An interview with Michael Hochschwender: Smithers acquiring capabilities and capacity.

Michael Hochschwender is president and CEO of Smithers Scientific Services, a multi-discipline, independent testing, research and consulting firm. The company was formed in 1925 and is growing through acquisitions, most recently, Noveon, Springborn Laboratories and Rapra, as well as initiating organic growth with new start-ups.

RW: Since 2002, Smithers has acquired Springborn Smithers Laboratories and Smithers Rapra Technology. Can you describe why the purchases were made and what effect each has had on what Smithers offers the rubber industry?

Hochschwender: Smithers has made several key acquisitions in recent years, having in fact completed four since 2000. We also launched a startup company during that time frame. These moves have complemented our organic growth. Smithers is a technology based service company. Supporting our clients often means adding capabilities and capacity, but it can also be investing in new technologies. Most important to our success is our people, and a key decision in any acquisitions is our ability to add highly skilled staff.

The five most recent additions to Smithers' business portfolio were the rubber testing and mixing services acquired from Noveon, Springborn Smithers Laboratories, selected equipment and personnel from Akron Polymer Labs, the startup of Synomics Pharma Services, and Smithers Rapra Technology.

In adding Noveon's rubber testing and mixing business, we gained technical capabilities in the form of both people and equipment in markets we were already serving.

Springborn was our first significant diversification but like our other companies, it is a technology based service provider. Strategically, we saw long-term growth opportunities in biological and chemical services associated with fields studying the environment and the effects of materials and chemicals. We were specifically attracted to Springborn, because of its leadership position in the industries it serves and its excellent reputation in the fields of ecotoxicology, environmental fate, and metabolism and analytical services.

Akron Polymer Laboratories represented a similar opportunity to Noveon. Smithers purchased selected equipment and was able to bring on board several of its key personnel. These additions enabled us to offer customers an expanded range of polymeric expertise.

Synomics Pharma Services evolved in a different manner than the others. During the first three years of our involvement with Springborn, requests from the pharmaceutical industry significantly increased. We determined a focused team would best be able to meet the needs of the clients in this market as they moved towards outsourcing more analytical services. In June of 2005, Smithers established Synomics as a separate, dedicated business entity. It offers a portfolio of high quality analytical chemistry-based research services to support the development and manufacturing of pharmaceutical, biotechnology and consumer healthcare products.

For our clients, we believe Smithers' addition of Rapra clearly highlights the benefits of our growth strategy. With Rapra we had the ability to expand our capabilities in existing and new technologies, to grow in terms of our global presence, and to add highly skilled staff. Rapra's diverse range of analytical, testing, research and information services to the rubber and plastics industry complements Smithers' activities in the U.S., and they in turn provide a critical link to the U.K. and European markets. Rapra also brings complementary pharmaceutical industry capabilities, particularly related to the design and evaluation of medical devices.

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Smithers' strength is based on depth in the technical fields we serve and an ability to understand the "business of science," In this way, our clients are provided technology based services with the best value. Acquisitions, even when involving a new technology area, must be in line with our strategy of having technical depth. The new technology additions allow Smithers to expand the breadth of services. Our experience has been that once these companies become part of The Smithers Group, there are additional benefits when they can participate in the sharing of best practices and become part of a structured and global business planning process.

Relative to the rubber industry, certainly additions like Noveon, Akron Polymer Lab and the Rapra businesses have an obvious benefit to our clients. Less obvious, although potentially just as beneficial, are the technical competencies Springborn Smithers can offer to our rubber industry clients. As the issue of chemicals and their effect on the environment becomes a more prominent issue, Smithers is fortunate to now be in a position to help our clients in a unique way. We understand both the materials science and the use of chemicals in rubber compounds and products, and we have the ability to work with our clients as they conduct studies and assess the impact of those materials on the environment.

RW: How has Rapra changed since the acquisition?

Hochschwender: The quick answer is that, as part of The Smithers Group, Rapra is accelerating the pace at which it can respond to needs of clients and the polymer industry. This is happening through a combination of increased capital investment in equipment, renovation of facilities and infrastructure enhancements.

Expanding upon the question, however, Rapra has always been a terrific technical organization. While our formal relationship with it is quite recent, Smithers has known and respected Rapra for many years. Over its almost 90-year history, it has successfully undergone a number of transitions. In the early years, Rapra was significantly subsidized by the government; later its funding came largely through membership dues, and then in the past decade they started moving towards a more commercial business mindset. Prior to Smithers involvement, Rapra was successfully operating as an independent provider of technical and information services to the polymer industry.

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The opportunity for Smithers to acquire Rapra was created by a change in pension funding legislation in the U.K. Liabilities associated with underfunded pensions impacted a large number of companies in the U.K., and was not unique to Rapra. Fortunately after the acquisition, Rapra is no longer encumbered by the pension legacy. Now that it is part of The Smithers Group, the next steps are taking place, such as the changes I mentioned that will enable it to more effectively serve the marketplace.

RW: Smithers has been at the forefront in testing in most areas of the rubber industry. Please discuss how the areas of analytical testing and mechanical/physical testing have evolved over the years. Our rubber testing services support research, development, manufacturing and quality activities. Each of these areas has seen significant changes over the past several years, and they continue to evolve. Certainly, one of the big factors driving research and development efforts is the move to drastically shorten the product development cycle. Less time to develop products means more reliance on laboratory testing and more emphasis on developing testing programs that relate to field performance; we see a continuing trend and emphasis on predictive life cycle projects.

