Andrew Liveris’s Winning Formula

ANDREW LIVERIS, 60, has run Dow Chemical, a very large and complex $57 billion company, for more than a decade. It has 201 sites in 36 countries, with six operating divisions making petrochemicals, specialty chemicals and agricultural chemicals. Dow is a company in transition. Two generations ago, Dow had the capital and the R&D to invent products entirely on its own. Products like Saran Wrap, Styrofoam, Ziploc bags and Scrubbing Bubbles were all Dow from start to finish but have been long since sold-off. Today, it’s working on things like self-healing materials and printable batteries. Barron’s Andrew Bary said that “Dow Chemical could be one of the industry’s best growth stories.”

The company, which boasts a market cap of $60 billion, has an underappreciated asset base that includes a large petrochemical division that benefits from low domestic costs for natural gas and related liquids. Liveris began implementing a program of divestitures of lower-return operations. Although its shares were up 20 percent in 2014 and over 50 percent from 18 months ago, the company has been under pressure to improve its performance since activist investor Third Point Capital, led by Daniel Loeb, revealed a stake in January of 2014. Resisting Loeb’s criticism that Dow needs to be broken up to realize value, Liveris, nonetheless, has stepped up his program to sell businesses worth between $4.5 billion and $6 billion by the end of 2015. (Liveris also agreed to add two directors chosen by Third Point to Dow’s board.)

“You’ve got to go to Washington because if you’re not at the table, you’re likely on the menu.”

The Darwin, Australia-born Liveris is a well-established senior CEO statesman and is a familiar figure in the corridors of power in Washington. He is a co-chair of President Obama’s advanced manufacturing partnership and a director of IBM. He was chairman of the U.S. Business Council until he was succeeded by Jeff Bezos at the end of last year. He also is a big fan of the periodic table of the elements in that “chemistry’s an enabler for human life.” He adds, “chemistry is a personal passion but it is also a wonder. It enables us to sustain 7 billion people on this fragile planet, and it will go to 9 billion. How have we done that? Chemistry provides a solution, whether it’s clean water, affordable medicines, affordable housing—all this comes from chemistry.”

Following are excerpts of Liveris’ conversation with Chief Executive Editor-in-Chief J.P. Donlon at the CEO2CEO Summit on restoring American competitiveness.

Q: After you and fellow members of the Business Roundtable recently met with the President, you said you sensed a change in tone since the elections. What exactly is different?

ANDREW LIVERIS: A one-liner I got from another CEO is that, “You’ve got to go to Washington because if you’re not at the table, you’re likely on the menu.” Without sounding naive, I do think there is an opportunity here. We met with John Boehner, Mitch MicConnell, the new Senate leader and the President. They were saying much the same thing. Given that this is the President’s last two years, this is his chance to put a stamp on the American economy, which he hasn’t done, really.

For their part, the Republicans clearly understand that now that they control Congress and have a presidential run to think about in 2016, they’ve got to show that they can govern. Each side has different motives, but the result may be good for America because we all agree that America must continue to grow the economy.

Relatively speaking, ours is the best-performing economy in the world; but we’re still underperforming, given our historic growth rate. Weeks earlier, I was with the President in China and had a private conversation with him there. I think he’s serious about working with the other side. It’s going to be a skill set that he hasn’t shown, but I am optimistic [that] we might get something done in this Congress.

WASHING WATER: Global Water Technology Center in Tarragona, Spain

Q: What one thing do you most hope for? Corporate tax reform or something else?

Let’s start with the word “certainty.” We all need some degree of certainty to plan our businesses. So how does one get certainty in Washington? For starters, we look for more fiscal responsibility and stability, including entitlement reform and government reform, such as some degree of Bowles-Simpson. Maybe all this is unlikely, but we all violently agree with corporate tax reform. The OECD average today is 25 percent. We’re now one of the highest tax jurisdictions in the world. Twenty years ago, we were one of the lowest, but everyone else has zoomed past us. The current tax code is a leaking sieve, to say the least, so if we can plug those loopholes, stay revenue neutral [and] work the S-corporation rate, that will be a great landing spot.

Not too long ago, serious people dismissed talk of a manufacturing revolution in the U.S., saying that the sector was headed for extinction; 40,000 factories shut down between 2000 and 2010, and 5.5 million manufacturing jobs were lost. You’ve said that thanks to entrepreneurs in the natural gas world—the shale-gale phenomenon—manufacturing has revived, and so it has. But what do manufacturing leaders really need to do to make sure this development can be sustained and that it’s not just a will-o’-the-wisp?

“The biggest issue we have is training a new skilled workforce to deploy against that value add, and for me, that is the key topic in manufacturing today.”

Entrepreneurial action and its ability to pivot, according to the world we face, is one of America’s greatest attributes. Manufacturers, for far too long, did not really display agility when global competition disrupted supply chains. We are in a different world. We’re traveling at the speed of flight. We are so connected to the information age without realizing that we’re still at the dawn of it. The smarter companies have figured out their place in the global supply chain and have adjusted their service and product models accordingly.

