BUSINESS
INVESTMENT R&D spending share is on the rise, at capital's expense 1996 1997 1998 1999 2000 2001 2002
) spending
Capital spending
20
40
80
60
100
% of future-oriented spending NOTE: Based on C&EN surveys and estimates of U major chemical companies listed on pages 13 and 14. Excludes Cambrex, Hercules, IMC Global, Praxair, and Rohm and Haas because 2002 data were not available.
PRUDENT SPENDING BUDGETS FOR 2002 Companies take a cautious approach, with cuts in R&D and 2% bare-bones rise in capital spending MARC S. REISCH, C&EN NORTHEAST NEWS BUREAU
A
S THE ECONOMY SLOWED LAST
year, major chemical companies slowed fundingforresearch and capital improvements. And while they wait for the economy to take a turn for the better, chemical producers indicate they will be making only the most prudent investments this year. So it should come as no surprise that a C&EN survey of 18 U.S. chemical companies finds capital investment plans will barely keep pace with inflation. The group estimates that it will spend $7.2 billion this year—a 2% increase above 2001. And C&EN predicts that capital spending as a percent of sales will be 6.3%—a decade low—assuming a 2.5% increase in sales for the group in 2002. The companies C&EN surveyed about research expect to cut R&D spending this year by more than 3%. This group of 15 chemical producers plans to spend only $4.9 billion this year compared with almost $5.1billionin2001. AndC&EN predicts that R&D as a percent of sales will be 4.5%—near the decade low of 4.3% for the group set in 1995 and 1996. The industry engine for new products and processes will be funded at a level of $4.1 billion this year on a constant 1992 dollar basis. Funding levels this year are off from the decade high of $4.6 billion in 1992, but better than the decade low of $3.6 billion in 1996. 12
C & E N / F E B R U A R Y 1 1 . 2002
Despite the drop in research spending, chemical producers are committing more money to R&D than to capital improvements compared tofiveyears ago. Between 1995 and 1997, R&D as a percentage of future-oriented spending hit a decade low of 33% for the companies that supplied C&EN with both R&D and capital spending data for the decade. However, over the past five years, the proportion of funding committed to R&D has steadily increased. It reached a decade high of 44% in 2001. And according to company projections for 2002, the commitment to R&D will remain strong at 43% of future-oriented spending. C&EN's survey this year—conducted injanuary—is a snapshot of company plans and expectations. But spending plans can
change midyear as chemical demand improves or drops. For instance, the companies surveyed in 2 0 0 0 assumed they would increase capital spending by 3% in 2001 (C&EN, Dec. 18, 2 0 0 0 , page 10). They anticipatedwrongjy—a growing economy in 2001. As it turns out, this year's group says it cut back on capital spending by 10%. It's a different story with R&D spending. Last year's survey turned up aggregate plans for a3%riseinR&D fundingin2001 (C&EN, Feb. 12,2001, page 15). This year's group followed through, with R&D spending up by 3% in 2001. The two largest companies in the capital spending survey—Dow Chemical and DuPont, accounting for almost half of the total—plan no increase in 2002. And the weight of their contribution to the survey's results accounts for the modest 2% increase for the group overall. Seven others plan either no increase or cutbacks. But nine of 18 companies plan healthy increases in capital expenditures in 2002. Cabot expects the largest increase in capital spending of the group. The company says its 50% increase in spending to $200 million is a result of construction on a new nanogel semiworks plant in Frankfurt, Germany, and the expansion of its Boyertown, Pa., tantalum facility It also is constructing a new inkjet products facility in Massachusetts. W.R. Grace plans the second largest increase—43% to $ 9 0 million—as it increases capacity to meet demand in its construction materials and catalysts businesses. Though the company declared bankruptcy last year because of the many asbestos-related claims against it, it was one of the few companies to report fairly decent financial results for 2001. Eastman Chemical anticipates a 36% increase in capital expenditures as it repositions its manufacturing operations in anticipation ofits split into two separate companies: Eastman and Voridian. And H.B.
