COVER STORY
TRANSFER DuPont sees a growth market in technologies for new ink-jet applications, such as textile printing.
R&D REALITY CHECK Companies across the specialty chemicals industry are changing the way they manage their research efforts RICK MULLIN AND ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU; AND PATRICIA L. SHORT, C&EN LONDON
R
UMORS OF MASS COMMODITIZATION I N THE SPECIALTY
chemical industry are much exaggerated, according to research managers at leading specialties companies. Indeed, a kind of research and development renaissance has moved across the sector in recent years, they say shedding light on new strategies for managing specialty portfolios. While more and more R&D dollars are going to develop brand-new products for fast-growing markets such as electronics, traditional markets like coatings, adhesives, and detergents continue to provide opportunities and are, in many cases, still the primary fields of endeavor in R&D.
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But for any product development effort to succeed, researchers need to glean pristine market intelligence. New tools to gauge customer needs are emerging, as are metrics for measuring the impact of research efforts. Monolithic R&D infrastructures are splitting up as companies launch discrete research groups that still share information with each other. Companies are rationalizing their R&D and finding strategic locations in which to do it—one of which is China. DuPont, one of the world's largest specialty chemical makers—and a company with a reputation for growth through the development of innovative products — completed a thorough reassessment of its R&D operations under the direction of Thomas M. Connellyjr., chief science and C&EN
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technology officer, in 2000. There turned out to be plenty of room for improvement. Since 2002, DuPont has cut the number of ongoing R&D projects from more than 4,000 to about 2,000 and launched a program calledlbp 75 designed to shift financial and management resources to projects most likely to generate revenue and sustainable growth. About one-third ofR&D resources now go to the Top 75, according to Connelly The company has also heightened its effort to link R&D with marketing. Connelly says that a review of DuPont case histories—including successful and failed projects—undertaken two years ago revealed that the most common determining factor for success was the level of marketing insight employed in development and the early involvement of a customer in codeveloping technology DuPont now invites a handful of its
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WORKING WITH Diane H. Gulyas, DuPont's chiefmarketing and sales officer, Connelly has developed programs and metrics designed to, as he says, "get science out of the lab, into the market, and into the hands of somebody who rewards us for developing the technology" One key metric is the traction index, a numerical handicapping tool used to keep revenue projections in line with market developments. Gulyas says DuPont, like other specialty chemical companies, is dealing with fast-paced change in its major markets. Product offerings, including intangibles related to service, must constantly be refreshed based on a steady input of market intelligence. "Commoditization doesn't just happen to you like catching a cold," she says. "It happens if you let it." Connelly says DuPont is placing more emphasis on "qualifying and classifying" opportunities with customer input before going into the lab, so that R&D efforts are channeled toward launching profitable products. "This isn't about R&D; it's about innovation," he says. "Researchers now understand that they own the outcome of what they create." Innovative R&D engages researchers in identifying markets, developing responsive technologies, protecting intellectual property, and even commercializing products. "Great R&D companies are also great marketing companies," Connelly says, "Otherwise you wouldn't know they had great R&D." DuPont has divided its business into five segments: safety and protection, electronics and communication technology, coatings and color technology, performance materials, and agriculture and nutrition. Connelly says there are as many growth opportunities in older markets— such as agriculture, where the company is combining offerings in crop genetics and crop protection—as there are in newer markets, such as ink-jet textile printing and photonics devices for telecommunications. Connelly claims that 30% of DuPont's 2004 revenue is derived from new products, up from 20% in 2000. The goal, he says, is to get that share up to 33%. DuPont
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corrupting the original intent oflechCon," Connelly says. "But we have to keep it relevant, which means getting customers into technical meetings."
