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Oct 28, 2004: CEO Forum with Andrew Liveris of Dow Chemical

The Dow Chemical Company’s Andrew Liveris met with AmCham members on Oct. 28, 2004, three days before officially taking over the reigns of Dow as its CEO. Below are excerpts from the meeting:

Opening Remarks

We are a true multinational, in the sense we are local everywhere. We do believe in investing in people locally and developing their leadership skills in different regions and cultures.

Today seven out of the top 10 executives, including my position, are non-U.S. born. In fact, of the last six CEOs, four of them were born outside the U.S.

We do believe in developing local people and the credibility they bring to us and our enterprise in making decisions. The capital investments we make – when we make them – are billions of dollars and when made, we have to live with them for a long time.

Right now our industry and our company are going through a generational shift. It’s brought to us by some incredible headwinds that have appeared in our industry during the last five years, that have seen the demise of many chemical companies or a change of ownership at a minimum.

It is also seeing the interesting departure of some that should be good at this ... oil companies, who you would think by definition – because they have the feed stocks that we consume – would be very good at this business. Many are deciding that they rather should stay in more lucrative businesses, which these days is simply selling oil, selling gas. Clearly the value-add of our enterprise and our industry is something that takes a lot more specific focus and expertise than even they who are operators and engineers have found trouble doing.

The last decade in the U.S. – and I dare say the world from our observations – has been a decade of price deflation, the advent of consumer power as manifested by the arrival of the box retailers, notable by the fact that the largest company in the world is a retailer, Wal-mart. The U.S. consumer wants everything cheaper and has gotten used to it. I dare say that model is starting to permeate the European market and elsewhere. Goods have been plentiful and available and people who supply those goods have been willing to put capacity in at whatever the price it is. And, we have lost in the chemical industry price power on the price trade index basis. We have lost 120 percent of our price power over a decade. What that has meant for Dow is that we have lost $9 billion of margin on a revenue-based stream of about $35 billion. $9 billion in margin has meant that instead of being a 40 percent gross margin company, we’re at somewhere of a 20-25 percent gross margin company.

We’ve outperformed everyone else only because productivity is in our DNA. For the last decade, we have improved productivity on average per year 8 percent every single year. Today we are roughly $37 billion in size and have about the same number of people as when we were $15 billion in size.

The manufacturing value chain has been squeezed. And now that 20 to 25 percent gross margin has been lowered 10 to 15 percent, before expenses. We’re still making a living, but barely. Most companies have abandoned the sector in search of glory in life science or electronics.

On Russia

Half of our mix is commodity based, and we need to find low-cost resources, thus our two deals in the Middle East, our deal in Malaysia, our deal in Argentina and thus my presence in Russia. Russia has an interesting opportunity. It is both a market place and a resource center. Can it be manufacturing center? If we are here, it is because it is a manufacturing center. In China in the last decade we have gone from $250 million in revenue to close to $3 billion today. From one manufacturing center to 14; from 100 people to 1200.

We believe we have to have a presence in emerging markets and I want to learn a lot about this one.

Given the current challenges of working in Russia, what do you see as the most likely areas in which you will be investing?

We normally go to market value-add investments – investments that feed a market that’s already evolved. A good example is building and construction. Our first investment, in fact, will be a building and construction material plant (in the Chekhov region of Moscow Oblast).

Where does Russia fit within Dow’s overall strategy?

As I enter the CEO job (as of Nov. 1), I came out with a very clear agenda of where the Dow Chemical Company is heading in its next decade or so. The agenda spoke to five themes. You’d be negligent if at least two of those themes weren’t growth based. One of those themes, in fact, is investing in emerging geographies of the type where the products the Dow Chemical Company makes are required for that growth. Russia is one of those emerging geographies. Our leaders are working very hard with our businesses to define entry strategies. I am here so I can have a sense of it myself.

As this is your first trip to Russia, what are your impressions? Do they correspond to those prior to your arrival?

My general impressions are very favorable, because they do not correspond to what I expected. I’ve been a victim of too much reading. Russia seems not to attract favorable press overseas. I expected more of a police state, an autocracy. I expected people to be hardened and sensitive to the West in a negative way. I got the complete reverse. People seem to be optimistic.