A New Formula

Dow Chemical’s Andrew Liveris is trying to concoct a market-oriented culture.


For years Andrew Liveris, the Australian-born chief of Dow Chemical Co., has been sounding alarms about volatile oil prices and the flight of manufacturing jobs out of the U.S. “And in September, I was screaming, ‘Don’t let credit freeze, it’ll impair the consumer!’” Liveris says. “Well, it certainly played out that way.”

If the economic downturn had remained confined to the automotive sector and housing or even to the U.S., the chemicals giant based in Midland, Michigan, might have gotten by with a minor bruising. It has one of the industry’s most diversified and international customer bases, and it has been steadily increasing the amount of non-oil-based ingredients it uses.

But Liveris’s prescience couldn’t cushion Dow, which takes in about $53 billion a year in revenue, from last year’s economic carnage. The company could neither raise prices enough to offset soaring costs nor find healthy markets to compensate for soured ones. Profits nosedived. Dow shares, which had traded in a range from $35 to $45 since mid-2005, began dropping precipitously last summer. They closed at $11.59 on January 30, several days after Liveris said the company might cut its dividend, despite earlier assurances that it would not.

Dow suffered further blows in late December, when Kuwait’s Petrochemical Industries Co. pulled out of K-Dow Petrochemicals, a previously agreed-upon joint venture that had promised to be a huge source of profits. Perhaps even more troubling, PIC had promised to pay Dow $7.5 billion for the plastics businesses it would put into K-Dow. Liveris planned to use that money to acquire specialty materials company Rohm & Haas, based in Philadelphia. Now Dow has refused to conclude the deal on schedule and is being sued by Rohm & Haas.

Liveris believes shareholders are overreacting. In December he announced a massive cost-cutting program, and Dow has access to bridge loans. It is also suing PIC for a $2.5 billion breakup fee, and Liveris says he’s talking to other potential joint venture partners. “We can do this very quickly with the right partner, given that we’ve already laid all the groundwork,” he says.

In a series of recent conversations with Institutional Investor Contributing Writer Claudia Deutsch, Liveris laid out his plans for Dow and his hopes that Washington will reshape policies.

Institutional Investor: The industries you serve are depressed, and your planned deals are in jeopardy, yet you seem relentlessly upbeat about Dow’s prospects. What am I missing?

Liveris: People are reacting to the current economic problems as though this were Armageddon, with zero to negative growth around the world. It’s just not true. The Chinas of the world are just growing a lot slower than they were before. Their governments are still injecting funds into their economies and stimulating consumption.

Dow’s operating mantra is to manage for cash and protect what you can. We have a good balance sheet and good cash flow, and we’re still planning to spend $1.6 billion on research and development in 2009. So we’ll be in a good position when the economy does turn around.

But the entire chemical industry is seeing double-digit volume declines. How can you maintain a cash-rich position if the downturn drags on?

We’ve shut down 20 factories and idled 180 that we’ll bring back when growth resumes. Some 70 percent of our revenues come from overseas, and we have 450 facilities left to service them.

We’ve been concentrating on what we call asset-light projects. We go into large markets like China or Brazil, which have high growth and low feedstock costs, and build factories that can produce a wide variety of products.

And we’ve had an incredibly positive side effect from a hugely negative event — the lower prices for oil.

Low oil prices are a negative event?

Oil prices are down because demand has been destroyed. You may smile when you see $1.50 at the pump, but then you drive by the closed factory next door. So sure, I’m paying less for hydrocarbon feedstocks, but I’m still losing volume.

Price volatility is the real enemy. I’d like to see a floor on oil prices. We need stable prices for manufacturers and a price floor for innovators.

But the U.S. doesn’t control oil supplies or pricing. Can Washington really do anything about energy volatility?

It can do a lot about energy usage. We need better tax credits and incentives for buildings to improve energy efficiency, and we need to improve compliance with building codes. Homes and buildings account for 50 percent of greenhouse gases and 40 percent of energy demand. Overall, I want to see the Obama administration push for a comprehensive national energy policy and take the lead in international climate change policies.

You have often said that bad policies have cost this country 5.2 million jobs, $190 billion in wages and $76 billion in benefits. But didn’t those jobs go elsewhere precisely because companies didn’t want to pay workers that much?

Compensation is just a small part of the story. Energy costs, for example, have an enormous impact on where we build plants. If we can operate with lower energy costs elsewhere, then we probably will.

We need an industrial policy that addresses all the reasons that jobs are moving overseas. Making stuff still matters in a global economy. America’s ability to compete internationally still rests on its manufacturing base.

You are chairman of the U.S.-China Business Council, and in October you took a dozen American CEOs to China to spur activity. What did it accomplish?

Energy efficiency, environmental controls, currency exchanges — all were on the table. And we talked specifically about China’s stimulus plan to keep infrastructure projects going. They gave us a heads-up on $586 billion worth of planned projects and urged U.S. companies to participate in them.

In July you agreed to buy Rohm & Haas for $78 a share, which many analysts say was way too high — a sum you now say you can’t afford. Have you soured on the deal entirely, or do you still want the company if it will agree to a lower price?

Rohm is a premium beachfront property that at worst lost a few shingles in the economic storm. Dow does about $3 billion a year in coatings; Rohm does $4.5 billion. Together we’ll be the world’s largest coating manufacturer. Rohm is a major player in the electronics industry. And when you add its ion-exchange technologies to Dow’s reverse-osmosis technologies, you have a full spectrum of water treatment offerings.

And Rohm has the customer-oriented culture we want. Historically, Dow has focused on what it could develop and efficiently produce. But this decade we’ve been creating market-based businesses aimed at specific industries, like health or infrastructure. If we merge our water, coatings and electronics businesses with Rohm, we’ll create a business that is fully market-oriented.

Why not merge all of the businesses, and let that market-driven approach filter throughout Dow?

You have to phase in an integration. And there are good things about the Dow culture we want to preserve. We are astute operators, we leverage shared services well, we keep costs low. The trick I’m trying to pull off is to have a low-cost back-room culture within a culture of growth.

We would set up a separate group of market-oriented businesses centered on agriculture and health. And Dow does about $10 billion in specialty chemicals, which meet specific customer needs. So if we do buy Rohm, that means about two thirds of our annual revenue will be coming from market-oriented businesses.

You recently got some high-profile support for your strategies.

Is it true that Warren Buffett has become a major investor?

[He planned to invest] with us to buy Rohm & Haas. [If] we close the deal, Berkshire Hathaway will become Dow’s largest shareholder. He said to me, “Call me and I’ll decide in ten minutes.” And he did.

When the economy does recover, which sectors will be most important to Dow?

Probably infrastructure and agriculture. Some of our older businesses have reached the end of their useful life. The transportation industry has already replaced steel and aluminum with lightweight plastics, so there’s not much growth there. Maybe we’ll look to develop nanocomposite materials that are even more lightweight than plastics.

We’re definitely going to accelerate our investments in alternative energy projects and in water treatment and coatings. And we are working with pharmaceuticals companies to develop better drug delivery systems. We’re even looking at cosmetics and fibers as areas of growth.