The Dow Chemical Company

views updated

The Dow Chemical Company

2030 Willard H. Dow Center
Midland, Michigan 48674
U.S.A.
(517) 636-1000

Public Company
Incorporated: June 11, 1947
Employees: 53,200
Sales: $11.113 billion
Market value: $15.779 billion
Stock Index: New York Amsterdam Antwerp Basle Lausanne Brussels Duesseldorf Frankfurt Geneva Hamburg Hanover London Paris Toronto Tokyo Zurich

To say that Dow is a very large chemical company is an understatement. Its annual sales are roughly equal to the Gross National Products of Kenya and Uganda combined. At last count the company offered two thousand different products. More than half of Dow’s income comes from basic chemicals, but plastics, specialty chemicals, consumer products and pharmaceuticals are also important to the company.

Herbert Dow began his career around 1890, when he convinced 3 Cleveland businessmen to back his latest project which involved the extraction of bromide from brine. Dow’s idea was to extract the huge underground reservoirs of brine, souvenirs of prehistoric times when Lake Michigan had been a sea. This brine was being used for salt, but Dow was determined to distill bromides and other chemicals from it. His first venture, called Canton Chemical, failed and was superceded by Dow Chemical.

Dow’s use of an electric current to separate bromides from the brine was revolutionary. He was experimenting with electrolysis at a time when the electric lightbulb was still viewed with suspicion. (At the time, President Harrison refused to touch the newly installed light switches in the White House for fear of electrocution.) However, Dow constructed primitive cells from wood and tar paper, and began producing bromides, as well as bleaching agents, for another fledgling company by the name of Kodak.

In the first years of this century Dow began to sell his bromides abroad, but the Deutsche Bromkonvention, a powerful group of German bromide producers, declared an all-out price war against Dow Chemical. German and British bleachmakers (bromide is used in bleach) reduced the price of their product from $1.65 to 88 cents a pound in the United States, which was less than cost. Dow’s plants depended on a price of $1.65 in order to make a profit. While other American bleachmakers closed for the duration of the price war, Dow went deeper into debt and fought for his share of the domestic and foreign markets. One of his successful tactics was to purchase the imported bromide that the Germans were selling in New York at a price below cost, and then resell it in Europe where the price of bromide was still $1.65 per pound.

After the bromide war came World War I which, among other things, ended German domination of the world chemical industry. The German naval blockade forced American industry to turn to American chemical makers for essential supplies. Dow was pressed into the manufacture of phenol, used in explosives, and magnesium. At the time these two substances had limited use outside of munitions, but they were later to play an important role in the development of Dow Chemical and chemical technology in general. Phenol would later be required for the manufacture of plastics, and magnesium, a metal that would make aviation history.

After the war Congress protected the fledgling American chemical industry by imposing tariffs, so that the country would not become dependent on foreign chemical manufacturers again. By 1920 Dow Chemical was selling four million dollars worth of bulk chemicals like chlorine, calcium chloride, salt and aspirin every year. By 1930 sales had climbed to $15 million and the company stock had split four times. Before the stock market crashed in 1929 the price per share had climbed to $500.

Dow’s success drew the attention of Du Pont which wished to acquire the midwestern bromide manufacturer until Herbert Dow threatened to leave the company and take his engineers with him. Without Herbert Dow’s leadership and ingenuity the company was not regarded as worth the price of purchase and Du Pont subsequently withdrew its offer.

Herbert Dow died just as the Great Depression began and was replaced by his son Willard. Willard Dow, like his father, considered research, as opposed to production or sales, the key to the company’s future. Despite the state of the economy, Willard Dow approved expenditures for research into petrochemicals and plastics. The company’s product line expanded to include iodine, ethylene and materials to flush out oil from the ground. A new plant was constructed that would extract bromine from sea water. There was also a rumor on Wall Street that Dow’s new method could also extract gold from the seawater, which turned out to be true. However, for every $300 worth of gold, $6,000 worth of bromine could be recovered.

During World War II Dow Chemical’s new research resulted in handsome rewards. Even before America’s entrance into the war, Dow had started to expand in preparation for future hostilities. One of its first wartime contracts was for the British who desperately needed magnesium, some of which was produced by the company’s new plant in Freeport, Texas, which derived magnesium from seawater. Dow later supplied the metal to the United States and even shared its patented process with other companies.

