BUSINESS
SCI Medalist Jefferson Addresses Problems Facing Chemical Industry
Earlier this month Edward G. Jefferson was awarded the Chemical Industry Medal for "conspicuous service to applied chemistry/' The medal is awarded yearly by the American Section of the Society of the Chemical Industry. The 65-year-old Jefferson retired in May as chairman and chief executive officer of Du Pont, after overseeing the company's acquisition of Conoco, a move that changed the face of the Wilmington, Del.-headquartered chemical giant. He also oversaw the restructuring of the company over the past few years as it shed a number of operations and reduced its worldwide employment by about 35,000. In the past few years, as chairman of Du Pont, Jefferson has been vocally concerned about the problems of U.S. competitiveness and what can be done about them. In a wide-ranging interview with C&EN assistant managing editor William J. Storck, Jefferson discussed some of those problems as well as other issues facing both Du Pont and the U.S. chemical industry.
How do you view your tenure as chief executive at Du Pont? What do you consider your accomplishments? Well, we've seen busy times. There have been substantial changes in two areas—restructuring and diversification. Let's focus on restructuring a little. We improved our productivity substantially over the past
few years by approaching the structure of the organization differently, expecting we can do the tasks with fewer levels of management and with a greater span of control on the part of individual members of management. This is not to say that the structures of the past were inappropriate—rather, perhaps, look at our restructuring as having capitalized on modern methods of communication and wanting to do things differently. We know we don't need as many sales offices around the country as we did at one time. We find we can run the plants efficiently and safely with fewer levels of supervision. At the end of 1981, I think we employed slightly less than 180,000 people. We brought this down to 145,000 and did it in a thoughtful and considerate manner. Another area of restructuring, of course, has been the abandonment, sale, or termination of businesses that didn't fit into our long-term plans or that were losers and likely to remain so. So we have moved out of a number of commodity chemical businesses and areas like consumer paint and color pigments. In the cases of paints and pigments, we've sold the businesses. That was true also of some of the major commodity positions we have moved away from. One other thing I might mention is that we changed the role of individual members of the executive committee. The structure, for many years, was one in which the members of the committee did not have line responsibility for operations. We did some experiments, going back a couple of years, with some departments and these turned out to be successful. So at the beginning of 1985, we gave members of the executive committee line responsibility for the businesses for which previously they only had a kind of liaison role. What about diversification? At the same time that we acquired Conoco, we increased and reoriented our research and development looking for new growth through research discovery. We reoriented particular areas, areas of opportunity for the industry as a whole that really represent a change in the traditional definition of the industry, I think. That is, we pushed into the life sciences field both as it affects health care and agriculture. We built two new laboratories, one for health sciences and one for plant sciences. We purchased the Shell agriculture chemicals business and most recently on the health side, since I retired, acquired the American October 27, 1986 C&EN
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Business Critical Care u n i t of Baxter Travenol. Of course, for a long time w e have been one of the biggest players in medical diagnostics if one takes our medical x-ray a n d our automatic clinical analyzer businesses in particular. This is a large u n d e r t a k i n g that has benefited already from the molecular biology emphasis w e instituted from those years. The other major area of diversification has been in electronics. We have made some small acquisitions in electronics but perhaps the biggest impact is in joint ventures.
There's no such thing as free trade. It doesn't exist So the theory of comparative
Some say the early retirement program of last year was the culmination of the Conoco acquisition — that the early retirement program got rid of a lot of the layers that were both built up within Du Pont over the years and also were acquired along with Conoco. N o I don't think it was. I think the biggest changes in this program were in Du Pont operations, a l t h o u g h the program also applied to Conoco. The biggest emphasis was also on Du Pont's domestic operations but the impact on Conoco was really not a substantial one except in this sense—since the merger there has been a learning process for both organizations in terms of h o w to do things better. Recognize, however, that the petroleum a n d coal businesses are very different from chemical businesses a n d chemical operations. There is a similarity w h e n you get to the refined products, get to the refineries. Of course, Conoco had a chemical business, m u c h of w h i c h we sold, but I w o u l d not view this piece of evolution as resulting from the merger. I t h i n k it was probably accelerated by the r e a l i t i e s of t h e s t r o n g d o l l a r . T h e i n t e r n a t i o n a l competitiveness equation in this has made all of us search our souls harder. But I think the idea of getting our plants m o d e r n i z e d along w i t h organizations that were similarly m o d e r n i z e d was one that was coming along anyway.
