"Still Pretty Tough" at Dow Chemical
Four years ago, William S. Stavropolous stepped aside as chief executive of Dow Chemical (DOW ), turning the job over to his hand-picked successor, Michael D. Parker, a 34-year veteran. Parker lasted two years. As losses deepened and Dow's share price suffered a meltdown, Stavropolous, who had stayed on as chairman, reclaimed the CEO post in December, 2002.
It's hand-off time again at the world's No. 1 chemical company. On Nov. 1, Andrew N. Liveris, 50, moved up from chief operating officer at Dow to take over as CEO. And this time, it looks like the new guy will last.
What's different? For one, Dow is much leaner. Over the last two years, it has gone through a deep restructuring, or as Liveris terms it, "an intervention." Under Stavropolous, the Midland (Mich.) outfit closed or sold off dozens of inefficient plants and cut 7,000 jobs -- 14% of its global payroll.
Also in Liveris' favor: Demand for Dow's catalog of chemicals and plastics has rebounded around the world. The business is expected to post record profits of $2.2 billion on sales that could top $40 billion in 2004, and Liveris sees even higher numbers in 2005. Dow's share price, which had slumped to nearly $25 as recently as March, 2003, closed at $45.19 on Nov. 1, up 9% for the year and near its 52-week high of $46.40 reached in early October.
Though Liveris joined Dow just after getting his bachelor's degree in chemical engineering in 1976, he has something of an outsider's perspective. He was born and raised in Darwin, Australia, a port city closer to Indonesia than Sydney. He joins a small group of Australians now running some of America's brand-name multinationals, including McDonald's (MCD ) CEO Charles H. Bell and Kellogg (K ) Chief Operating Officer A.D. David Mackey.
Liveris, a self-described stargazer, talked with BusinessWeek Senior Correspondent Michael Arndt on the eve of his promotion. Here's an edited excerpt of their conversation:
Q: One of the things you've done to balance higher raw-material costs has been massive job cuts. Are you done with this? A:
Q: One of the things you've done to balance higher raw-material costs has been massive job cuts. Are you done with this?
A:We believe the interventions of the last 18 to 24 months have had a lot to do with the lack of export competitiveness of our U.S. assets. That should be stabilized by now. We'll continue to find ways to be productive. We're always looking at ways to be less inefficient. But I doubt there'll be severe head-count reductions of the type you've seen.
Q: You were able to boost your profit margin, despite huge increases in your expenses for natural gas and oil, which you use as energy and as raw materials for chemicals and plastics. I'm wondering if the heavy lifting is over. A:
Q: You were able to boost your profit margin, despite huge increases in your expenses for natural gas and oil, which you use as energy and as raw materials for chemicals and plastics. I'm wondering if the heavy lifting is over.
A:The heavy lifting is not over. The year-on-year cost increases were substantial, and we're expecting $400 million more in the fourth quarter. Obviously, oil and gas prices at these levels are not our friend. The fact of life is that even though we're in a better place than we were a year and a half ago, it's still pretty tough.
What we're saying is that the countervailing winds of demand vs. the winds of hydrocarbon costs has tilted the balance a little bit more to our favor. Our operating rates are now over 90%, which is high. That means that [for the most part], we have a degree of price power returning to the producers. The consequence of that is that we can keep covering these hydrocarbon and energy costs and still see margin expansions. And [over] the next several years we believe we'll have margin expansion because of tight supply.
The market is robust. It's across the board and across all geographies. But it's still very hard work because our customers obviously haven't seen these sorts of price increases for a long time.
Q: Earlier this year, Dow announced plans for two petrochemical joint ventures in Kuwait and Oman, where natural-gas prices are much cheaper. At the same time, you're scaling back and selling off U.S. assets. Do high natural-gas prices doom the U.S. chemical industry? A:
Q: Earlier this year, Dow announced plans for two petrochemical joint ventures in Kuwait and Oman, where natural-gas prices are much cheaper. At the same time, you're scaling back and selling off U.S. assets. Do high natural-gas prices doom the U.S. chemical industry?