Before World War II the potential value of magnesium in the manufacture of airplanes had gone unnoticed, and during this time Dow Chemical was the only U.S. magnesium producer. Yet even with a monopoly on the metal, the company lost money on its production. This was typical of Dow Chemical, namely to invent a product and then patiently wait for a market. During the war Dow produced over 80% of the magnesium used by the United States, which later led to federal investigations into whether or not Dow had conspired to monopolize magnesium production in the country. The U.S. press, however, sided with Dow and eventually the charges, which had included accusations of a conspiracy with German magnesium manufacturers, were dropped.

Besides manufacturing magnesium the company also made styrene and butadiene for synthetic rubber. After the bombing of Pearl Harbor the Japanese had conquered the rubber plantations of the Far East and soon the commodity was in short supply. Due to the fact that Dow had persisted in plastics research during the Depression, it was at the forefront of manufacturing synthetic products. Besides making styrene and butadiene, it molded Saran plastic, now known as a food wrap, into pipes or had it woven into insect screens to protect soldiers fighting in the tropics.

After the war the company had to adapt to the post-war economy. One of management’s concerns was that Dow Chemical had placed such a strong emphasis on research and development in the past that it sometimes ignored the fact that it was supposed to be making profits. The marketing and sales departments were reluctantly increased. Said one man employed at the time, “You got the feeling that Willard looked on sales as a necessary evil.”

Despite the fact that Dow had to share trade secrets with its competitors during the war, it was the sixth largest chemical company in the country and well-positioned to take advantage of the increasing peacetime demand for chemicals. Its product line was extensive and included chemicals used in almost every conceivable industry. Bulk chemicals accounted for 50% of sales, plastics accounted for 20% of sales, while magnesium, pharmaceuticals and agricultural chemicals each accounted for 10% of sales.

Dow expanded significantly during the postwar period, going heavily into debt in order to finance its growth. The man who presided over this expansion was Willard Dow’s brother-in-law, Lee Doan (Willard Dow having been killed in a plane crash). One of Doan’s first tasks was to reorganize the company and make it more customer-oriented. Willard and Herbert Dow’s tenures had been previously described by insiders as “capricious.” The emphasis now was on long-range planning.

In the year of Willard’s death, 1949, sales were $200 million, but ten years later they had nearly quadrupled. Products such as Saran Wrap began to make Dow a high profile company. Dow’s growth surpassed that of its competitors, and the company was ranked fourth in the industry. The company’s plants had previously been located in Texas and Michigan, but during the 1950’s important production centers were built elsewhere. Foreign partnerships like Ashai Dow in Japan were formed, and the company expanded its presence in the European market.

Dow began the 1960’s with a change of leadership. Ted Doan succeeded his father and, with Ben Branch and Carl Gerstacker, reorganized the company. Communication had become a problem because of Dow’s vast size, so the company was broken into more manageable units which could be run like small businesses. Marketing, however, became more centralized. The management liked to think of their company as democratic, with overlapping lines of responsibility. The structure of the company was deliberately arranged so that employees would use their own initiative to invent new products and to manufacture existing products at a lower cost. The strategy worked.

Throughout the 1960’s Dow’s earnings increased approximately 10% each year. Among the company’s hundreds of products, however, one began to receive an inordinate amount of publicity—napalm. Beginning in 1966 the company became the target of anti-Vietnam War protests. Company recruiters were overrun on college campuses by large numbers of placard-waving students. Dow defended its manufacture of the searing chemical by saying that it was not responsible for U.S. policy in Indochina and that it should not deprive American fighting men of a weapon that the Pentagon thought was necessary. Critics charged that the gruesomeness of the weapon made it imperative for the company not to cooperate with the government. Right or wrong, the public outcry against Dow demoralized a company that wanted to be associated with Handy Wrap rather than with civilian Vietnamese casualties.

At the beginning of the 1970’s Forbes magazine predicted that Dow would have trouble growing because of its indebtedness. In 1974, however, the same Forbes reporter was subjected to criticism by chief executive officer Carl Gerstacker because Dow had a record year. The oil embargo was beneficial for Dow since it had its own petroleum feedstocks with which to manufacture its various specialty chemicals, while its competitors could not find the necessary petroleum. Noted Gerstacker: “Price wasn’t the problem in ’74; it was availability.” Dow increased the price of many of its chemicals and its earnings increased, despite a strike in its hometown of Midland, Michigan. After the six month strike, Dow gave the strikers a 10% bonus and gave each pensioner two thousand dollars worth of bonds. The stockholders did not mind management’s sudden display of generosity; that year they received a 30% return on equity.

The year 1975 was followed by an oversupply of petrochemicals and a business slowdown, and the company’s earnings began to slide. Since the company was doing almost half of its business overseas, an unfavorable rate of exchange added to the above problems with the result that earnings also decreased.