R&D TRENDS Constant-dollar spending to s l i p . . .
. . . and stumble as percent of sales
$ Billions
Percent
1992
M
NOTE: For 15 chemical companies listed on page 13. SOURCES: C&EN surveys and estimates, National Science Foundation
HTTP://PUBS.ACS.ORG/CEN
R&D SPENDING Most U.S. chemical companies plan a conservative approach in 2002
$ MILLIONS Air Products9 Albemarle Cabot»·11 Crompton1 Cytec Industries Dow ChemicalJ DuPontk Eastman Chemical H.B. Fuller W.R. Grace Great Lakes Chemical Lubrizol PPG Industries Rohm and Haas1
3M TOTAL ANNUAL CHANGE
1996
$1U 30 80 52 40
1997 $114
31 83, 54 45
1998 $112
1999 $123
2000 $124
30 83 53 43
34 73 68 44
26 43 85 39
R&D SPENDING AS % OF SALES CHANGE PLANNED ACTUAL PLANNED. 2002c 2000-01 2001-02e 2000 2001 2001a 200Γ 2.3% 2.2% 0.0% -0.8% $123 $123 $125 2.4 0.0 2.8 -15.4 22 22 26 2.9 2.8 11.6 0.0 48 48 59 2.9 2.8 4.5 84 -1.2 88 87 2.3 2.6 34 -17.9 32 5.9 34
9.9 0.0 5.9
4.1 6.3 2.8 1.3 2.9
3.9 6.4 3.1 1.3 2.8
0.0 0.0 0.0 5.0 5.7
2.4 4.8 3.3 3.8 6.6
2.8 5.0 3.5 3.5 6.7
4.7%
4.7%
761
785
807
845
892
900
1,032
1,116
1,308
1,617
1,776
1,800
1,072 1,588
1,000 1,250
20.2 -10.6
-7.2 -27.0
184 26 94
191 25 42
185 22 47
187 21 42
149 18 46
170 na na
155 17 48
172 17 51
4.0 -5.6
64 93 239 187 947
42 88 250 201
42 78 271 207
46 78 284 236
40 86 282 259
44 90 313 293
44 86 285 230
44 86 285 242
1,002
1,016
1,038
1,101
1,150
1,084
1,150
$3,943 0.3%
$4,069 3.2%
$4,304 5.8%
$4,736 10.0%
$4,966 4.9%
$5,091 2.5%
$4,918 -3.4%
4.3 10.0
0.0 1.1 -11.2 -1.5
-3.4%
2.5%
a January 2001 estimates, b January 2002 estimates, c Budget for 2002. d From 2000 to January 2002 estimate, e From January 2002 estimate to 2002 budget. f January 2002 estimate as a percentage of estimated 2001 sales, g Fiscal year ends Sept. 30. h Data for 2000 excludes Cabot Microelectronics and liquefied natural gas business, i Figures reflect acquisition of Witco in September 1999. j Beginning in 2001, includes Union Carbide, acquired on Feb. 6, 2001. k Excludes Conoco. After 2001, excludes DuPont Pharmaceuticals. I Figures reflect acquisition of LeaRonal in January 1999 and Morton International in June 1999. na = not available.
Fuller expects to increase spending by 34%. Though Fuller anticipates cutting back on capacity, the firm says it expects to incur higher capital costs as it improves its remaining facilities. Lubrizol anticipates a 31% increase in capital spending as a result of new envi ronmental regulations that will force it to add equipment in 2002. Cambrex expects a 13% increase in capital expenditures that will fuel a new focus on biotechnology and biopharmaceuticals.
