Dow Chemical's Aussie Alchemist

CEO Liveris is striving for just the right blend of cost-cutting and price hikes

Four years ago, William S. Stavropoulos stepped aside as chief executive of Dow Chemical Co. (DOW ), turning the job over to his handpicked successor, Michael D. Parker, a 34-year veteran. Parker lasted two years. As losses deepened and Dow's share price melted down, Stavropoulos, who had stayed on as chairman, reclaimed the CEO post in December, 2002. Last November the baton was passed to then-COO Andrew N. Liveris. And this time, it looks as if the new guy -- a Dow lifer -- will stick.

What's different? For one, Dow is much leaner. Over the past two years, Dow has gone through a deep restructuring, or as Liveris terms it, "an intervention." The Midland (Mich.) company has closed or sold off dozens of plants and cut 7,000 jobs, or 14% of its global payroll.

Another difference is rising global demand for Dow's chemicals and plastics, especially from China. Indeed, Dow's upswing comes as the chemicals sector is emerging from a punishing slowdown. After five years of little-to-no change in total output and meager revenue growth, industry-wide sales surged by nearly 9% last year and are expected to grow another 6% in 2005, to $531 billion, according to the American Chemistry Council, an industry group.

For Dow, too, it has been a banner year. It's expected to report on Jan. 27 that it earned a record $2.4 billion in 2004 on sales of $40 billion, also an all-time high, and Liveris sees even higher numbers in 2005. Dow shares, which drooped to $36.35 last May, fetched $49 in mid-January, double the price two years ago, and just below their 52-week high.

Now 50, Liveris joined Dow in 1976 just after getting his bachelor's degree in chemical engineering. But he has preserved something of an outsider's perspective, having been born and raised in Darwin, Australia. He joins a small fraternity of Australians who have risen to the top of Corporate America, including former CEOs Charles H. Bell at McDonald's Corp. (MCD ) and Douglas N. Daft of Coca-Cola Co. (KO ).

Liveris, a self-described "stargazer," recently talked with Senior Correspondent Michael Arndt before Dow's pre-announcement quiet period.

Last year, Dow boosted profit margins despite huge increases in spending on natural gas and oil, which you use as energy and as raw materials or feedstocks for chemicals and plastics. Is the heavy lifting is over?

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.

There are the countervailing winds of demand vs. the winds of hydrocarbon costs. Lately the balance has tilted a little bit more to our favor. Our capacity utilization rates are now over 90%, which is high. That means that in the main, we have more price power. The consequence 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 haven't seen these sorts of price increases for a long time.

To offset higher raw material costs, a lot of jobs have been cut as well. Are you done with this?

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 prior to our productivity measures. That should be stabilized by now. We will continue to find ways to be productive. But I doubt there will be severe head count reductions of the type you have seen.

Recently, Dow announced plans for two petrochemical joint ventures in the Middle East, in Kuwait and Oman, where natural gas prices are much lower. At the same time, you've been scaling back and selling off U.S. assets. Do high natural gas prices doom the U.S. chemical industry?

They do not doom us. Our industry had capacity that 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 expect that natural gas prices will go down. What you're seeing is an intervention as we and others recalibrate our capacity in the U.S. to serve only the domestic market.

In the grand scheme of things, though, I take it that more of Dow Chemical's investments will go abroad.

Our strategy for growth says we must participate in emerging markets where we are not as big and are not as omnipresent as we are in the U.S. and Western Europe. That means China, India, Russia, and Eastern Europe. The strategy will also include accessing low-cost feedstocks in places like the Middle East and the Far East. So yes, you'll see more asset investment in higher-growth markets.

Let's talk about your background. Is there something about Australia that gives your country's executives an edge in the U.S.?

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. Australians also have a healthy disrespect for authority -- you know, our convict past. We call it as it is, which is why we're such fierce competitors. We're also egalitarian. We believe in the power of everybody. We do not separate people because of class or how they were born or what wealth they have.

Is there anything about the U.S. culture that still surprises you?

I just came back from Russia and Germany. Americans are respected and liked. But as the world leader, the U.S. is on a pedestal. That makes it hard to achieve that respect. I think there has to be a lot more outreach. I think your model of allowing people like me to rise to the top -- the immigrant model -- is exceptional. We need to advertise that more.

In President George Bush's second term, and with a new Congress, what do you want from Washington today?

An energy policy. This country is at the point it is, with dependency on imported oil and insufficient natural gas supplies, because of a lack of an energy policy. We've been in Washington countless times advocating for a policy that does not allow for the destruction of vital manufacturing sectors.

If you've been following the natural gas industry, you've seen an inordinate number of power plants built on natural gas to meet rising electricity demand over the last 10 years. There is abundant coal in the U.S., and there is nuclear potential that never gets built because of environmental activism. But conservation isn't even being put in place. Just stopping the guzzling would enable the manufacturing sector to have competitively priced energy and ensure its highly paid jobs. We need sympathetic listeners in Washington from both parties.

I can't escape this opening without talking about 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 administration will make this a priority.

Of course, Dow Chemical has a stake in capping liability. Dow faces asbestos liabilities of $1.7 billion, which you inherited in taking over Union Carbide.

We've dealt with it. We've been working hard 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. 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 by setting aside necessary reserves.

What about your spare time -- what are you reading these days?

I'm into astronomy and math and science. I have already read all of Stephen Hawking's books, and I am rereading The Universe in a Nutshell. I started it again because of the Cassini space probe that is exploring Saturn right now. I'm into stargazing.

Do you have a good stargazing spot in Michigan?

No, but I have had on flights from Russia to here. Actually, I saw Halley's Comet over the North Pole, while flying from Hong Kong to Chicago. The pilots invited me up to the front -- this was 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.

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