FOCAL POINT An Arkema researcher performs surface analysis using X-ray photoelectron spectroscopy at the firm's R&D center in King of Prussia, Pa. biggest customers—including Samsung, BP, Siemens, and General Electric—to TechCon, its annual gathering of research and marketing managers. Researchers did not like it when the invitations first went out. "Frankly, at first there was a little resistance from people who thought we were
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COVER STORY maintains aflatannual R&D budget of $ 1.3 billion, he says. At BASF, "R&D is akey success factor for the growth of the company," says Dieter Jahn, senior vice president for university relations and research planning. The company's focus is helping customers be more successful by supplying innovative products, Jahn says, but "there is also great potential for BASF to strengthen its global competitiveness through process innovation." BASF's R&D expenses last year were nearly $ 1.2 billion, up slightly from $1.1 billion the year before. But there has been a steady evolutionary change in BASF's R&D activities, "not only in the research areas of interest, but also in the way we are doing research," Jahn says. Moreover, the optimization of the company's R&D structures has led to efficiencies elsewhere. For example, Jahn notes, BASF has made strong enough progress in process simulation to reduce its reliance on pilot plant operations, thus freeing R&D resources for new projects. In another example of evolving strategy he cites the formation of BASF Future Business, a unit that is focused on business
opportunities in areas outside the company's traditional operations. However, Jahn notes, "we are still convinced that our central technology platforms are a key factor in our success, in particular in the longterm-oriented part of our R&D activities." Jahn says BASF is the first company to establish a commercial process specifically using ionic liquids. "In the Basil process, the ionic liquids act as acid scavengers offering three important benefits," he says. "They are easy to separate and to recycle and substantially improve yields." BASF recently started marketing ionic liquids under the trade name Basionics, and the overall process know-how under the name Basil. AT SCI, although restructuring and cost cutting in recent years have transformed the company from a basic chemical producer to a specialties player, R & D resources have been only minimally affected, according to Carmine Iovine, group vice president for R&D. The company's R&D direction, however, has been refocused, specifically on growth areas. This reshaping, Iovine says, accompanied a strategic analysis of ICI's four main
businesses: National Starch & Chemical, a polymers and diversified specialty chemical business; Quest Internationalflavorsand fragrances; the oleochemicals and surfactants maker Uniqema; and ICI Paints. As a result ofthis effort, the company organized its businesses into a strategic matrixgrouped by growth potential. "The R&D folks across ICI knowwhat the growth businesses are and what the intentions are for marketing people," Iovine says. This has allowed R&D to optimally focus resources. "Even the 'maintain' categories get attention because they do contribute," he says. "But most resources are focused on the growth businesses." About 90% of the company's R&D is handled in the businesses themselves, Iovine says, and the remaining 10% in a corporate group. With so much R&D conducted in the businesses, ICI manages the function with a technology board. "There are functional heads like me," Iovine says, "and we interact with the business heads." Like ICI, Clariant has decentralized its R&D into its various businesses, which also have full responsibility for implementing projects. The proximity to their mar-
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COVER STORY kets enables the divisions to quickly translate market potential and customer requirements into commercial products, according to Hartmut Wiezer, head of group technology at the company Because Clariant's divisions stretch over a range of markets, however, company officials also acknowledge the importance of ensuring that business-specific know-how is made available throughout the group. 'Apart from computer-supported data management, the most important source ofknowledge transfer is personal dialogue," Wiezer says. TO SUPPORT this basic requirement, Clariant has established several cross-divisional centers of excellence. One is the Nanotec Lab in Reinach, Switzerland, which develops processes for making stable micro- and nanoemulsions. Clariant has made progress recently in ultraviolet (UV) stabilizers, oil services, and pharmaceutical and textile chemicals, Wiezer notes. A new business development effort in Wiezer's group technology unit is building a business involving nanometer-thin, multifunctional coatings based on polysi-
LI QUID STY BASF stakes out commercial processes using its Basil ionic fluid technology shown here. lazanes. One potential product, according to Wiezer, is a purely inorganic polysilazane
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about $125 million. In 2005 alone, says Oberholz, "we intend to invest some [$65 million] more in R&D—in research by the business units, in international R&D activities in such places as Shanghai, and in the development of technologies like our new process intensification project house." The process intensification project house is the sixth of Degussa's multidisciplinary R&D workshops. With a budget of about $20 million over the next three years, the new project will involve 15 chemists and engineers exploring process strategies and plant construction concepts. Other project houses have explored nanomaterials, biotechnology, catalysis, fermentation, and functional polymers. Each interdisciplinary team has three years to realize its plans, and throughout the duration the team benefits from the expertise of Degussa's business and service units. Moreover, partnerships with