nize that you need the people, and the people did stay. We had some losses but by a n d large the key people we were anxious to retain remained with us. A n d I think that there are several of us a r o u n d here w h o are quite p r o u d of h o w the relationships between Conoco a n d Du Pont evolved. We had a period of feeling our way. We managed things like capital budgets with care. But the relationship aspect w e n t smoothly. I imagine that I could find one or two people w h o were u n h a p p y , but I could find t h e m in any organization if I were to keep trying. I remember one of the members of the board saying to me: "If you can in the next several years bring the two companies together effectively, it will be a tour de force." I w o u l d say w e did that.
You brought up the difference between Conoco and Du Pont in terms of management How did that affect you? You had just been elected chief executive at the time. And you had come up through chemicals. Did you have to make any great changes in your attitude toward the company? Well obviously it was a complex merger in size and the characteristics of the n e w businesses. I w o u l d preface this by saying a couple of things. First w e had been looking for a long time to find a way of reducing our d e p e n d e n c e on fibers. We considered all kinds of things. Remember w i t h fibers more t h a n 30% of the corporation prior to the Conoco merger, a step that w o u l d make a significant difference had to be a large one. Then w e recognized the vagaries of raw materials. Three quarters of Du Pont operations products are petroleum-based, a n d w e recognized that there w o u l d be periods w h e n the m o n e y w o u l d be made on raw materials a n d other periods w h e n it w o u l d be made on derived products. But it is a different business today. I guess the wisdom in m a n a g i n g a different business is to recog-
R&D is increasing as a percentage of future-oriented spending both at Du Pont and in the chemical industry at large. Do you see this as a long-term trend, or will it abate as capital spending comes back? I don't think R&D is something that should be yoyoed around. If you take the step to increase it, it should be a step you have in m i n d over a substantial period of time. Basically w h e n you make the commitment, you make it lasting. Look at the research mounted by foreign companies—BASF, Bayer, a n d Hoechst in Germany, ICI in the U.K. The industry does have to m o u n t very vigorous research programs to remain competitive a n d to blaze n e w trails. I don't t h i n k there is any question about that; I think it's a very healthy trend. It's necessary for competitive health in businesses that are well-established. It's necessary to find n e w ways a n d n e w products. It's really the p h i losophy that has governed our efforts a n d one shared by my colleagues. You've got to companion that view in the case of the chemical industry with its opportunities. The busi-
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advantage simply doesn't apply to world trade
ness cycle hasn't been repealed. It will be w i t h us a n d we'll have our periods of difficulty, but the opportunities for the industry are substantial. In terms of new directions for R&D, there is the academic-industry cooperation aspect now. Do you see that as something that has to come about and how do you overcome what seems to be a certain lack of confidence on the part of academia and also on the part of industry? I t h i n k you overcome it by w o r k i n g w i t h them, by k n o w i n g t h e m , by h a v i n g good relationships. We cultivate these. Of course, w e lean on the universities for trained people, and so w e interface w i t h t h e m in m a n y areas. Any organization w i t h the kind of research effort w e have in so m a n y different areas has to be close to t h e basic research that goes on in universities. I think there were problems w i t h a m y t h that goes this way: Business should not be getting a free ride from its contracts w i t h the universities. Well that, of course, is rubbish. The public benefits w h e n its industries avail themselves of the benefits of the basic research d o n e in the university. Benefits from better international competition, better products, job creation, benefits in many, m a n y ways. The free ride concept is kind of n a r r o w a n d silly, but it exists a n d it's only dealt with, I think, by talking it out. Then there is another m y t h that basic research exists for its o w n sake. If you look d o w n the years you'll find that some of the most creative basic scientists had a h i g h interest in seeing the benefits of their basic work translated into things of value for society. In fact, the areas in w h i c h they work were often very m u c h influenced by w h a t society needed. You can go all the way back to N e w t o n ' s time w h e n people were w o r r y i n g about the things that h e l p e d navigation. You can trace it all the way d o w n . Look at the a m o u n t of basic work that is being committed to virus problems, particularly AIDS (acquired i m m u n e deficiency syndrome) at the moment.
