29400 Lakeland Blvd.
Wickliffe, Ohio 44092
Incorporated: July 31, 1928
Sales: $985 million
Market value: $1.533 billion
Stock Index: New York
When scrutinizing Lubrizol, the world’s largest manufacturer of petroleum additives, industry analysts have to pinch themselves to make sure they aren’t dreaming. Until recently the company had no long term debt. For decades at a time the stockholders consistently received a return of over 18% on their equity. And due to the nature of its product the company thrives on changes in the economy. When the price of oil is high, there is a greater demand for additives that extend the longevity of oils and lubricants. When the price of oil is low, people drive more and therefore use more motor oil, which expands the market for another kind of Lubrizol additive. Technical know-how and an ability to turn almost any economic situation to its advantage explain why even hardened analysts refer to Lubrizol as “gold-plated” and “a jewel.”
The company was founded in 1928 by the Smith brothers-Kelvin, Kent and Vincent, the Nason brothers-Frank and Alex, and their friend Thomas W. James. The three Smith brothers had all worked at Dow Chemical, a company their father, a professor of chemistry, had helped to establish.
From its beginning the growth of Lubrizol, originally known as The Graphite Oil Products Company, was tied to the expansion of the petroleum and automobile industries. By working closely with manufacturers, or, in the case of short-sighted automobile makers, by staying one step ahead, Lubrizol was able to carve out an unassailable niche for itself. The company’s first product, a suspension of graphite in oil, was formulated to prevent car springs from creaking.
After this initial success, the young men addressed a more serious problem. Early automobile engines were lubricated with mineral oil, which meant that the engines overheated frequently, and that their pistons would stick because of the heat or accumulated sludge. When this happened the driver had to pull over and wait for the engine to cool. The chemists at Graphite Oil discovered that by adding chlorine to lubricants the problem of overheating was alleviated. This new product, and later the whole company, was named Lubrizol, although no one knew what the “zol” stood for. Soon auto repair shops and car dealers were ordering the strangely named oil, along with specialty lubricants tailor-made for specific models of engines.
In 1935 Alex Nason traveled to Detroit to promote his small company, but General Motors scoffed at the idea of adding chemcials to oil in order to increase engine performance. At the time, G.M.’s diesel engines became so clogged with impurities that they had to be stripped and cleaned every 500 hours. Eventually the auto manufacturer was convinced of the value of gasoline and lubricant additives, and added Lubrizol products to its list of recommended products for car care.
During World War II Lubrizol supplied its products to the military. In order to keep its equipment in optimum running condition the government established scientific tests and rigorous performance standards for all lubricants. After the war standards for lubricants used in passenger cars were also set. Since Lubrizol had patented important processes and ingredients in the manufacture of high quality lubricants, it profited from the new regulations. In 1942 the company decided to abandon the manufacture of oils and lubricants, and to concentrate solely on petroleum additives like oxidation inhibiters, detergents, and chemicals to reduce oil breakdown at high temperatures. These additives were then sold to the major oil refineries.
By the 1950’s Lubrizol was selling more petroleum additives than any other company in the world, yet it was still a privately held corporation with less than 5,000 employees. There were many factors in its success. One factor was the nature of the additive industry. Lubrizol sold its additives primarily to oil companies and, interestingly enough, its only competitors were oil companies. When a company like Exxon needed an additive it did not manufacture itself, it preferred to buy the additive from Lubrizol rather than a rival oil company. Additionally, Lubrizol’s status as an independent company often appealed to nationalized oil industries for political reasons. In the 1960’s Lubrizol was the sole supplier of additives to the nationalized oil industry in Peru which was, for ideological reasons, reluctant to deal with the major companies in the petroleum industry.
But Lubrizol’s position as a supplier to a handful of huge companies was not without a certain amount of risk. This became apparent in the mid-1950’s when Texaco decided to make its own fuel additives. This single corporation had purchased nearly a quarter of Lubrizol’s total output, so its defection was painful. Today defections such as Texaco’s are less likely because inflation has increased the already formidable start-up costs for an additives operation.
Despite its problem with Texaco the company flourished. It did not, however, expand. The company philosophy has always been “to grow, but not get big” in the words of one executive. The president at the time, Mr. Clapp, said “Our goal is to increase earnings to shareholders in a business we understand.” Consequently, Lubrizol was reluctant to diversify. Until the acquisition of Agrigenetics Corporation in 1985, company policy was to buy companies only as strong as Lubrizol, and there were not many chemical firms that fit this description. In the 1950’s the company made its first acquisition, the R.O. Hull Company, which made rust-proofing chemicals. This company, which rarely accounted for more than 2% of Lubrizol’s sales, has since been sold.
In the 1960’s Lubrizol continued to watch its revenues steadily increase. In 1960 it became a public company, and by taking advantage of the stock options that the company offered many employees became rich. The company has had a good relationship with its employees, in part because salaries are generous and employees are eligible for profit-sharing, including those on the shop floor.
