agreement s tha

t gover n thes e customer/supplie

r relationship s giv e customer s greate r buyin g powe

r whil e lowering pricin g level s fo

r chemica l suppliers . The to p chemica

l manufacturers hav e responde d t o custome r globalizatio n wit

h globalizatio n of

their own . Today , asurve

y o f th e thes e companie s sho w tha t sale s outside o f

their hom e region s ar e bot h larg e an d growing . I

n th e cas e o f

Th e Dow Chemica

l Company , fo

r example , almos t

6 0 percen t o f 199 8 sale s wer

e outside of Nort h America . Wit

h globalizatio n ha s com

e intensified competitio n a s mor

e globa l player s vi e fo

r th e sam e busines s wit

h th e sam e customers . Toda y . . Globa l Supplier s Percentag e o f Sale s b

y Regio n o f To p Chemica l Manufacturer s Americas Europ e Res

t o f th e Worl d Baye r BAS F Hoechs t Do w Rhon e Poulen c 31 %

25% 34 % 40% 34 % 57

% 63 % 55 % 34 % 52% 12%

12 % 11 % 26 % 14 % Ne w Busines s Models Whil e mos t

chemica l producer s thirt

y year s ag o operate d in muc h th e sam e manner , chemica

l companie s toda

y ar e pursuin g divers e strategie s t o achiev e globa

l leadershi p position s in their

chose n fields . http://www.socma.org/bond/archive/Jul y 1 .htm l 12/12/00 

# 3P. 5

cove r stor y Pag e 4 of 8 Som e companies , including Asia n producers , Exxon , BP , an

d Shell , have chose

n t o focu s solel

y on basi c chemicals . Others ar e focusin g o n chemica l specialties , fo

r example : ICI , Clariant , an

d Ciba . Still other s have moved awa

y fro mchemical s entirel

y t o focu s on lif

e sciences . Thes e includ

e Monsanto , Hoechst

an d Novartis . Then , ther e ar e the diversified companie s —Do w i s on e —wh o have sough t t o balanc e thei

r portfolio s betwee

n cyclica l commoditie s an

d les s cyclica

l differentiated and specialt y businesses . I n all cases , thes e firms ar

e tryin g to focu s thei

r talent s an d resource s t o b e mor e market-driven instea

d of drive n solel y b y their ow n manufacturing technology . Al l ar e strongl y motivated by th e nee d t o gro w an

d stabiliz e profitability . Thi s refocusing ha s contribute d to expansion int o globa l markets , t o merger s an

d acquisitions , an

d to genera

l industr y consolidation . In th e end , th e marke

t will b e comprise d o f

fewe r bu t large r companies , globa

l i n scope , and mor

e focuse d i n thei r busines s pursuits . Exces s Capacity Exces s capacit

y i s aseriou s problemfo

r mos t manufacturin

g sectors . I n 1999 , the chemica

l industr y i n the Unite

d State s will hav e th e lowes t

operating rat

e in the pas t

te n years . A numbe

r o f factor s hav e contribute d t o this . Industr y consolidation , fierce competition , th e rush to b e global , an d th e ques t fo r world-scal e and world-competitiv e economic s ha s led to high capacit y i n man y product s an

d generall y lowe r profitabilit

y tha n i n th e past . Today.
. Excessiv e Capacit y Capacit y Utilisatio n (% ) Chemical 4 Allie d Product s

Globalization , consolidation , fewe r an d mor e powerfu l customers , an d industr y exces s capacity , al l sugges t tha t w e now operat

e i n a muc h differen t an d muc h mor e competitiv e environment . Addin g mor e pressur e ar e trend s towar

d produc t standardization ; market maturation ; th e emergenc e o f lean , hungr

y competitors ; improve d custome r purchasing competencies ; an d th e eas e an

d econom y wit h which customer s ca

n switch fromon e competito r to another . http://www.socma.org/bond/archive/Julyl.htm l 12/12/00 

# 4P. 6

uuvc i aiui ^ Pag e 5 o f 8 Lookin g T o Th e Futur

e So , how will the industr

y evolv e i n the future ? 

# Tomorrow.. . Globalization/consolidation continue What * W

W Executive s O o Busines s I n th e Future ?