Capital spending has remained low in the chemical industry for some time. Right now some products are in pretty tight supply and probably could use some new plants. Since the rule of thumb is that it takes three years to build a new plant, doesn't this indicate some chemical products might go short and won't this help foreign competitors? You obviously have to look at very specific pieces of the business or take the w h o l e universe. The industry's capacity utilization is about 80%. To be sure, there are some products in tight supply; there are others for which the overcapacity is considerably more than 20%. The g r o w t h rate in industrial production has been anemic n o w for five years. W h e n you are only averaging industrial-production increases of a couple of per cent a year, you don't r u n out of capacity very quickly. Given these realities, along with the perception of uncertainty, I t h i n k it's understandable that people held back. The principal reason has been lack of growth. The industry w e n t t h r o u g h many years following World War II averaging 8% per year. In t h e seventies industry was back d o w n to 4%, more recently 2%. So I think the decision to build n e w plants d e p e n d s on growth. A n d one of the problems w h e n you build a plant, w h e n g r o w t h is slow, is that mistakes are not easily forgiven. If the g r o w t h rate is 8% w h e n you're a couple of years off in your timing, the problem is soon healed by growth. But if you're off in your timing w h e n the g r o w t h is a couple of per cent, you may be in pain for a considerable period. Do you think it's growth more than price vs. cost of capital? International competitiveness considerations undoubtedly have been a restraint in a n u m b e r of areas, not so much in the specialties but clearly in the commodity areas, because the cost of capital in other parts of the world is less. In the Middle East countries the ingredient position is hard to d e t e r m i n e because you can cost
Du Pont has changed during Jefferson's tenure
How does Du Pont define basic research? Basic research may h e l p one deal w i t h a product problem. There are various grey areas here. However, generally speaking, basic research amounts to about 10% of w h a t we do a n d it's work that has n o immediate commercial objective, but it is pursued in fields that are of interest to us. Theoretical studies of polymer structure, for example, w o u l d be basic work that w o u l d b e of p o t e n t i a l v a l u e as b o t h background a n d perhaps as providing methodology w h e n tackling a specific problem related to products or problem-related processes.
1980a
1985 Biomedical products 3% Coal Industrial & consumer products
Biomedical products Industrial & consumer products
Agricultural & industrial chemicals
Total sales = $13.74 billion
Polymer products
^ K . Agricultural & Petroleum industrial exploration & chemicals production
Total sales = $29.48 billion
a Year prior to Jefferson's appointment as chairman and chief executive officer.