plan a 5% increase: Crompton Corp. and Rohm and Haas. The American Chemistry Council's pol icy, economics, andriskanalysis group con ducts an annual survey of members that includes an analysis of capital spending and R&D plans. The survey conducted last fall, shows that 95 respondents were planning a collective 2% increase in capital spend ing in 2002—the same as C&EN's survey group. Looking ahead to 2003, the ACC respondents expect a nearly 9% increase. While ACC respondents say they made ONLY SIX of 15 companies intend to in 69% of their plant and equipment invest crease R&D spending in 2002. Seven plan ments in the U.S. in 2001, they expect to no increase and two, DuPont and Dow, put only 61% of their investments at home plan to spend less in 2002 than 2001. The in 2006. Higher outlays would go to Chi drop for DuPont, a spokesman says, is en na and other Asian countries, where in tirely due to its sale of DuPont Pharma vestments are to increase from 5% of the ceuticals to Bristol-Myers Squibb at the total in 2001 to 12% in 2006. end of last year. If DuPont were excluded, C&EN's own modest survey of U.S. cap the group as a whole would show a nearly ital spending bears out this trend. Of four 5% increase in R&D spending. companies that could provide U.S. break All those firms that plan increases in outs of capital outlays—Albemarle, Cytec, R&D expect only single-digit boosts, with Eastman, and Lubrizol—investments out the exception of Eastman, which is put side the U.S. are toriseto 23% of the total ting itself in order before it splits into two in 2002 from 20% in 2001. separate companies. Three plan a 6% in ACC survey respondents expect to cut crease in R&D: Cytec, Grace, and 3M. Two back on R&D by 3%—in line with a sim
ilar projection for the group C&EN sur veyed. For 2003, ACC respondents expect to increase R&D spending marginally A late summer poll by another group, the Industrial Research Institute, pre dicted a 4% drop for all industrial R&D in 2002. Seventy-seven firms participat ed in the survey IRI's 280 members con duct 80% of the U.S. manufacturing sec tor's research. Respondents also predicted a 16% decrease in hiring of new graduates for research. However, F. M. Ross Armbrecht Jr., IRI's president, says he doesn't expect hir ing to drop dramatically in the chemical industry A former research executive at DuPont, Allied, and Witco, Armbrecht says so many chemists are nearing retire ment that chemical companies can't and won't stop recruiting even in bad times. And he doesn't expect chemical R&D to slip as much as in industry as a whole. < The chemical industry has 'skinnied' down so much through mergers and layoffs, there is just not a whole lot of slack to cut," Arm brecht says. "The next thing they'll cut in to is muscle and bones, and they can't do that if they want to be competitive." Andrew A. Boccone, senior adviser at
The proportion of funding committed to R&D has steadily increased. It reached a decade high of 44% in 2001. HTTP://PUBS. ACS.ORG/CEN
C&EN
/
FEBRUARY
1 1, 2002
13
BUSINESS ment," says Calvin B. Cobb, a vice president and chemical industry leader at management consulting firm Cap Gemini Ernst & %ung. And companies have to take advantage of advances in molecular engineering through adoption of nanotechnology and other materials science breakthroughs.
management consulting firm Kline & Co., agrees. The chemical industry keeps expecting to grow through acquisition, he said in a recent speech, but the universe of companies to acquire is shrinking and the markets it serves are maturing. If the specialty chemical industry, in particular, is to grow, it needs a resurgence in innovative thinking, Boccone says. One way to think differently is to adopt "stretch goals," suggests Krishna Narayan, a partner in the chemical industry practice of Chicago-based consultants DiamondCluster International. "Find a customer
who is not satisfied and asks you to stretch your current capabilities to meet their needs," he suggests. Such a customer advances R&D and helps a company become more competitive. And working with this type of customer benefits all of a company's customers. "It changes the way a company does business and makes its products more competitive," Narayan says. Chemical companies have to "return to their roots, and take advantage of new biological routes to compounds that can support the notion of sustainable develop-
"GLOBALIZATION and cost reduction have run their course," suggests Cobb, immediate past-president of the American Institute of Chemical Engineers. "WeVe got to go back to basics. I'd argue now is the time to increase R&D." But Cobb realizes that R&D is "difficult to manage and success rates are low. Throwing money into research may not be the answer, particularly if your batting average is low" He suggests that more companies adopt the stage-gate process. "It's widely accepted, but not universally" Rohm and Haas uses the stage-gate process to periodically measure the ultimate value of a research project against the time, effort, and money that goes into it. At various stages, a research team makes an assessment of a project and decides whether or not to continue. "We also look at the natural evolution of a business," says David C. Bonner, global technology director at Rohm and Haas's polymer technology center. "We don't want to get into
GLOBAL INVESTMENT Survey of major U.S. chemical firms finds capital spending to rise 2% in 2002 CHANGE
PUNNED
ACTUAL
PLANNED.