A:They don't doom the U.S. chemical industry. Its capacity was based on low-cost natural gas and partly built for export. What we're seeing with natural-gas prices north of $8 per million BTUs is that we've lost competitiveness as an exporter. Our view is that oil prices will go down over time. But we don't have the view that natural-gas prices will go down. We and others are recalibrating our capacity in the U.S. to serve only the domestic market.
Q: Let me turn a little bit to your background. Is there something about being Australian that accounts for more Australians at the top of U.S. business these days? A:
Q: Let me turn a little bit to your background. Is there something about being Australian that accounts for more Australians at the top of U.S. business these days?
A:From my perspective, I grew up in an Outback town in northern Australia, close to the shores of Indonesia and Southeast Asia, and it was a real melting pot of Chinese, Malays, Indonesians, and people from Papua New Guinea, as well as a multiplicity of Europeans -- Greeks, Italians, Yugoslavs. I've seen diversity in all of its shapes, colors and sizes.
The Australians also have a healthy disrespect for authority -- you know, our convict past. We call it as it is, and that's why we're such fierce competitors. We're egalitarian. We believe in the power of everybody. We don't believe in class and separating people based on how they were born or what wealth they have.
Q: Is there anything about U.S. culture that still surprises you? A:
Q: Is there anything about U.S. culture that still surprises you?
A:The affinity between the U.S. and Australia is very high. You've just been at it a lot longer, and you've got 10 times the number of people, which I think constrains you a little more. Australia is still very rebellious, very much a pioneer country -- still testing the rules, so to speak.
I really think your model of allowing people like me to rise to the top, the immigrant model, is exceptional. We need to advertise that more. The American model of humanity is the greatest power. That's what surprises me -- how that withstands all the other attacks on your institutions.
Q: Are there any issues or things that you want from Washington regardless of who wins?A: An energy policy.... We've been in Washington countless times advocating for a policy that doesn't allow for the destruction of vital manufacturing sectors. If you've been following the natural-gas industry, you've seen an inordinate amount of power stations built on natural gas to meet rising electricity demand over the last 10 years.
There's abundant coal in the U.S., and nuclear plants never get built because of environmental activism. But there isn't even [energy] conservation being put in place. Just stopping the guzzling so much would enable the manufacturing sector to have competitively priced energy and ensure its highly paid jobs.
I can't escape this opening without talking about tort reform. We desperately need tort reform. The cost of doing business in the U.S. is huge and is manifesting itself in all sorts of forms, whether it be the cost of health care, which employees can no longer afford because of malpractice, or product liability and mass tort. We've got to change that. I hope the next Administration will make this a priority.
Q: Of course, Dow Chemical has a stake in capping liability. Dow Chemical faces asbestos liabilities of $1.7 billion, which you inherited from your takeover of Union Carbide. A:
Q: Of course, Dow Chemical has a stake in capping liability. Dow Chemical faces asbestos liabilities of $1.7 billion, which you inherited from your takeover of Union Carbide.
A:We've dealt with it. We're working with the Bush Administration and all the appropriate members of Congress to really try to pull together a trust fund that would pay these liabilities. We don't believe anything is going to happen imminently. But we're still working very hard on this. In the meantime, we're taking on the battles that need to be won in the courts. And, of course, we're making sure our shareholders are protected at all times.
Q: I'm curious what you're reading these days. A:
Q: I'm curious what you're reading these days.
A:Maybe I shouldn't reveal this, but I'm into astronomy and math and science. I have read all of [physicist] Stephen Hawking's books, and I am re-reading The Universe in a Nutshell. I started it again because of the Cassini space probe that's exploring Saturn right now. I'm into stargazing.
Q: So do you have a good stargazing spot in Michigan? A:
Q: So do you have a good stargazing spot in Michigan?
A:No, but I do when I'm traveling. I saw Halley's Comet over the North Pole flying from Hong Kong to Chicago. The pilots invited me up to the front -- this was obviously before 9/11 -- and I got to sit up there and watch it for about an hour. It was one of the biggest thrills of my life.
Edited by Patricia O'Connell