INDUSTRY & BUSINESS
Above San Francisco workman sprays beams with silicone rubber
Chemical companies move deeper into construction Despite construction's current slump, CPI firms ready for "inevitable boom" Like "contrary-minded" stock traders in the trough of the bear market, chemical companies are pushing sales and investment in the construction field—perhaps the most depressed industry in the countiy. The building industiy has drawn chemical companies into deeper product penetration—one recent example is factory-applied silicone coatings on plywood— and more hard investment such as Olin's housing ventures. What in this critically weak sector of the U.S. economy could be so attractive to chemical companies? Conventional wisdom is that construction can only get better—and must take the route of new technology (modular construction, synthetic materials) to do so. In spite of firstquarter housing starts, which fell more than 20% from last year's already poor showing, chemical companies are positioning themselves for a boom many observers say is inevitable. But will it all be automatic? Lawrence C. Russell, a consultant at McKinsey, one of the country's largest management consultant companies, warns that the construction industry is due for an internal restructuring which will greatly alter—and improve—the openings to makers of synthetic materials.
At present, basic chemical producers display amazingly varied approaches to the construction field, which has an annual turnover more than three times their own. Mr. Russell notes this multiplicity is a natural consequence of the unstructured nature of the market. Companies have been forced to make opportunities where they can, selling through many company divisions to different levels of the construction industry. Complex selling. There are several chemical companies that provide examples of the complexity of selling to the construction industry, including Celanese, General Electric, and Olin, which have long-standing programs in construction. At Celanese, involvement in construction comes through both product sales and new ventures. The key building product lines are Devoe paints (Celanese Coatings Co.) and Yardley plastic pipe and fittings. Yardley works primarily with acrylonitrilebutadiene-styrene (ABS), but also with polyvinyl chloride and polyacetyl resin. Celanese reaches construction through other product lines, such as the 100 million board-feet of lumber made per year as by-product in its pulping operations. However, Celanese also takes an
In General Electric training session, roofers prepare joint for coated plywood
entirely different tack with direct building enterprises in New York City. The company's joint venture with American Standard has put up one low-income apartment building on Manhattan and is working on four more sites in the Bronx, in addition to a luxury building site in Yonkers. No relation. Celanese vice president William A. B artel observes, "The low-income housing projects in New York City have no necessary relation to our products. It is an illusion that you can build enough houses to contribute to the market for a product." Mr. Bartel estimates a company would need to create housing in the billions of dollars to make a captive market for its products. However, Celanese thinks highly of its projects for a different reason. The projects have educated the company in the ways of the construction market and may, in time, set examples of new techniques and demonstrated product applications to be followed by the traditional construction industry. One of the lessons Celanese has learned is that neighborhood involvement is crucial for planning and building low-income projects. For the future, Celanese's building chief sees urban construction in large projects on land which only the government can assemble. Projects would have 1000 to 5000 units and would demand the management skill of a large corporation. These projects would be out of the league of the small contractor. At present, Mr. Bartel agrees that Celanese is in a waiting, proving period. "We're just on the first step," he says. Construction group. Another company that has initiated unique ap-
Housing starts in U. S. fell on all fronts in first quarter 1970 200
Units (thousands)
150
100
Source: Advance Mortgage Corp.; Mobile Homes Manufacturers Association
proaches to reach the construction field is General Electric's silicone products department. The department has formed a customized construction marketing group under manager Donald V. Brown, whose product lines are sealants, roofing coatings, and traffic toppings. Traffic topping includes resins for a new series of factory-coated plywood sections being introduced this week by Weyerhaeuser at the American Institute of Architects meeting in Boston. Mr. Brown calls construction one of the most promising volume outlets for silicones. To help establish the market, GE started a contractor-education program last year. To date about 100 contractors have taken two days 6f training. Afterwards, they must pass three test installations with silicones to get the company's designation of qualified contractor. Beyond this, GE's Re-entry and Environmental Systems division, Valley Forge, Pa., has moved into construction under one of the U.S. Department of Housing and Urban Development's Breakthrough contracts (C&EN, March 9, page 1 2 ) . Even greater commitment to housing by a chemical company has come about at Olin, which sees this market as one of its three best growth areas and hopes to sell $300 million in the area by 1974. Olin sells numerous products to construction and has three housing ventures that include factoryproduced housing, housing developments, and experimental housing using innovative materials. Olin's director of new business development, Lane Thorson, says the company's ventures in housing can not only be outlets for Olin products
but also serve as testing bases for new products. However, the main company rationale for the ventures is diversification into a growth area. As for marketing of product lines into construction, Mr. Thorson points out that a new company survey shows no general pattern of market channels. Whether a product goes to building suppliers, dealers, or other outlets, or whether technical service or educational programs are necessary, is strictly u p to the individual profit center within the company. Unavoidable attack. At McKinsey, Mr. Russell looks at this multipronged attack on the construction market as unavoidable at present. He says that it is now unnatural for a chemical company to organize its marketing function as a single corporate entity. A company must do the best it can through existing product lines and specific building enterprises such as joint ventures with building suppliers, he remarks. It is too much of a risk, according to Mr. Russell, for a chemical company to centralize its marketing in construction before the building industry itself reshapes. This restructuring will definitely occur, he says, although not through outside forces. The plain fact is that middle-income housing can no longer be built at present costs. What will happen, in the consultant's view, is an emergence of two new centers of power in constructionentrepreneurial development companies and merger-created suppliers in commodity materials such as cement. Present contractors will become commissioned builders and will not merge because of the vastly different building conditions in different communities.
Thus, Mr. Russell says that if he ran a chemical company he would find where there are important materials suppliers, build relationships with them, and think about working with development entrepreneurs. When these two corporate entities become powerful, the chemical companies can set u p organizations to sell regions with a minimum of transactions. On the materials side, the McKinsey specialist suggests that chemical companies can profitably establish market chains in cooperation with building suppliers which already have contracts in the industry and will build a substantial market leverage as they merge. A specific material to develop is composites, Mr. Russell points out. Various rationales. As to basic motivation for entering construction, Mr. Russell cites various rationales for different industries. For instance, oil companies have gone deeply into construction to develop land on which they have mineral and surface rights. One example is Shell Oil Co.'s $1 billion real estate development disclosed earlier this month in Houston, Tex. On the other hand, chemical companies say their own push into construction stems from social responsibility and the need to diversify away from commodity chemicals. Diversification should be into growth areas with a high public visibility, chemical companies believe. In spite of this potential, Mr. Russell still prescribes caution for chemical companies moving toward the building field. "I don't see every chemical company dashing into construction," he says. "This is an interesting market, but it must reorganize before many market risks are worth it." J U N E 22, 1970 C & E N
33
