U.S. Industry in 2000 Studies in Competitive Performance (1999) / Chapter Skim
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3 Chemicals
3 Chemicals
Pages 45-74
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From page 45... ...
industries encountered growing competitive pressure from foreign sources and well before the onset of the "oil shocks" of the 1970s that affected prices for the industry's key raw material. Slower growth for its dominant products, including polymers, along with the growth of production capacity offshore, led many leading U.S.
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From page 46... ...
government funded large programs for research and production of synthetic rubber and created massive demand for oil for aviation fuel.3 After the war the demand for cars and gasoline skyrocketed, and by 1950 half of the total U.S. production of organic chemicals was based on natural gas and oil.
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From page 47... ...
Moreover, the development of a world market in oil meant that the oil and natural gas endowments of the United States did not prove to be an overwhelming source of comparative advantaged By the end of the 1960s, European countries and Japan had succeeded in closing much of the gap with the United States. Since then, relative shares in world output have largely remained constant, with the exception of a small decline in the U.S.
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From page 48... ...
chemical industry output; as indicated earlier, these figures have been fairly stable over the 1980s and early l990s. Japan, as Table 1 also suggests, has been increasing its share of world chemical production, producing a little less than two-thirds of the U.S.
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From page 49... ...
and European chemical companies, 1987-1996. Source: Global Vantage database from Standard and Poor.
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From page 50... ...
data: Our calculation based on ESCIMO database (European Chemical Industry Coun cil)
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From page 51... ...
The German chemical industry was strong in other fields such as inorganics and high-pressure chemical processing from coal. BASE for instance had developed the contact process for sulfuric acid, and it was responsible for many process innovations, which culminated in the development of the Haber-Bosch process.
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From page 52... ...
Indeed, research into new catalysts remains the focus of research efforts involving existing polymers, and the recently developed metallocene catalysts are viewed by many as a major breakthrough for plastics (Thayer, 1995~. As with synthetic dyestuffs, polymer science was marked by knowledgebased economies of scope.
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From page 53... ...
Consequently, even small information leaks allowed very rapid imitation. Thus, many chemical companies and some oil producers found themselves operating and competing in very similar markets.
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From page 54... ...
In turn, the development of chemical engineering was key to the progress in chemical processing technologies. CHEMICAL ENGINEERING: THE SCIENCE OF THE CHEMICAL PROCESS If polymer chemistry is the science of chemical products, chemical engineering is the science of the chemical process.
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From page 55... ...
In addition to supplying proprietary processes, some SEFs also acted as licensers on behalf of chemical firms and provided design and engineering know-how. During the past ten or fifteen years, SEFs may have declined in importance but in the post-World War II period as a whole they have played an important role in developing new and improved processes and a crucial one in diffusing new technologies.
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From page 56... ...
Prominent among the early SEFs are companies such as Kellogg, Badger, Stone and Webster, UOP, and Scientific Design.~4 Steeped in a tradition of secrecy, chemical firms were initially reluctant to outsource plant design and engineering. Established chemical companies were especially reluctant to buy technology from SEFs or to enter into alliances with SEFs to develop new technology.
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From page 57... ...
CHEMICALS TABLE 3a Producers, Capacities, and Concentration Ratios for Selected Petrochemicals in the United States, 1957, 1964, 1972, and 1990 57 Ethylene Polyethylenea Ethylene oxide Ethylene dichloride Styrene 1957 Producers 16.0 13.0 7.0 8.08 1964 Producers 20.0 17.0 10.0 10.09.0 Capacity 4.9 1.2 0.8 0.91.0 Concentration ratio 52.1 47.8 70.5 42.170.3 1972 Producers 25.0 21.0 13.0 11.012.0 Capacity 9.8 3.7 1.9 4.72.6 Concentration ratio 40.5 40.8 72.0 60.854.1 1990 Producers 22.0 16.0 12.0 11.08.0 Capacity 18.4 10.3 3.3 8.44.0 Concentration ratio 30.8 37.9 54.2 57.552.1 aIncludes LDPE and HDPE. Notes: Capacity is measured in millions of tons.
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From page 58... ...
Indeed, as we discuss below, many chemical producers also licensed their technology to others. Thus, a major consequence of SEFs was, paradoxically enough, to reduce the strategic importance of process technology, in essence by helping to develop and supply a market for technology (Arora et al., 1998~.
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From page 59... ...
For an industry whose growth was closely tied to manufacturing growth, the oil shock meant a decline in demand precisely at a time when its costs were rising and when opportunities to innovate were becoming rarer. The combination of increasing entry, slower demand growth, and diminishing opportunities for major product innovations on the scale of nylon or polyester forced a consolidation of industrial structure.