$ MILLIONS Air Products1 Albemarle Cabot1·» Cambrex Cromptonh Cytec
1996 $951 90 209 32 39 73
1997 $870 85 163 36 50 91
1998 $771 71 187 43 67 104
1999 $889 78 166 31 132 77
2000 $768 52 137 39 155 77
2001a na 60 na 40 175 80
2001b $708 50 133 40 135 64
2002c $708 55 200 45 115 74
2000-01d -7.8% -3.8 -2.9 2.6 -12.9 -16.9
2001-02e 0.0% 10.0 50.4 12.5 -14.8 15.6
Dow Chemical' DuPontJ Eastman Chemical H.B. Fuller W.R. Grace Great Lakes
1,3a 1,701 789 90 457 237
1,198 2,129 749 69 259 133
1,546 2,240 500 62 101 161
1,412 2,055 292 56 83 119
1,349 1,925 226 49 65 157
1,500 2,000 300 na na na
1,600 1,600 215 32 63 160
1,600 1,600 292 43 90 95
18.6 -16.9 -4.9 -34.7 -3.1 1.9
0.0 0.0 35.8 34.4 42.9 -40.6
Hercules IMC Global Lubrizol PPG Industries Praxair 3M
120 173 94 489 893 1,109
119 244 101 466 902 1,406
157 368 93 487 781 1,430
196 248 65 490 653 1,039
187 118 86 561 704 1,115
na 180 90 450 650 1,000
66 125 65 301 650 1,000
60 140 85 300 650 1,000
-64.7 5.9 -24.4 -46.3 -7.7 -10.3
-9.1 12.0 30.8 -0.3 0.0 0.0
$8,890 7.2%
$9,070 2.0%
$9,169 1.1%
$8,081 -11.9%
$7,770 -3.8%
$6,994 -10.0%
$7,152 2.3%
TOTAL ANNUAL CHANGE
-10.0%
2.3%
—
—
a December 2000 estimates, b January 2002 estimates, c Budget for 2002. d From 2000 to January 2002 estimate, e From January 2002 estimate to 2002 budget. f Fiscal year ends Sept. 30. g Data for 2000 excludes Cabot Microelectronics and liquefied natural gas business, h Figures reflect acquisition of Witco in September 1999. i Beginning in 2001, includes Union Carbide, acquired on Feb. 6, 2001. j Excludes Conoco. After 2001, excludes DuPont Pharmaceuticals, na = not available.
14
C&EN / FEBRUARY 1 1 , 2002
HTTP://PUBS. ACS.ORG/CEN
DOMESTIC INVESTMENT U.S. capital spending slips in 2002 2001a
Albemarle Cytec Eastman Lubrizol TOTAL
2002 b
$50 64 215 65
$45 42 185 45
$55 74 292 85
$50 44 235 60
$394
$317
$506
$389
a January 2002 estimates, b Budget for 2002.