1 0 M 4 0 « 0 « 0

OtMt * « Toock * Sart y Spendin g fo r Acquisition s i s a t a Recor d Pac e



## I § i s i 97 H an d 98 H ar e Juu-er y tnroo g h Jun e ontj (peal s j f eote f tha n $2 5 mBon ) Source : Youn g A P»rw«f »
aGlobalization will

continue, supporte d b y th e shif t from managed t o marke

t economie s worldwide . aConsolidation also will continue. Th

e industr y sa w arecor d level o f merge r activit y i n 199 8 an d there continue s t o b e considerabl e activit

y i n 199 9 a s companie s combin e or repositio n themselve s t o pursu e ne w busines s models . aRelentless pursuit

of higher productivity t o achiev e alo w cost-to-serv e positio n will b e amajo r drivin g force ofth e industry . Improving productivit y alway s ha s bee

n crucial , but th e type s o f

productivit

y gain s bein g sough

t ar e changing . A s companie s complet

e effort s to streamlin e thei r

organization s an d interna l processes , the

y ar e turnin g t o suppl

y chain integratio n fo

r bot h cost - to-serv e an

d quality-of-servic e improvements . aIncreased

outsourcing i s bein g don e fo r everythin g from manufacturing t o proces s developmen t to interna l administratio n function s i n a n effor t t o contro l costs . Thi s trend ha s translate d int

o abusines s growt

h opportunit

y fo r http://www.socma.org/bond/archive/Julyl.htm l 12/12/0 0 

# < rP. 7

tren d ha s translate d int

o abusines s growt

h opportunit

y fo r som e chemica l companies . Th

e Do w Chemica

l Company , fo

r example , ha s forme

d acontrac t

manufacturin

g busines s tha

t offer s engineerin g an

d manufacturing service s t

o othe r chemica l and pharmaceutica

l companie s interested i

n reducing thes e cost s internally . A t th e sam e time , Dow ha s investigate d outsourcin g o f administrativ e functions , suc h a s account s payable , to contro l it s ow n costs . aRe-engineering of

internal processes i s becomin

g popula r a s companie s emphasiz e centralizatio n an d standardization an

d see k t o avoi d duplicate d efforts . • Knowledge management seek s to ensur

e tha t all o f a company' s expertise , know-ho w an d technolog

y ar e full y leveraged t o the benefi

t ofth e business . aInvestments are being made in information technology tha t ca n b e use d to achiev e highe

r productivity , greate

r operatin g efficiency , an

d improved custome

r service . aSpending is being increased for research and

development (R&D). Although R&

D spending ha s been essentiall y flat fo r the pas t seve n o r eigh t years-and dow

n in rea l term s during th e sam e period-it appear s tha

t 199 8 was aturning poin

t yea r wit h highe r rea l spending . Eve

n highe r spendin g wa s forecasted fo

r 1999 . Investmen

t will gro w furthe

r a s companie s ente

r new fields , suc

h a s biotechnology , in search o f highe r valu e an d mor e profitabl e business . A Near-Ter m Financia l Forecas t I n th e next tw o year s th e U.S . econom y will slo w down , but no on e ca n predic t whe n th e downtur

n will occu

r an d ho w sever e i t wil l be . The soone

r th e slowdown occurs , th e mor e gradua l th e adjustmen

t wil l be . But , th e longe

r th e curren t perio d o f rapi d growt

h continues , th e large

r an d mor e dramati c th e correctio n i s likel y to be . Th

e majo r vulnerabilitie s i

n th e U.S . econom

y ar e astoc k marke t correction , th e lo w savings/hig h persona l credi t levels , an d a hig h trade deficit . O

n average , th e industr

y will gro w a

t GDP growt h rates . Heav

y pric e competitio n wil l remain afac t o f life . 199 9 wil l b e atoug h yea r an d recover y ma y b e slo w becaus e ofth e possibilit

y o f adoubl e dip o f

ove r supply followe d b y adro p i n demand . Industr

y repositioning , globalization , industr

y consolidation , and th e driv e fo r improved productivit

y wil l continue . 

### Worl d Busines s Cycl e -199 9 Th e worl d Busines s Cycl e

i n 199 9

Asi a Pacifi c «_,,, , J*fn Hon

* TKy iXS'r ! S\ ^ ^ J

Ottmr ^ , _Eurof w l ! Pag e b ol 8

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

### 0?P. 8

coye r stor y l**ag e 7 o l 8

Th « , /~\ Ainoika s •~VW*W M gowtto-w n fioceMido Recover y Expattdon i Internationally , financial crises

- characterize d b y currenc y devaluations , commodit y pric e deflation , increase d marke t volatility , an d acapita l flight t o quality-hav e lowere d near ter mgrowt h prospect s for th e globa l economy . Japa n i s mire d i n dee p recessio n an d China' s growth ha s slowe d somewhat . Economie s i n th e remainde r o f Asi aappear

t o hav e stabilize d an d perhap s ar e improving . Th e regio n probabl y wil l return t o growth , bu t

no t robus t growt h a s i n th e past . I n Lati n America , Brazi l i s i n recessio n followin g it s currenc y devaluation . Othe r part s ofth e regio n als o ar e slidin g int o recessio n du e t o bein g hurt b y lo w commodity price s fo r oi l an d othe r

