BUSINESS
Arco Chemical's Sorgenti Mulls Major Issues Confronting Industry Earlier this year Arco Chemi cal's Harold A. Sorgenti re ceived the Commercial Devel opment Association s 1990 Honor Award for introducing technological advances and applying them to new con sumer and commercial prod ucts. But Sorgenti has not only commercialized new. ^products for new markets. As a chemical engineer, he was involved early in his career in discovering and refining new chemical technologies. As president and chief ex ecutive officer of Arco Chemi cal, a part publicly owned subsidiary of the petroleum products giant, Atlantic Rich field Co., Sorgenti has a unique perspective on the role research plays in the develop ment and commercialization of new chemical products. He also has some opinions on the role research plays in a compa ny's profitability and by extension on the success and compet itiveness of the U.S. In an interview with C&EN associate editor Marc S. Reisch, Sorgenti gave his views on how investments in re search make for a profitable company, outlined strategies for capitalizing on that research to build global businesses, and described the cntical need for a better educated population to ensure a supply of future scientists. He decried the U.S. gov ernment's lack of critical leadership in dealing with the bud get deficit so that the country could get on with the business of business in a post cold war world, and he offered some in sight in how he believes the chemical industry should handle itself amidst public concern over cntical environmental issues. Why do you stress technological innovation at Arco Chemical? I believe there are relatively few criteria that allow you to compete effectively. For a company of modest size like Arco Chemical, you need some margin of differ ence such as technological innovation to stay competi tive. Other, larger companies are outspending us in re search by a margin of 10 to one. They have vast re sources and enormous numbers of people. We compete against some enormous companies like the French and
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How has your strategy to grow through technologi cal innovation helped you compete more effectively? In 1980 Arco Chemical was a much larger company than today. At the time we had sales of about $3.5 bil lion. We decided we could not compete effectively in all the businesses we were in because our technology was n o t d i f f e r e n t i a t e d compared with our com petitors. We set up a series of fairly simple standards to evaluate our business portfolio. The first was that we had to have a tech nological or cost advan tage. The idea is that a technological advantage gives an inherent cost advantage, which is critical to our ability to compete. Secondly we had to have a strong market position. We were in many businesses in the eighties where we had a market share of 2 or 3%. We found that is not an attractive position. We looked at our businesses to see where we had important mar ket shares. General Electric's Jack Welch decided his company ought to be number one or number two in the businesses GE was in. We made a similar decision in 1980. Finally we thought that if we had unique prod ucts, we ought to be able to compete effectively. We evaluated our businesses against those standards. They are simple to understand and communicate to your people. Then we decided to go through a rationaliza tion and divestment program. By 1985, this $3.5 billion company was down to a company with $1.5 billion in sales. However, it was positioned extremely well to grow effectively and profitably. To me, technology is one of the key ingredients that allows you to be com petitive and gain an advantage. Do you see an economic slowdown ahead both in the U.S. and overseas? There is no question that we began to see a slowdown last July, primarily in durable goods markets like housJune 4, 1990 C&EN
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Business ing and appliances. The slowdown is still with us. It is not serious and will be moderated by the fact that we've seen some major new markets open. We've un derestimated the potential represented by Eastern Eu rope and the Soviet Union and even the Far East. Chi na alone represents demand from a few billion people. The Soviet Union and Eastern Europe represent a mar ket size as large as Western Europe. Prior to this year there were three great markets: the U.S., Western Eu rope, and Japan, along with the Far East. There are two additional markets now: China and Eastern Europe. However, it will take some time for those markets to develop. As these new markets will not provide immediate op portunities,, will any other trends moderate the cur rent slowdown? For one, industry has dramatically improved its cost structure, compared with the past. We've also rational ized capacities and are involved in more strategic busi nesses. Most people are also careful about adding capac ity, so there isn't as much overcapacity. An excellent example is that in the past few months a few plants shut down unexpectedly in styrene and that caused a genuine styrene shortage around the world. That indi cated to me that supply and demand is still tight. A number of new styrene plants will relieve that shortage soon. Inventories are also much lower now than during the recession in the early eighties. Another moderating factor is that so many companies are global and all world markets do not go into recession simultaneously. So while one market is softening, another is proceeding at a reasonable growth rate and that has a moderating effect.
capacity at very low cost. From a profitability stand point, I don't think people will see the heady days of 1988. But the downturn for companies like us will be less severe than for others. Will the highly touted 1992 internal trade improve ments in the European Community help Arco Chem ical compete in Western Europe? It will help in reducing tariffs and paperwork. We've been fairly well positioned in Europe for a long time. We have plants in the Netherlands, Belgium, and southern France, and sales offices throughout the con tinent with headquarters in England. The move to a single market will stimulate growth in Europe, create greater demand and a better marketplace for us in Eu rope. We're looking at another major propylene oxide plant in Europe and we're currently undergoing a poly- '" ol capacity increase in southern France. How are you positioned competitively in Asia? As you know we have a joint venture in South Korea, but we also have had a successful venture in Japan with Sumitomo for years. It's one of the most successful joint, ventures in Japan. It's quite profitable. The relationship has been a long and very harmonious one. We're look ing at expanding that. We also bought a little company in Taiwan called Chiunglong Petrochemical. It was a publicly traded company and we made a tender offer for the stock. We didn't get all of the stock but we own in excess of 80%. We just commissioned a polyol plant in Indonesia. That country has a very rapidly growing chemical market. The day I went there to inaugurate the plant, the president of Indonesia christened 13 pet rochemical plants including ours. Indonesia has the fifth largest population in the world. It will have very strong economic growth, particularly since the country has its own raw materials. Last year we moved our Far East sales and marketing headquarters from Japan to Hong Kong. If you look at Asia we're quite well posi tioned for future growth. We're also evaluating oppor tunities in China and Thailand. I think there is a lot of potential there.
How has Arco Chemical specifically altered its opera tions to weather the current U.S. slowdown? Last year we had 46% of our assets outside the U.S. and about 45% of our sales outside the U.S. In addition, im provements in our own cost structure will help us weather a slowdown. We have installed cogeneration facilities since the early eighties in some of our U.S. plants and that has dramatically improved our utility costs and effi ciency. They are o p e r a t i n g in Since Arco Chemical went Channelview, Tex.; Bayport, Tex.; and at the Beaver Valley plant in public in 1987, its sales... Monaca, Pa. We've also built flexi I Billions bility into our plants. Demand con 31 tinues in the gasoline market for octane enhancers. We can change the ratio of coproducts produced at 2 our plants so that while propylene oxide demand may be lower now, we can run them at a much higher ratio in favor of octane enhancers. 1 We've dramatically improved our processes over the past 10 years to improve our costs. We're also oper ating at a much higher total capac ol ity than we did 10 years ago even 1984 85 86 87 88 89 as we've added a lot of incremental 10
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The move to a single market will stimulate growth in Europe, create greater demand and a better marketplace for us in Europe
Why did you move Arco Chemical's Far East headquarters to Hong Kong when so many of the local firms are moving out in anticipation of China's takeover of the British colony within a few years? Is that to position you better for a future foray into China? It's both that and the fact that Hong Kong is quite central. Distances in Asia are enormous. A flight from Tokyo to Singapore is eight hours. Just contrast that in terms with our ability to fly from Philadelphia to the West Coast or Chicago or Houston in under five hours. Hong Kong is quite central and allows management teams to move around the area. That was the main reason. It also allows you much easier access to China and development of that major market in the future. You use joint ventures more in the Far East than you do anywhere else. Why? Joint ventures are always appropriate when either party benefits from the combination. The main reason for joint ventures in the Far East is access to the marketplace. The U.S. partner frequently brings technology and sometimes money. The foreign partner brings access. We would rather operate without joint ventures. But where there is a need and both parties benefit, we don't have any aversion to joint ventures. One of the challenges of the nineties will be to operate businesses on a global basis. On some product lines we already do that: propylene oxide, polyols, and octane additives. The mechanism for global product lines will be quite important in the future and that may involve joint ventures. Your R&D budget increases are slowing from year to year. The increase amounted to 29% between 1987 and 1988 to $44 million, and only 18% between 1988 and 1989 to $52 million. Why? What will the rate of increase be in 1990? I think R&D will be up 10% in 1990. The limitation there is the ability to absorb people. We've had an enormous increase in R&D staff. The ability to absorb, train, and integrate those people into our system and our phi-
losophy is really the limit. After we've digested the growth we've already undertaken, future growth will come in spurts. I don't believe that the dollars you spend or the number of people you hire is critical. The focus of what you do, the quality of your people and staff are key ingredients to successful R&D. But I am very pleased with what we've accomplished in a fairly short period of time. We anticipated environmental problems with certain solvents and developed a whole new product line of glycol ethers that are environmentally sound. We anticipated the problem and then did the research and now have the products available when they are in demand. That is the key to success. Another example: We anticipated lead phasedown in gasoline many years ago. We developed oxygenated additives for gasoline—first alcohols, then a mixture of alcohols and ethers and then ethers alone. Today we have about 40 to 50% of the world capacity for octane enhancers. The growth in that area appears unlimited. We see opportunity for other more environmentally acceptable products. Understanding the business, understanding the trends, anticipating the needs and the demands, turning and then focusing your research to meeting those needs are, I think, the real keys to success. Can you give other examples of those successes? Our butanediol project is a case in point. The shortage and high cost of producing acetylene in the short run were the key from our standpoint. Then we developed the ability to make butanediols out of a different raw material. We've