it too early since we can waste a lot of time waiting for it to mature." "If we think [a project] will take a long time to grow, we might partner with a uni versity," Bonner says. That is what Rohm and Haas is doing with a proprietary nanotechnology capability that is "so novel we don't fully understand it." If it gains mo mentum, "we would put more resources into the project" and bring it back to Rohm and Haas. Cabot also has a mechanism to expand its market opportunities. The company successfully used the stage-gate process to grow and then spin off Cabot Microelec tronics—a company that is now a leader in supplying semiconductor wafer polish ing compounds. It hopes to repeat that success with other businesses. To begin, "we survey markets Cabot is not serving and explore leading-edge trends," says Dan Gilliland, Cabot vice president of business development. "We talk to innovators in a field and learn from them about what we can do," he says. "We try to envision the next step in the technology And then we see if we can bring technology competencies we have to a new development." NOT ALL NEW developments are break throughs, and many are extensions of ex isting lines of business. The trend has been to put the bulk of research under the di rection of business units, Bonner says. "Where there were only strong ties before, the links are integral now to more rapidly bring new products to market." But for "front end" research, a company needs a separate administrative unit with "a mis sion to create new technology platforms to feed into its business strategy." Rohm and Haas calls the effort "targeted funda mental development." Rohm and Haas has two such innova tion centers now: one for polymers and the other for electronic materials. Though the centers concentrate on areas of interest to thefirm'sbusiness units and keep a sharp eye out to identify opportunities for new HTTP://PUBS.ACS.ORG/CEN
businesses, they also scan for the most in novative practices, such as the use of highthroughput screening to develop new cat alysts and polymers. The company expects to set up a dif ferent kind of innovation center later in the year that is likely to involve universities and other companies. The objective, Bon ner says, would be to develop technology that promotes sustainable development. "Sustainable development has not been technology based. We'd like to inject that."
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C & E N / F E B R U A R Y 1 1. 2002
15
BUSINESS
CAPITAL OUTLOOK Spending goes up a little...
. . . but holds as a percent of sales
$ Billions 10 9
Percent 10
^
8 7
^V
6
i ι
1992
Ι
94
^.j*"" ι
-
I
96
98
00
02
7
\v/
6 1992
i
^-^Λ
Λ\
l
96
96
98
00
02
NOTE: Combined data from 17 major chemical producers listed on page U . Excludes Cytec because 10 years of data are not available. C&EN estimates for 2001 and 2002.
the partners focus on a specific project, he says. Puaar suggests companies put more em phasis on integrating Six Sigma programs in the R&D process. The quality assurance program enforces a discipline, he says, that forces producers to work with customers to reduce costs and ensure products that meet their requirements (C&EN, June 18, 2001, page 23). "The chemical industry has lagged others such as the semicon ductor industry in implementing Six Sig ma," Puaar says.
Reducing the cost of research is impor tant, agrees Richard M. Gross, corporate vice president of R&D at Dow Chemical. The company uses computer links and in formation technology to cut costs and con nect with the Union Carbide research ef forts acquired last year. Since 1995, Gross says, Dow has worked to align research with individual business es. Today, about 75% of the company's re search efforts are conducted under the aegis of its business units. The goal is to put 80% there. Corporate-level R&D will
invest in efforts to "push out the envelope," Gross says. "We will invest funds here where businesses don't have enough knowl edge to know where to invest." Gross says some corporate R&D funds go to a "science and technology exploration fund" that puts out "probe money" for re search new to the world. It's on the order of "tens of millions of dollars," he says. Dow turns to the scientific community for leads on where to place its bets. "But when we pick our bets, we put a three- to five-year horizon on it. The question is, Can we push the envelope of science out far enough to get a business interested in it?" If one of its businesses signs on, Dow has a return on its investment. While Dow and other chemical com panies wait for the economy to take a turn for the better, R&D leaders are convinced that their efforts are the key to better-thanaverage sales and earnings growth. Chief executive officers will be hard-pressed to maintain R&D investments in the current economic climate, notes IRI's Armbrecht. But they know it's what they will have to do to be ready for an economic upturn when it comes, he says. •
INFORMEX
.
RreatiTra ijid-i=iùi=»:
