Dow Chemical Company
Dow Chemical Company
2030 Willard H. Dow Center
Midland, Michigan 48674
Fax: (517) 832-1465
Incorporated: June 11, 1947
Sales: $18.97 billion
Stock Exchanges: New York Midwest Pacific Amsterdam Antwerp Basel Bern Brussels Dusseldorf SICs: 2819 Industrial InOrganic Chemicals Nec; 2821 Plastics Materials & Resins; 2812 Alkalies & Chlorine; 2869 Industrial Organic Chemicals Nec
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 more than two thousand different products. Approximately 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 three 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 His first venture, called Canton Chemical, failed and was superceded by Dow Chemical.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 with the British, who desperately needed magnesium. Dow produced some of the mineral at its 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 at that time; it often invented a product and then patiently waited for a market. During the war Dow produced over 80 percent 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 postwar 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 ranked as the sixth-largest chemical company in the country and was 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 percent of sales and plastics accounted for 20 percent of sales, while magnesium, pharmaceuticals, and agricultural chemicals each accounted for 10 percent 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 had 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 soon ranked fourth in the industry. The company’s plants had previously been located in Texas and Michigan, but during the 1950s 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 1960s 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 1960s Dow’s earnings increased approximately ten percent 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 Indo-china 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 1970s 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 ten percent bonus and gave each pensioner two thousand dollars worth of bonds. Company stockholders did not mind management’s sudden display of generosity; that year they received a 30 percent 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 deemed 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 1970s. P.P. 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 1980s a pattern of write-offs that depressed earnings began to emerge. In 1983 the write-off of two ethylene plants and a caustic soda plant caused earnings to drop 16 percent. 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 percent 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 derived 50 percent of its income from commodity chemicals that are sold by the ton. Foreign competitors, Arab chemical companies in particular, invaded 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 complicated 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.
In 1981 Dow purchased Merrell Drug, thus expanding its pharmaceutical division. In 1984 Dow purchased Texize, which boasted a strong line of detergent products, from Morton Thi-okol. Research spending remained at almost 90 percent of cash flow. Extra-strong ceramics and plastics for the electronics industry are among the numerous specialty chemicals that Dow hoped would account for two-thirds of its sales in the 1990s. The company still placed a premium on innovation, however, and stated that it anticipated placing 15 to 25 new products on the market each year. The expansion into pharmaceuticals, specialty chemicals, and household products, however, some felt, required 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.”
The company appointed a new chairman of the board, Robert Lundeen, and launched a new ad campaign, in which working for Dow was equated with “doing something for the world.” Eager to rid itself of the adverse publicity surrounding topics such as Vietnam and alleged environmental abuse, Dow actually supported an increase in the Environmental Protection Agency’s budget and a strengthening of rules regarding hazardous waste. This marked a significant philosophical turnaround for a company that had argued against a ban on dioxin in the 1970s.
Despite its changes in management, however, Dow was hurting in 1985, as it failed to recapture market share lost during the 1980-1982 recession. Profits tumbled from $805 million in 1980 to $58 million in 1985. Frank Popoff was appointed president and CEO from his position as head of Dow Chemical/ Europe. Largely on the strength of Popoff s decisions, the firm improved marketing and sales of value-added products, which commanded higher prices. Dow began to win market share in this higher-margin area as it increasingly concentrated on finding new applications for existing products.
The company’s efforts found a ready-made market in the auto industry, which was in the midst of a campaign to increase efficiency and cut costs. Dow concentrated on other durable sectors like appliances, housewares, and electronics as well. It also looked into packaging and the recreation and health-care industries. Since Dow already made so many plastics, chemicals, and hydrocarbons cheaply, increased sales of them at higher margins offered an immediate hike in profits. This strategy was immediately successful, and the company received a further boost when the U.S. dollar began to fall, making it easier for Dow to sell against German companies and other competitors.
Oil prices fell in 1986, further feeding Dow’s recovery. With the dollar continuing to fall and the world economy humming, the spread between raw material costs and final prices expanded until the firm’s plastics business was making a record 25 to 30 percent on sales during mid-1987.
Dow continued to diversify through acquisition, but tried to concentrate on firms with a base in chemicals, paying special heed to firms with technologies or distribution systems deemed not practical for Dow to develop internally. A joint venture in agricultural chemicals, called Dow Elanco, was begun with Eli Lilly. Dow acquired 39 percent of Marion Laboratories, a Pharmaceuticals firm, for $2.2 billion, then joined it with Dow Merrell, making it a public company with a 67 percent Dow stake.
By 1988 commodity chemicals accounted for just 53 percent of the firm’s $13.3 billion in sales. Its move into pharmaceuticals was proving to be a success, with $1.1 billion in sales a year. Its star drug was Seldane, an antihistamine with sales that were reaching hundreds of millions of dollars. Total Dow sales for 1989 reached $17.6 billion, an increase of $7 billion over five years earlier, with profits up to $2.5 billion.
In 1990, however, the world economy headed into recession. As in past recessions, the chemical industry, plagued by overcapacity, began a price war and began cutting output. Dow was the leading low-cost producer of commodity chemicals, hydrocarbons, and plastics. Rather than cut capacity, Dow continued to produce chemicals at a lower profit margin in the hopes of keeping its market share and driving out weaker competitors. Profits fell, but the company maintained its position in the marketplace; even DuPont was forced to cut production of polymers.
The Persian Gulf War temporarily caused the price of oil to rise, further hurting Dow. When the war ended, the slowdown in the chemical industry continued. Many in the industry believed that it was just another cycle in a cyclical industry. Popoff, however, maintained that the slowdown represented a more fundamental shift in the industry, one that was eroding the advantages of bigger firms. The strategy, Popoff felt, was now to be as lean and fast as small firms while maintaining an R&D advantage.
Despite these beliefs, Dow was forced to build new plants for commodity chemicals when a Canadian supplier decided to become a competitor. Dow began building ethylene plants in Alberta, Canada, and Freeport, Texas. Even after 40 years in Asia, sales there still acounted for less than 10 percent, while European sales accounted for 31 percent of total sales. But with Europe mired in recession and sales there slowing, Dow began pushing into Asia again, building a petrochemicals plant in China, where it enjoyed an expanding polyurethane business.
Though its growth had been slowed by the downturn in chemicals, Dow had nevertheless reduced its dependence on commodity chemicals from 80 percent of sales in 1980 to 45 percent in 1992, making it one of the world’s most diversified chemical firms. It has also vastly improved its environmental reputation over the past decade via both advertising efforts and tangible results in elevating its environmental record. Dow Chemical remains, as the Wall Street Journal noted in 1991, “the industry’s bellwether petrochemical stock.”
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.
Duerksen, Christopher J., Dow vs California: A Turning Point in the Envirobusiness Struggle, Washington, DC: Conservation Foundation, 1982.
Harman, Adrienne, “Metamorphosis,” Financial World, February 2, 1993.
Meyer, Richard, “Avoiding the Fifth,” Financial World, November 15, 1988.
Quickel, Stephen, “Uncle!,” Financial World, May 15, 1990.
—updated by Scott M. Lewis