exports . I n Nort h America , Canad aan d Mexic o ar e slowin g down , but continu e t o grow . I n Western Europe , growth als o i s slowin g ye t i t ha s som e momentum . Russi aremain s i n depression . Th e Long-Ter m Outloo k I s Robus t Despit e th e challenge s an d pitfall s face d toda y an d i n th e nea r future , th e long-ter moutloo k for th e chemica l industry i s bright . Th e industrializatio n ofth e worl d provide s a n enormou s opportunit y a s basi c huma n need s an d infrastructur e requirement s mus t b e met . Ther e ar e 1. 2 billio n peopl e i n th e worl d toda y withou t clea n drinkin g water , tw o billio n withou t

electricity , an d thre e billio n withou t adequat e sanitation . Housing , doming , persona l care , an d transportatio n al l represen t enormou s opportunitie s fo r th e chemica l industr y t o provid e product s tha t contribut e t o upgrade d livin g standard s fo r th e world' s population . " * Populatio n growt h wil l b e both achalleng e an d a n opportunity . Wit h th e worl d populatio n expecte d t o increas e u p t o 5 0 percen t

b y th e year

2040 , deman d fo r

greate r foo d production , fertilizers, herbicides , an d pesticides , bio

engineere d foods , medica l care , healt h services , an d pharmaceutical s als o wil l increase . Concer n fo r

environmenta l issue s wil l grow , includin g pollution , wast e disposal , aci d rain , ozon e laye r concerns , greenhous e gases , globa l warming , toxi c chemical s i n foo d an d water , mas s extinctio n o f species , huma n health , an d sustainabl e growth . Th e nex t te n year s wil l requir e majo r ne w investment s i n effluent-abatemen t technologies . And , locatin g ne w chemica l processin g plant s i s likel y t o becom e mor e difficult . Continue d custome r

effort s t o reduc e pollution , waste , an d http://www.socma.org/bond/archive/Julyl.htm l 12/12/0 0 —p. e^a . cove r stor y Page 8 o f 8 _\ Continued custome

r efforts t o reduc e pollution , waste , an d cos t will affec t th e chemica

l busines s a s acustomer' s mor e efficien t us e of ra w material s ofte

n will com

e a t th e expens e o f it s chemica

l supplier . However , thi s typ e o f evolution i s inevitabl e an

d i t make s sens e t

o addres s thes e issue s jointl y wit h customer s i

n the interes t

o f buildin g astronger , long

ter mpartnership . Whil e 2 0 percen

t ofth e world' s populatio n currentl y enjoy s the materia

l benefit s of

industrialization , the rest-abou t 2. 5 billio n peopl e - d

o not . A s developin g countrie s progres s an d industrializatio n spreads , ther e will b e considerable strain placed on th e world' s resource s an d on th e environment . Th

e deman d fo r wood , fo r example , i s expecte d to increas e by 5 0 percen t in th e nex t te n years . Companie s wit

h the technologica

l prowes s an

d visio n to develop product s capabl e of solvin g environmenta

l problem s stand to thriv e i n th e new ecologically sensitiv e globa l marketplace . Advance s in technolog y wil l hav e ahug e effec t on th e chemica l industry . Th

e pac e of technologica

l change will accelerate , resultin g i

n shorte r produc t lif e cycles . Thos e wh

o adopt state-of-the-ar

t method s t o quickly identif

y an d tak e advantag e of

emerging opportunitie s wil l prosper . Information technolog y and e-commerc e wil l have a significan t effec t on ho w busines s i s conducte d i n th e chemica l industry . Dr . P . Bindra , vic e presiden t of IB M P&P , state s tha t "e-busines s wil l transfor

mever y institutio n an

d industry , creat

e ne w winner s an

d losers , an

d generat e competitiv e force s tha

t wil l threaten th e world' s mos t entrenched brands. " Biotechnology will becom

e formidable an

d extraordinar

y wit h suc h product s a s plant s tha

t emi t their ow n pesticides , plastic s fromplants , food s a s medicine s or vaccines , hig h protein trout , ultra-lea

n meats , and "quicken"- atransgeni c hybri d o f quai l an d chicken . Histor y ha s proven tha

t th e challenge s tha

t com e wit h chang e ca n b e daunting . Bu

t ther e ar e hug e reward s availabl e t o thos e wh o ca

n properly manag e chang e and tak e advantag e o f th e ne w opportunitie s i t

offers . Ala

n Ka y state s tha

t "the bes t wa y t o predic t th e futur e i s to inven

t it. " Thi s i s anothe

r wa y of saying tha t th e wa y t o prospe

r in th e futur

e i s to tak e contro l an d creat e tha t future . Despit

e th e challenge s w e face today , th e globa

l chemica l industr y i s in a n excellen t positio n t o d o jus t that . Chemica l Bon d Archiv e I SOCM A Hom e Pag e

http://www.socma.org/bond/archive/July 1 .htm l 12/12/00 

# 8