For example, of the top 20 chemical companies in the world in 1990, 17 of them disappeared by 2010. Dow is one of the survivors because we were able to pivot on a global scale, which is no
easy thing. It’s not for the lighthearted.

You have to bet your company, whether it’s small, medium or large, against these global forces. Who has replaced some of these American and European enterprises in the top 20? State-owned enterprises. They have a very different model. Their model is simple—employ people. Jobs are the quintessential issue of our time. As they emerge and globally compete, they don’t use EVA analysis or ROC; they get subsidized capital, subsidized labor, subsidized energy—subsidized everything—because jobs are the greater good. In our industry, we stopped innovating, if you think of innovation as the quintessential aspect of manufacturing in all of its forms, whether it’s making a smartphone or making a chemical product. So, if they’re commoditizing faster than you innovate, they will run over you. Manufacturing today means you’ve got to innovate faster than they commoditize you.

This should be an American advantage because we run the intersections of research, universities, start-ups, finance and supply chains of small, medium and large scale better than anyone.
Manufacturing now employs 12 million people in this country—almost one million more than it did in 2010. The energy tailwind, shale-gale, has been an enabler, an American entrepreneurial action. We’re in the fourth wave of investment in value and in energy—it’s terrific. In the chemical industry alone, and Dow’s part of this—$130 billion of value-add facilities will create 1 million new jobs in the next five years, and this means another three-to-five million in the supply chain.

The biggest issue we have is training a new skilled workforce to deploy against that value add, and for me, that is the key topic in manufacturing today. We need technically trained people at the
German skill level, in automation, robotics and fine-precision manufacturing. This is the world that we’re in today and we’ve got to adjust to it, and frankly that’s what I spend my time on.

TEXAS TECH: Dow’s chlor-alkali facility in Freeport

Q: Considering that there are easily 4.7 million manufacturing jobs going unfilled, what steps should companies take to deal with the skills gap?

Create your own supply chains. We have these sites you talk about. A third of them are in the U.S., some of them [are] very large locations. We hub and speak to the community colleges. We work with them on curricula changing, if necessary, to suit the requirement for the modern worker. I use community colleges because that’s where most of the deficit is, in the trades. It’s in the highly skilled operator of complex chemistry. There’s such a shortage of skilled people, especially in the U.S. Gulf Coast for example, that companies are poaching each other.

Talk about wage inflation—go to the U.S. Gulf Coast, Houston and Louisiana. So we do our own training. At the President’s Advanced Manufacturing Partnership (AMP), which I co-chair, this was one of the three topics that received attention at the national level. Big companies are involved with AMP, but we will help small companies get into the mix. We’re going to hub-and-spoke this across the country to put in place national training centers where small companies can participate. Through this (concept) we can convince high school kids, and even middle school kids—that the trades are noble professions. Not everyone should be a double Ph.D. in economics. In fact, there’s not much demand for that, except maybe here at the New York Stock Exchange.

“In our industry, we’ve got to re-discover creativity. This is why we find partnerships very useful.”

Q: In 2013, Booz and Company, now Strategy&, conducted a study of R&D spending and found no discernible link between the amount of spending and financial performance of the spender. How do you measure outcomes against your R&D? And what advice would you give to CEOs for doing a better job at managing the relationship between R&D and outcomes?

It seems like you’re spending a lot of time inside our boardroom, J.P., because it is an incredibly difficult thing to achieve. I personally have spent a lot of time with some of the best innovators in the country and in the world. What I learned is that no one has the definitive answer. The common denominator, of course, is always the people quality. Google provides open areas for
rollerblading and cafeterias with free food. At Dow, we’ve replenished our facilities around the world, creating similar environments to encourage interaction and spontaneity.

In our industry, we’ve got to re-discover creativity. Call it serendipitous research if you like. This is why we find partnerships very useful. We made a big decision five years ago to cull down the number of universities we work with in terms of research partnerships. We found we were trying to be everything to everyone and it was not satisfactory.

We culled it down to 15 in this country but went deep with all of them. By deep, I mean a quarter of $1 billion for five years. We also helped them rebuild their research engine because many of their chemical-engineering facilities are not very good. Out of this change, we generated a whole new, lightweight materials platform.

We’ve introduced smart coatings. These are coatings that can literally absorb emissions in a room like this. For example, if the paint used on these walls were “smart” paint, it could absorb harmful emissions in the room so you wouldn’t have to breathe it. The next generation of smart coatings will reduce viruses transmitted in the air. Imagine this [technology] applied in hospitals of the future.

These research collaborations are generating patents through the roof, but that’s not how we measure it. It’s the percent of margin that comes from new product. This is an investment headwind very few companies can bear. We spend $1.8 billion a year, $200 million of that in serendipitous or creative areas. Then, we grab business ownership. Once it gets through that first part of the pipeline, individual businesses have to sponsor it.

So our business operates like a hub of startups. They have to make the case to us why that research is of value to them, but they don’t have to pay for it.

J.P. Donlon: J.P. Donlon is Editor Emeritus of Chief Executive magazine.
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