universities and research institutes, the company believes, will guarantee access to current scientific knowledge and methods. AT DOW CHEMICALp specialty chemical resources are allocated using a portfolio management regime that puts each business into one of four categories: growth, run for cash, improve profitability and feedstock. "Growth businesses receive the greatest amount of R&D funding—particularly for product R&D and application development with key customers—because these businesses deliver the highest margin return for the investment in R&D," says Phillip H. Cook, senior vice president for performance chemicals and thermosets (PCI). For feedstock and run-for-cash businesses, R&D focuses on breakthrough process technologies and technical service, Cook adds, noting that 17% of sales in his division are from products less thanfiveyears old. Rich Myers, vice president for R&D in the PCT business, explains that Dow has captured all its R&D projects in a database it calls Portfolio. Information technology "allows us to capture and analyze the value proposition of each project, and better align resources, such as people and budget, to each project," he says. "We're also strengthening our metrics to measure return-on-R&D" investment. Like DuPont, Dow has downsized operations, canceling approximately 20% of the R&D projects in the PCT division over the past year, Myers says. The company is also working on reducing the number of small research sites around the world. "We have a major effort underway to move segments of our R&D people to locations where there is a critical mass of research
and development going on," he says. One important location will be the company's planned R&D center in Shanghai. L. Louis Hegedus, Arkema's senior vice president for R&D in North America, likes to quote hockey great Wayne Gretzky when he describes the company's R&D strategy: "It ain't where the puck is; it's where the puck will be." The trick in specialty chemicals, Hegedus says, is to determine future product needs in particular markets and to start designing
to deliver products just in time. This requires good market intelligence and communication between marketing and R&D, he says, but it also requires speed and a coordination of tasks in the lab and in market research. Arkema's R&D budget for 2005 is about $220 million, unchanged from 2004. Arkema has been working more closely with customers in recent years, forming joint development partnerships in many cases. The firm has also been relying on a stage-gate strategy, in which projects are
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COVER STORY vetted at periodic junctures in order to check alignment of research efforts with market targets. Projects can be terminated at any "gate" along the way. The technique, which is common in manufacturing industries, aids in directing resources to the projects most likely to generate revenue and long-term value. Hegedus says it is also a key mechanism in coordinating research, development, manufacturing, patenting efforts, marketing, and sales as projects progress. IN DEEDp multitasking has become a key focus in Arkema labs, where Hegedus says high-throughput experimentation, automation, and miniaturization are ramping up. "Experiments can be drastically scaled down, and huge numbers of samples can be taken quickly and modeled simultaneously," he observes. Arkema's "library" of acrylate monomers and copolymers, for example, can be employed combinatorially to design high-throughput experiments, he says. Hegedus points to Arkema's development of antifoulant marine paints incorporating silyl acrylate polymers to replace
tributyltin as an example of high-throughput experimentation allowing the company to cover a lot ofground quickly Arkema synthesized about 1,000 polymer binders for testing, measurement of performance characteristics, and identification of prototype products. Arkema generated four patent applications for low-silyl acrylate binders and has made and tested 4 0 0 paint formulations. After four years of work, the company is now in late-stage commercialization with several customers. Hegedus estimates that highthroughput and combinatorial techniques in the lab allowed the company to work at "double speed." While there has been little R&D reorganization with the creation of Arkema from the formerAtofina Chemicals, Hegedus says there is an ongoing effort to link research and marketing in a dedicated fashion, with specific R&D groups assigned to specific markets and products. At the same time,
Arkema seeks to maintain fluid communication across a centralized R&D structure. "Epitaxy is required at the business-research interface," Hegedus says. Ultimately Hegedus says, all R&D is a matter of risk management. "It is like managing a financial portfolio to achieve an optimum of shortterm and long-term investments in order to balance security and risk," he says. Rohm and Haas employs a hard-core financial metric to quantify the success of its R&D efforts. According to Vice President and Chief Technology Officer Gary S. Calabrese, the company measures the gross profits from products that are less than five years old. Measuring R&D output that way, he says, allows the company to keep a close eye on the profitability of the products it rolls out. Calabrese says the gross profit number has been improving in recent years—from about 27% five years ago to the low 30%
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range today The company's goal is to bring this number up to 35%. The key to Rohm and Haas's improvement is a shift in funding to more cuttingedge chemistry Calabrese says. Eight years ago, the company spent only 10% of its research dollars on new product lines. Nearly all of its funding went to incremental improvements on existing products. Today 4 0 % of its annual R&D budget of $265 million targets new products, usuT H E