Lubrizol’s approach to management is distinctive. Job descriptions are flexible, and employees have a high degree of autonomy in deciding what tasks they should do and in what manner. The company’s success has always depended on staying at the forefront of research on additives, and technicians have historically comprised a high percentage of Lubrizol’s workforce. Upper management is also saturated with chemists, although in the 1970’s a prominent lawyer joined their ranks. The ordinarily mild-mannered Lubrizol is extremely combative in guarding its patent rights.
Unlike many chemical companies, Lubrizol applauded the country’s growing concern with pollution. Lead-free gas and catalytic converters opened up a new demand for lubricants to replace the lubricating action of leaded fuel. Any change in engine design is beneficial for Lubrizol because a new design requires new additives, and the company is well-equipped to meet the latest demands before its competitors are able to. It is possible that larger profits have something to do with Lubrizol’s enthusiasm for environmental protection; however, to its credit the company has never been indicted for polluting the environment.
By the early 1970’s Lubrizol was recognized as an excellent investment. Although ranked by size in the lower four hundred of the Fortune 500, it was one of the top 40 companies in terms of stock performance. The company seemed impermeable to the various economic problems that arose during the 1970’s. For instance, although some of its additives are derived from petroleum products, and many of its products are used in passenger cars, the company prospered as a result of the oil crisis. This is because high gasoline prices encouraged auto makers to design new, energy efficient cars, and these design modifications required new fuel additives, transmission fluids, and gear lubricants.
Even the recession had a beneficial effect on Lubrizol, which also makes additives used in the production of oils for heavy industrial machinery. During the recession it became imperative for large industrial companies to lower repair costs, and quality lubricants and additives were a good place to start. Lubricants are one of the least likely places for a company to economize. As then president Mastin said, “In relation to these factors (high maintenance costs) the price of superior lubricants is minor, but the benefits are significant.”
In the late 1970’s Lubrizol started a cautious program of diversification. Its first new purchase (1979) was the Althus Corporation, a firm that makes lithium batteries. In the early 1980’s Lubrizol purchased a biotechnology company which uses recombinant DNA for medical uses. Both of these firms are small (200 employees) and financially sound.
In the last few years Lubrizol has narrowed its interest in diversification to companies that are perfecting genetic engineering with plants. Using genetic engineering, Lubrizol hopes to develop improved seed oils which could be employed in the manufacture of the additives and specialty chemicals that are likely to remain Lubrizol’s main product line. In 1985 Lubrizol purchased the Agrigenetics Corporation, one of the leaders in the small field of plant genetics. This company became the first to modify a plant using recombinant DNA when it spliced a bean gene to that of a sunflower.
The purchase of Agrigenetics may appear to be an uncharacteristic move for Lubrizol, especially since Agrigenetics was operating at a loss of nearly 40 million dollars. Agrigenetics was by far the largest acquisition in Lubrizol’s history, and one that required the company to go into debt. Industry analysts have pointed out, however, that there are only 20 firms capable of developing recombinant DNA techniques for plants, and that corporations who want to diversify into this particular field may soon find it impossible to acquire a plant genetics subsidiary.
As mentioned previously, although it had a long-standing policy to only buy companies that were financially sound, Lubrizol itself once seemed like a risky venture. In the seven years between its founding and its endorsement by G.M., Lubrizol did not always turn a profit. It is as if the management of Lubrizol saw in Agrigenetics a reflection of the Graphite Oil Products Co.
Nevertheless, there is more than nostalgia behind the acquisition of Agrigenetics. Although the company denies it, for the last thirty years there have been predictions that the additives industry will eventually mature. Additives have become so highly specialized and effective that there may be no pressing need for new ones. Nothing short of a return to draft animals could overcrowd the market, yet the day may come when there will be little room for growth. Plant genetics, while risky, provides unlimited possibilities for new technologies, and Lubrizol wants the patents.
Agrigenetics was purchased at a time when Lubrizol proved itself to be vulnerable to economic trends. Lubrizol has always been able to turn adverse economic conditions to its advantage, but in 1985 the world wide recession began to cut into demand. Despite the rising concern over maintenance, enough machines and vehicles were out of operation to slightly depress the additives market.
Lubrizol responded to this situation by restructuring the company. There has been a shift towards fewer employees in manufacturing and more in the development of specialty chemicals. The workforce has been pared down, but this was accomplished through voluntary early retirement plans rather than layoffs.
1985 was by no means an unprofitable year for Lubrizol. The additives industry as a whole is more insulated than other industries to an economic recession. And as the U.S. economy improves so will the world economy. Coupled with a weaker dollar, this should expand the demand for Lubrizol’s products abroad, which accounts for over two thirds of its sales. The future remains bright for Lubrizol, and the purchase of Agrigenetics provides it with long term growth potential.
LBD Enterprises, Inc.; Genetechs, Corp.; Agrigenetics Corp.; Lyneville Seed Co.; Sungene Corp.; and SVO Enterprise Corp. The company also had subsidiaries in the following countries: Switzerland, Canada, Chile, Spain, Philippines, France, Austria, West Germany, Britain, Australia, Italy, Mexico, South Africa and Japan.