By 1978 a change of leadership was necessary; Gerstacker’s retirement from the board of directors was the end of an era. Gerstacker’s management strategy was that, “you should have as much debt as you can carry.” During recessions and slowdowns, borrowed money was used for research and development as well as for plant expansion. He was an administrator in the tradition of Herbert Dow, but the moves that had catapulted Dow to a position of leadership in the chemical industry seemed unwise in the business climate of the late 1970’s. P.F. Oreffice, who Gerstacker had referred to as “a little old lady in tennis shoes” because of his conservative fiscal policy, became president and chief executive officer.

Soon after his promotion, Oreffice reorganized Dow as most of his predecessors had done after their appointment. These frequent reorganizations were less a testimony to the inadequacy of the previous organization than an admission that the company was outgrowing previously successful arrangements. This time management was reorganized on a geographical basis, since Dow had plants all over the world. In 1980, the year of the reorganization, sales exceeded $10 billion for the first time.

In the early 1980’s a pattern of write-offs which depressed earnings began to emerge. In 1983 the write-off of two ethylene plants and a caustic soda plant caused earnings to drop 16%. Ethylene, a lead additive which prevents knocking in automobile engines, had been an important product for Dow at one time. In 1985 earnings fell 90% from the previous year as additional ethylene plants were closed.

Another factor that depressed 1985 products was the decrease in price and demand for basic chemicals. Dow still derives 50% of its income from commodity chemicals that are sold by the ton. Foreign competitors, Arab chemical companies in particular, are invading the American market in the same way that Dow once invaded the European bromide market. To make matters worse, the market for commodity chemicals is sensitive to world economic conditions. Dow’s position as an American company complicates matters further. When the dollar is strong, as it was in 1984 and part of 1985, the company’s exports are harder to sell and its foreign earnings, when converted to dollars, are smaller.

Recently the company has shifted to specialty chemicals and consumer products (the latter being recession-proof). In 1981 Dow purchased Merrell Drug, thus expanding its pharmaceutical division. In 1984 Dow purchased Texize, which has a strong line of detergent products, from Morton Thiokol. Research spending remains at almost 90% of cash flow (a very high figure). Extra-strong ceramics and plastics for the electronics industry are among the numerous specialty chemicals that Dow hopes will account for two-thirds of its sales in the 1990’s. The company still places a premium on innovation and anticipates placing 15 to 25 new products on the market each year, adding to the 2,000 products it already makes. In addition, the expansion into pharmaceuticals, specialty chemicals and household products will require a new approach to management. According to an analyst with Kidder and Peabody, “If you’re running a monolithic chemical business, management is the same across all products. Now they’re going to have hundreds of small businesses to manage.”

Dow’s dependence on commodity chemicals makes the chemical company potentially vulnerable to market fluctuations, but it is presently taking the necessary steps to protect itself. The company also has a new chairman of the board, Robert Lundeen, and a new ad campaign in which working for Dow is equated with “doing something for the world.” Dow is eager to rid itself of the adverse publicity surrounding topics such as Vietnam and environmental abuse. As a result, it actually supported an increase in the Environmental Protection Agency’s budget and a strengthening of rules regarding hazardous waste. This is quite a turnaround for a company that had argued against a ban on dioxin in the 1970’s. Whatever its difficulties, however, one thing is certain—Dow will remain a highly visible presence in the world chemical industry.

Principal Subsidiaries

Admiral Equipment Co.; Boride Products, Inc.; Cayuse Pipeline, Inc.; Dofinco, Inc.; Domoclean International Inc.; Dorinco Reinsurance Co.; Dow Chemical Delaware Corp.; Dow Chemical Inter-American Ltd.; Dow Chemical International Energy Co.; Dow Chemical International Inc.; Dow Chemical International Ltd.; Dow Consumer Products, Inc.; Dow Corning Corp. (50%); Dowell Schlumberger Inc.; Dow Engineering Co.; Dow Financial Services Corp.; Dow Interstate Gas Co.; Dow Pipeline Co.; Great Western Pipeline Co., Inc.; Louisiana Gasification Technology Inc.; Merrell Dow Pharmaceuticals, Inc.; Metal Mark Inc. (50%); Midland Pipeline Corp.; The Cynasa Co. (90%). The company also lists subsidiaries in the following countries: Argentina, Australia, Belgium, Brazil, Canada, Chile, China, Colombia, Ecuador, Finland, Greece, Indonesia, Italy, Japan, Kenya, Malaysia, The Netherlands, Netherlands Antilles, New Zealand, Norway, Panama, Philippines, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, United Kingdom, and Venezeula.