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ally ones that are more profitable than products already on the shelf "We have had a really big focus on coming up with products that have higher margins and getting them to market faster," he says. Products that have come from this approach include an acrylic polymer technology meant to replace formaldehyde resins in wood products and a purification technology for advanced biopharmaceuticals. "We view ourselves as a specialty ma-
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ollowing years of cost cutting and restructuring, the specialty chemical sector is shifting its focus to profit margin improvement. Marketing executives with major specialties firms say they are looking for short-term results and are emphasizing top-line strategies, especially improvements in pricing. Joseph L Coote, an analyst with the management consulting firm Charles River Associates, sees ample room for improvement in an area where the sector has not been particularly aggressive. "We often see product prices at a steep discount to their value," he says, adding that a lot of companies do not fully understand the value, of all the products in "tremendously complex" portfolios. In a recent report, Coote broke down the portfolio of a client that he says typifies the specialty chemical sector. The company, according to Coote, could claim it dif- ' ferentiates itself from its competitors with 30% of the products it sells. Another 40% of its products offer no differentiation in Gulyas the market. The remaining 30% are in between—but at risk of sliding toward commodity status. As a bulwark against commoditization, Coote says, specialty chemical producers need to segment customers and assess the "cost to serve" for all products that customers buy. Product and service innovation efforts can then be focused on customers willing to pay. The recent run-up in raw material pricing, Coote says, has prompted many specialty chemical companies to move in this direction. "Margin restoration has been our
mantra these past two years," says Phillip H. Cook senior vice president for performance chemicals and thermosets at Dow Chemical. Even in Dow's specialty businesses—where pricing is based more on value added by functionality than on supply and demand or feedstock costs—improving margins is an important focus, he says. Segmentation evaluations are a key, Cook says. "Just 20% of Dow's customers contribute 95% of our margins," Cook says. "While some of this effect is due to scale, much is due to the product mix and value. We are focusing more on these so-called winning customers." Diane H. Gulyas, chief marketing and sales officer at DuPont, says that in the past 18 months, her company has heightened its focus on pricing. "We've been catalyzed partly by the oil and gas crisis and partly by the recognition that we were not a world-class sales and marketing company, and that there were a lot of opportunities to significantly upgrade our skills." Like Dow, DuPont is working to get a better understanding of the value of products to customers. It has had some success in increasing prices—though Gulyas acknowledges that raising prices is difficult to do without some associated technical or service enhancement. Cook says Dow is gaining some traction on prices. "Customers are starting to understand that if they want us to keep investing in R&D as well as new capacity to meet their growth needs, we need to improve our margins," he says.-RICK MULLIN
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COVER STORY terials company" Calabrese says. "We just in venture capital through an investment want to get more special. That is what the in the firm Innovation Ventures. Calabrese shift from 10% to 4 0 % has done for us." says this investment exposes the company to start-up firms—or "listening posts," as Rohm and Haas is also making Asia a he calls them—that allow it to pick up on bigger part of its R&D mix. Next year, the company is opening a $30 million R&D center in Shanghai. The company initially plans to employ some 300 researchers at the facility, mostly through consolidating smaller research stations nearby Calabrese maintains that Rohm and Haas isn't shifting its research efforts to Shanghai. "We really don't view this as outsourcing R&D," he says. "We are growing very strongly in Asia, and China is our fastest growing market, so we need boots on the ground there." Connelly Rohm and Haas also has been Hegedus making heavy use of government grants over the past several years. It has trends. "It isn't just about finding new stuff won grants for projects to develop new to acquire," he says. "It is about learning acrylic polymers, low volatile organic comwhat's real and what's not in emerging marpound coatings, adhesives from soybeans, kets and technologies." and a process for making acrylic acid from Martin Riediker, chief technology offipropane. cer (CTO) at Ciba Specialty Chemicals, Similarly, the company has been active says his company introduces some 270 new
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products per year, nearly one "per working day" Major products that the company will soon launch include three-dimensional \JVcurable coatings and UV-curable ink for printing on plastic packaging. THE OUTPUT is not only beneficial to Ciba's business, it's also a necessity Riediker says. "The increasingly globally competitive environment really means that our customers constantly need to offer benefits that differentiate themselves in the marketplace," he explains. "We help our customers differentiate and also rejuvenate our portfolio." Cibaaims for products developed v^thin the past five years to make up 33% of its portfolio. That statistic currendy stands at about 25%, an improvement from the 18% that the firmpostedm 2000. The company also aims to maintain the amount of sales that come from patented products at about 33%. Like Calabrese at Rohm and Haas, Riediker links the improvement to a new strategy in spending. In 2001, the company devoted only 20% of its R&D spending to what he calls "advancement opportunities," or product introductions into new markets. By 2003, that