worked for years on a process to eliminate phosgene in making isocyanates. I still believe someday that that technology will be useful. From a societal point of view, there will be a move toward phosgene-free materials. It's those kinds of thing that drive our research effort. By being focused on specific areas it allows you to be somewhat more innovative than your competition. Setting a figure such as 2% of sales for R&D is a rather arbitrary formula, isn't it? I don't think percentage of sales so much as the effectiveness of your effort and what it accomplishes is important. We have some very simple objectives. First, we want to continue to improve our existing processes so we're the lowest cost producer. Second, we want to use our core products as raw materials for new chemicals or existing chemicals. An example is the use of propylene oxide for butanediols. Another is the use of isobutylene as a feedstock for methyl methacrylate or isobutylene to produce superabsorbent fibers—a product with great potential. Propylene oxide has potential as a source of a dietary synthetic fat substitute. Though that product is a long time down the road, its development is clearly driven by our presence in propylene oxide. We're also working on propylene oxide-derived polymers and actively working on using propylene oxide and carbon dioxide polymers in lost foam technology. It will allow the automotive industry to cast complex metal parts without any carbon depositing in the parts. None of the residual polymer will be left in the cast metal part affecting its metallurgical properties. June 4, 1990 C&EN
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Business While Arco's R&D plans are ambitious,, experts have been projecting shortages of qualified personnel in the years ahead. How do you plan to deal with the expected shortage of qualified research personnel? It's a cause of great concern to me personally and as a businessman. If the U.S. fails to be competitive in one area of activity, it's in its educational system. Surveys on math and science place U.S. students in the bottom quartile. It's a very broad problem and must be solved if we are to remain competitive in an increasingly sophisticated and technological world. What can be done about it? Each company has its own programs and objectives, I'm sure. We've been active in supporting science training. We underwrite a program to send teachers to a course during the summer to sharpen science teaching skills. We support programs in Philadelphia to introduce minorities to engineering. We provide scholarships to students to support their science education. We've given grants to universities and support research activities at them to help increase the number of graduates. We recently adopted a school in Philadelphia. We are discussing standards of measurements and how you judge what teachers are doing and accomplishing. It's clearly a major problem for this country. I have strong personal opinions about it myself. There is an enormous job to do here. Is the U.S. on the way to becoming an educational and scientific backwater? I think the U.S. is still a leader in science in the world. And not only are we leaders in science, but we are also more innovative and entrepreneurial than most other countries in the world. If you look at Arco Chemical, we've made some important strides in searching out technology around the world and then using our innovative, creative, and entrepreneurial skills to commercialize those products. I think that's inherently an area where American ingenuity is still giving us a good shot in the arm in leadership. If you look at the major developments of technology in the world, such as biotechnolgy and medical technolgy, the U.S. is a leader and continues to be a leader. So it's not all despair. We have a significant problem, we have to do something about it. When we get serious about it, we can solve it. But it is going to take major renovation. It is kind of exciting because it is both a problem and an opportunity to do something creative and innovative in the educational field. A lot of people in the school system itself are trying to adapt the system. If we don't get on with it, we will have a serious problem going into the next century. Is the U.S. too preoccupied with working out its budget deficit to put the effort behind fixing the educational system and then rebuilding its position in world trade? Two issues drain the sap of this country. The first is education. The second is the fixation of this entire country on the budget deficit. If you add up the cost over the past 40 years, it's trillions of dollars spent on defense. We've won the war. Now having won the war we have had the great markets of the world open to us: 12
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the Soviet Union, China, Eastern Europe. What are we going to do to make sure that American industry is moving aggressively to capture those markets? America is paralyzed by the debate over the budget deficits. We seldom hear government officials talk about anything else. As we go around the world we get lectures from foreign government officials about how the U.S. ought to solve its problems before it attempts to solve or talk to other people about their problems. I think we are on the verge of great opportunity for this country but we y are bogged down in a quagmire that requires political leadership to solve. The American people know what has to be done to solve it and are prepared to do it with the appropriate leadership. Putting the budget deficit behind us will create great opportunity for this country and its people. The politician who explains that and comes forward with a reasonable, bold solution will be well respected by the people. We need to deal with our young people's education, the U.S. budget deficit, and then we must attack the world markets with a supportive government. Are the Japanese pursuing world markets we should be going after? When I was in Japan, I was interviewed by a reporter from a Japanese magazine. The first question posed by the interviewer was how do you feel about the fact that the U.S. is becoming a second-rate economic power. I was stunned by that. Frankly I wasn't prepared for it. I thought Japanese reporters were supposed to be pleasant and polite and that was a rather aggressive question. My response was that I had flown over on a 747 on Japan Airlines and I didn't believe that it was made by a Japanese company. I couldn't think of a Japanese oil company that was a top 10 company in the world. There are very few Japanese drugs that are sold on a worldwide basis. There isn't a major Japanese aluminum company I can name equivalent to the large American companies. The Japanese have been good at certain things, captured certain markets. But we ignore American companies' strengths.