October 2 7 , 1 9 8 6 C&EN
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Business in the natural gas or crude oil derivative almost anywhere. They have the disadvantage, of course, of high construction costs. But I think when you get a corporation of our size, our results are enormously influenced by the growth of the economy as a whole. If the industrial production part of the economy isn't growing vigorously, it's going to have its impact. You have spoken for years about the pro-industrial strategy. Would you define that term? There is a tendency for people to speak of the virtues of the level playing field. When they do so, they fail to realize that we are not in a position to say how the game will be played around the world. We can set the rules at home, but we can't set them around the world. So if we say there should be no actions at all that change the topography of the playing field, we are really ignoring the part of the country's business that has grown since World War II: the overseas business. Most of the countries are unwilling to say hands off, so they have capital grants, tax holidays, nontariff barriers to trade, and so on down the list. We have to realize that we must take conscious actions to be competitive. I would say in R&D there has been encouragement of research through the tax credit. On the other hand, the funds available in universities for university research are less, and so that is one aspect that should be a matter of conscious concern in designing national policy. Now the health of our industry in terms of modernization and in terms of participation in world trade was ignored too long. The 1981 tax bill was encouraging for investment. Some say it didn't do enough, but it was encouraging at a time when monetary policy, which was having to do all the work with a terribly permissive fiscal policy, drove up the exchange rate of the dollar and made it very hard to compete in international markets. What about foreign trade being used by the U.S. as a political weapon? The trade question does get caught up in matters of diplomacy. I would, however, remind the political leadership that if we continue down the road of worsening trade balance of great dimensions, the reckoning will be severe. Another misapprehension you find is people taking refuge in postindustrial thinking. My question there is what will you use to trade, what will be your tradeable goods? You really have to think substantially in terms of tradeable goods, and that means you have to have cultivated the strength of our industrial establishment. I've run into some thinkers who will ask if we need the industrial economy, that we have perhaps progressed beyond that. I think the answers there are obvious. Some of the wanted service jobs are unsophisticated and lower paid and they do not produce tradeable goods. We've been reasonably comfortable in this country because we've been willing to extend our credit, and we get others to extend their credit to us. We've doubled the national debt in five years and run up huge debts overseas. I think one of the first points of focus ought to be not industrial policy in the sense of 14
October 27, 1986 C&EN
picking winners and losers on the industrial scene, but a policy that is conducive to industrial growth, which means, as I said, research and engineering. It means monetary policies within the fiscal area, and tax policies that seek such industrial health. You have discounted "industrial policy" saying in some of your speeches that it can have a number of meanings or no meaning at all. But do you think the U.S. should counter some of these other countries with its own incentive to trade more than it does? There is no such thing as free trade. I've said that before. It doesn't exist. So the theory of comparative advantage simply doesn't apply to world trade. That means there has to be fairness in the design of trade relationships. You can't expect the struggling developing country trying to set up some kind of industrial base to allow pure free trade relationships with the rest of the world. You can expect a reasonable design and you can expect in the interrelationship with developed countries a reasonable reciprocity of action. Now that makes for very untidy work. It's much nicer to have a simple, almost religious, faith in free trade, but the world is not going to be that simple, and it's a grinding, difficult process involving endless negotiations and discussions. But you know, if you look at what happened after GATT (General Agreement on Tariffs & Trade) was put in place, there were many years of excellent growth in world trade. As time passed, policies have been adopted around the world that result in nontariff barriers that we can be concerned about. All of this makes it timely to take another pass at better international understanding and what it takes to get growth in world trade. It won't come just by preaching free trade, because free trade doesn't exist in the world today nor will it. You have often discussed a value-added tax. What would that do for the U.S.? Value-added tax with what? A value-added tax is an attractive revenue raiser. It is because of its rebatable characteristics—rebatable at the border—that it is a constructive thing to do from a trade standpoint. I've not called for VAT. I reviewed its advantages in trade and the advantages that the Europeans enjoy with the rebating of VAT in international trade and the Japanese with the similarly rebatable merchandise tax. I've spoken about VAT as something that should be seriously weighed in designing our domestic tax code and it has not been. A value-added tax as an approach to revenue raising is very useful. Many will feel it is regressive and the answer to that is to exclude food, medicine, and the like. If you were to simply add the value-added tax to the present code, however, it would be taking the lid off another honey pot. It could be used to raise revenues excessively. So even though it has many interesting characteristics, particularly from a trade standpoint, whether it's something that should be endorsed depends on the circumstances, the rest of the tax code, the limitations, and so on. How does it apply and to what products? •