Product liability, regulatory compliance and government legislation are the key drivers behind the vast majority of work undertaken across the testing areas. For example, the UKAS accreditation and overall quality culture have become increasingly valued by the client base at Rapra, and are key factors when selecting a testing partner for work programs. Analytical testing at Smithers Scientific Services is experiencing ongoing transitions from wet methods to spectroscopy; is using increasingly sophisticated composition mapping tools, such as EDAX and GC/MS; is witnessing more interest in oxygen testing; and is increasing efficiencies through auto-samplers. In physical testing, we are seeing improvements in electronics and software, yielding better accuracy and higher data acquisition rates. Also, there is increasing use of such techniques as compression stress relaxation to supplement or replace simple compression set tests.

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In the end though, most clients come to Smithers for some basic reasons: they seek technical knowledge; they need conformity assessment; failure analysis services; or they require additional capacity beyond their internal capabilities.

RW: Are there any new tests or equipment pending?

Hochschwender: Within rubber services, one of the significant growth areas concerns potential chemical migration between a product and its packaging material. In the case of pharmaceuticals, for example, extensive testing programs are needed to demonstrate that contact with a polymeric material does not compromise safety or the efficacy of the drug's active ingredients. As a result, there has been considerable investment at Rapra in expertise, quality systems, laboratory facilities and state-of-the-art analytical equipment.

In the tire industry, NHTSA, ASTM and others have been working over the last few years to develop an aged tire performance test. Still pending is the final test, which will be required by the government, but the activity in this area will continue both in terms of compliance and development.

RW: At the present time, what tests are the most in demand?

Hochschwender: Many of the standard physical/mechanical tests are still very much in demand. We have seen an increase in fluid immersion testing and low temperature brittleness often associated with testing to the ASTM D2000 standard. Sealing force has become a critical measure for some automotive applications, and we are performing more compression stress relaxation testing.

In our component testing area, lifecycle testing under a variety of conditions, is a frequent request from our clients. The use of dynamical mechanical thermal analysis to characterize the properties of rubber in dynamic service applications is another strong area of interest.

RW: Smithers tests to numerous specifications (ASTM, SAE, ISO, military, auto companies, etc.). How different is the testing for international standards? The European Union?

Hochschwender: In general, the testing requirements for international standards are very similar to the other specifications you mention, albeit with occasional subtle differences. What we do see, however, is a strong trend toward reliance on international standards. This is particularly true in the EU, but is becoming the norm in other regions as well. The trend can probably be attributed to the increasing globalization of business and commerce--as industries go global, standards follow along. Many of our clients are large global companies and they drive test specifications that are transferable to any location in the world.

RW: With your unique vantage point, can you discuss how the tire industry could best achieve its goals of lower rolling resistance, better traction and less weight?

Hochschwender: It is common knowledge that lower tire rolling resistance can directly lead to better fuel economy. However, as with any tire characteristic, there are potential tradeoffs. Additional work is needed to evaluate other performance attributes. Currently, there is really no information, in terms of rolling resistance or fuel economy, available to a consumer purchasing replacement tires. The U.S. Senate recently passed an energy bill containing language to create a national consumer information program on tire rolling resistance. The bill now goes to the U.S. House of Representatives.

RW: How prevalent is outsourcing testing services to Asia?

Hochschwender: Because the situation for testing services in Japan and Korea is very different than in China, India or Thailand, characterizing Asia as one market is difficult. On the whole, however, what we see is the reverse of what might be expected. A significant amount of the testing in support of product development and export from Asia is in fact being outsourced to U.S. and European laboratories. In some Asian countries, there is a gap between existing technology support services and the demand. This will change as more R&D activities are established to support the manufacturing operations. In response to this, The Smithers Group has in fact recently hired someone to be based in Shanghai, China, and will help in facilitating discussions with Asian organizations that may have need for the services of our member companies.

RW: Can you discuss the impact of REACH and other materials regulations and restrictions regarding health and environmental concerns?

Hochschwender: The REACH directive will certainly have a significant impact on raw material suppliers to the rubber industries, and these companies will have to evaluate how their products perform to the requirements. The issue is more complex for rubber mixers and rubber product producers, for whom definitive answers are still evolving.

We are fortunate within The Smithers Group, based on our technology additions in the last five years, to have chemistry and polymer-based product expertise and an understanding of the legislative and technology issues associated with environmental risk assessments. Additionally, as a provider of information services, Smithers is involved with coordination of industry conferences. Specifically, two of our companies are collaborating on a REACH conference scheduled for next April in Boston. Overall, we believe we are in a unique position to help our clients as they work to understand and eventually complying with the requirements of REACH.

Taking a big picture view, from Smithers' perspective, REACH is part of a general trend toward more oversight of all products. Globally, there are increases in government regulatory requirements and client conformity verification requirements. Evidence of these trends traces back to the early days of ISO quality management systems and global harmonization, followed in turn by certification of chemicals in the early 1990s, OEM-inspired automotive quality requirements over the past dozen years, and the TREAD Act earlier this decade.

Today, we not only see programs like the REACH directive, but also other examples where increased oversight will have global effects, such as EU regulations on the pharmaceutical industry and emphasis on more and better oversight by the FDA. Each of these initiatives in effect establishes a new benchmark that is then applied to future programs being implemented in other regions of the world. Added to all of this is the globalization continuing to take place within industries and throughout their supply chains. This, in turn, fosters increased oversight of safety and compliance issues by OEMs and regulators as parts, products and subassemblies are sourced from a variety of countries for global distribution.

Is this level of oversight appropriate? That remains to be seen. Feedback we get from stakeholders varies widely by regulation, but, for the most part, as long as the regulations are uniformly applied, resistance seems to be limited.

Many of our North American clients associated with the rubber industry know us primarily in the context of Smithers Scientific Services. In the future, programs like REACH will mean many of our clients will know Smithers based on the breadth and robustness of services offered by all of our companies.