Not only are we leaders in science, but we are also more innovative and entrepreneurial than most other countries in the world
It is the perception of late that Japanese companies are advancing both their investments and technology worldwide while the U.S. in particular lags behind. American companies have 20% of the European automotive market. Why then do we complain that Japanese auto manufacturers have 20% of the U.S. market? I'm not interested in giving up my market position in Europe, Japan, or anywhere else. I don't think we should close our markets to any other company. American companies still have larger investments in dollar terms overseas than foreign companies have investments in the U.S. We just invested $600 million in France, we're investing $400 million in South Korea. We're talking about huge investments in Indonesia and Singapore. That's the way the world functions. In some things, American companies have a clear leadership; in others, German companies have the leadership; in others, Japanese companies lead. That's the meaning of globalization. I would expect that in the automotive business, four or five companies will operate worldwide. I don't think that is a disaster necessarily. That is the way some industries already operate. There are only a few aircraft companies, there are probably 10 major oil companies in the world. The drug industry is going through that kind of consolidation now. The chemical industry is undergoing that kind of worldwide globalization and consolidation. We concentrate too much of our effort on being protectionist in areas that are not fruitful. As a past chairman of the Chemical Manufacturers Association, you have grappled with the problem of the chemical industry's public image. Has there been any change in people's perception of the chemical industry? If anything the perception is worse. I think what people are saying is that they want all the benefits that chemicals provide, but they are frustrated because they have little say in the risks involved.. People want to know what is going on in chemical plants. I think that industry in general is willing to open itself up to public scrutiny. The Responsible Care program that CMA adopted agreed to a citizens advisory panel to evaluate what the industry does. Some companies have brought in local advisory panels in communities where they operate plants. These panels are meant to show that the industry believes that what it is doing is sound and protects the community, its employees, and our environment. When people come into our plants they are impressed with how clean and efficient our operations are. This kind of openness will build trust. We also have to continue to improve our performance. Arco Chemical has said it will reduce emissions in the next few years 85% and reduce waste 40 to 50%. The law doesn't require us to do that. We believe that the public wants us to do that. Performance and action will count and so will openness. When the public sees that, the perception will change. I don't think that people debate the value of chemicals. But they are unwilling to accept the risk without a better understanding of the risks and a measure of control over them. I think that is what responsible care is all about.
U.S. needs to be competitive globally and educationally, and must modernize its industrial system and infrastructure
Another problem, though, in this country is that small groups of people are able to quickly galvanize public opinion and move the legislative process forward when there is no basis for doing that. We have a number of examples. People are spending billions of dollars on the removal of asbestos. The government's own studies recently published say that when asbestos is undisturbed it is often not a problem. Yet every school district in this country is spending millions of dollars tearing asbestos out of their buildings. Another example: While the Clean Air Act is being negotiated at the moment, the government's study on acid rain has concluded that the problem is less severe than we thought before. That study has had absolutely no impact on the legislative process. In yet another case, a 10-year government study on climate change has preliminarily concluded that global warming is not the problem we thought it was. It has absolutely no impact on the debate. How do these expensive policy issues affect industry? I find these things troubling because the U.S. needs to be competitive globally and educationally, and must modernize its industrial system and infrastructure and must care for a growing elderly population. While everyone wants a clean environment—and I want one, too—I want to do it in a way that is prudent and does not sacrifice our country's other needs. We no longer are a country that has the resources to do whatever we want to do. So we have to make choices. We shouldn't be running headlong to do something that costs billions and billions of dollars before we really understand whether it is necessary. When you discuss these things, people frequently consider you reactionary. But the debate has to go on. Everyone wants to protect the environment for ourselves and our children and their children. We can't afford to squander and waste resources unnecessarily. It's a delicate balance and I wish more people would talk about that. Our country faces so many very important choices in the future. 0 June 4, 1990 C&EN
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