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From page 60... ...
firms have outperformed the leading European chemical firms.20 The process of restructuring has been most marked in the basic and intermediate petrochemicals, the sectors with the strongest competition. Several traditional chemical companies in the United States and Europe are exiting from some of their commodity chemical businesses and moving downstream, focusing on businesses where product differentiation based on quality and performance allows for higher margins.
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From page 61... ...
The restructuring of the chemical industry initially focused on cost reduction and, among other actions, managements of firms in both the United States and Europe cut back spending on R&D. Total R&D spending for the leading American chemical firms between 1985 and 1995 increased at a little more than 3 percent a year in nominal terms and even declined from 1993 to 1995.
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From page 62... ...
Chemical Companies, 1986-1995 ($ Millions) Company 1986 1987 1988 1989 1990 1991 1992 1993 1994 Dow Chemicalsa75180789797312131191128912241201 Monsanto740740753666654644651610580 Rohm and Haas165171181195190188199200192 Union Carbide184191185202204195155135130 Air Products & Chemicalsb766984797782859092 W.R.
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From page 63... ...
Whether this shift is merely a cyclical phenomenon or represents a new phase remains to be seen, but a recent industry-supported study has identified the key science and technology areas for research (Vision 2020, 1996~. Table 4b, which presents data for a sample of the TABLE 4b Real R&D Spending by European Chemical Companies, 1992 1996, in 1992 dollars ($ millions)
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From page 64... ...
Source: R&TD and Innovation in the EU - Economic Bulletin - June 1997 Article 2 chart 4, http:// www. cefic.be/Eco/eb9706b .htm 24We lack comparable data for Japanese chemical companies but as Figure 3 below suggests, R&D spending by Japanese firms is likely to have gone up during this period.
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From page 65... ...
To some extent, these trends reflect the increasing importance of drugs in the chemical sector and the concomitant decline in the share of plastics, fibers, and ~ ~ Chemcals and allied products ~ industrial chemcals 18.000 16,000 14,000 12,000 1 0,000 ~ 8,000 6,000 | ~ Mugs and n~dicines -~- Other chemcals 2,000 ~1: ~ -- a ~ o 1 1 1 1 1 1 1 1 1 1 1 ~oo a)
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From page 66... ...
Instead, firms will license the generic process technology and, as illustrated by the example of Quantum, focus on adapting and improving the technology to best suit their needs and those of their customers. Perhaps the most vivid example is the metallocene catalysts, which have been used in many of the most significant process innovations in recent years because they provide greater impact strength and toughness, melt characteristics, and clarity in films than do existing catalysts.
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From page 67... ...
, Phillips, Exxon, and BP that have been licensing their technologies for quite some time, a number of leading chemical producers such as Dow, Monsanto, Du Pont, and Hoechst are actively rethinking their traditional reluctance to license. For instance, Dow expects to earn $100 million in licensing revenues by 2000, while Du Pont hopes to reach the same target by 2005.
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From page 68... ...
Both factors reflect a division between basic or general purpose research not tied to specific applications and downstream application and development research, which is decentralized and globally dispersed. Fundamental research, on the other hand, is becoming geographically concentrated.
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From page 69... ...
Although molecular models have been used for some time in the pharmaceutical sector, their use is now expanding in areas such as organic chemicals, as well as new materials and processes. Chemical modeling techniques require greater understanding of the fundamental aspects of the phenomena that have to be modeled as well as the creation of simulators, which are inevitably general in nature (Vision 2020, 1996~.
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From page 70... ...
The chemical industry does have large and diversified companies, but in recent years these companies have been narrowing their product portfolios at the same time as the knowledge required is growing more complex and interdisciplinary. Reduced market opportunities for many chemical companies, caused by slower demand growth and increased competition, have intensified the problem (see, for instance, Lenz and Lafrance, 1996~.
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From page 71... ...
Similarly, a global market for capital gives shareholders the opportunity to look for the best returns, putting managements under pressure to cut costs and improve shareholder value. In the chemical industry, technological superiority was often a key component of competitive advantage, and the clear relationship between advances in chemistry and chemical engineering had led the market leaders to fund a substantial amount of basic research.
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From page 72... ...
. "The Evolution of Corporate Capability and Corporate Strategies within the World's Largest Chemical Firms." In Chemicals and Long-Term Economic Growth, Arora, Landau, and Rosenberg, eds.
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From page 73... ...
. "The Learning Curve, Technological Barriers to Entry, and Competitive Survival in the Chemical Processing Industries." Strategic Management Journal 10.
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From page 74... ...
. "The Origins of American Industrial Success, 1879-1940."American Economic Review 80(4)
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