figure had increased to about 33%. This year, investment is slated to rise to two-thirds of R&D spending. To become a research project at Ciba, an initiative has to provide a direct benefit to customers and lead to products that the company can actually manufacture. But the company also assesses pricing potential. "We ask, W h a t are the competing technologies, and does this give us a position in the market to make sure that we can actually extract value?' Otherwise, we don't get the return on the project," Riediker says. He also manages a discrete $15 million annual budget for speculative projects. "I can allocate it to high-risk and high-reward projects, which otherwise, under the pressures of business, probably would not take place," he says. This program began three years ago and funds 12 projects at a time. Riediker says a third of these projects have been handed over to business units for further development. But he notes a qualitative benefit from the program as well. "It has significandy increased the risk-taking in our R&D community which for me as CTO is an absolutely crucial element of successful innovation in the culture," he says. The company has also built an R&D center in China and expanded another one in India, though Riediker insists the focus of these centers is mostly local. "We develop products that meet unique cultural
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market demand, and the aim is to add a dimension to our R&D capability and not to replace R&D activities in Europe or the U.S. with a cheap alternative," he says. Joseph J. Kozakiewicz, vice president of technology for Cytec Industries' performance specialties segment, says his company's road-mapping and stage-gate processes have allowed it to increase the output of its R&D activities. Today, 16% of Cytec's sales are ofproducts that are less than five years old, an improvement from 14% last year. The company's goal is to reach 25% in the next five years. Kozakiewicz says Cytec's road-mapping approach gives the company the guidance it needs to select and maintain projects. "It helps us better target major, unmet customer and market needs and grow the industry and market," he says. Cytec uses what Kozakiewicz calls "soft gates" in its stage-gate process, in which it is assumed that a project will be funded until it is commercialized, as opposed to funding it only through the next gate, as most companies do. The gates, he says, are only meant to check that the project is still on track. Germany's Altana Chemie has three growth pillars: innovation, acquisitions, and regional expansion, CEO Matthias L. Wolfgruber says. Innovation, he says, includes R&D and new business and new market development. And the company is backing those efforts, he adds, "steppingup our efforts and spendingfrom4.5% to 6% ofsales." Moreover, Altana Chemie is hiring a CTO and new technology officers for every business unit. The company is "expanding internal competences and also steppingup external cooperations," "Wolfgruber says. A case in point is the Altana Chemie Innovation Fund, which sponsors longer term and higher risk projects. IN A SECTOR that has been squeezed in recent years by high raw material prices on one side and pricing pressure from big retailers on the other, R&D can provide a key coping mechanism. At some firms, it can boost a turnaround. At financially strapped Rhodia, for example, R&D is being relied upon to help rebuild the company's fortunes. "Rhodia is a three-chapter story" CEO Jean-Pierre Clamadieu says. "Up to autumn 2003, we were dealing with emergencies. This was completed byJune 2004. We are in the second step now, improving profitability in line with competitors. Then we will open the new chapter in 2008 to 2010. There are plenty ofquestions we need to answer. But for now, we focus on profitability"
However, he notes a recent R&D development that he is pinning high hopes on—a new biosynthetic route to vanillin. "The quality of this process makes the resulting product a competitor to natural vanilla, not to vanillin." This, Clamadieu says, will justify a price that is "quite high." Research heads at specialty chemical companies agree that the development of the highest value products—new materials for new markets—is the bull's eye in R&D, but they recognize that R&D needs
to work the entire target, all the way out to the old products in mature markets. The fact that some specialty products have settled into commodity-like behavior is not a serious problem, as long as research resources are allocated accordingly—and as long as the product makes a profit. " % u can argue that a commodity is a successful specialty," Arkema's Hegedus says. 'Aluminum used to cost more than gold. We are trying to sell as much as we can at a reasonable price." •
ChemBridge's GPCR Library
In-house Validation: Targeted Library vs. Diverse Library
Melanocortin-4 Cell-Based Agonist Screening Experimental Results: Diverse Control: 5 weak hits
6PCR Results: • 10,000 compounds randomly selected from the ChemBridge GPCR targeted library screened at 10|iM
10,000 compounds from a similar 'control' diversity library screened under identical conditions
GPCR Library Properties: • Comprised of >10 unpublished 'preferred templates' mimicking beta-turns, and using in-house building blocks, culminating from a four year R&D effort • Over 25,000 drug-like, highly pure, small molecule compounds • Successful identification of both agonists and antagonists • Drug discovery advancements by several Independent laboratories • Designed to enable rapid hit-to-lead optimization with quick follow-up in medicinal chemistry services
Client Statement "We are very pleased with the quality of the ChemBridge GPCR-focused library, particularly since the library helped us to resurrect several projects that we had previously dropped due to lack of leads." Jeremy Caldwell, Ph.D. Director of Molecular and Cellular Biology Genomics Institute of the Novartis Research Foundation
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