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Street fighter.

Through diversification into higher-margin consumer products, Frank Popoff is laboring to make Dow Chemical more immune to the industry's notorious boom-bust cycle. Will Wall Street reward the effort?

Corporate value, like beauty, is often in the eye of the beholder. Put another way, if solid performance is half the battle of winning praise on Wall Street, perception comprises the other half. That's why Dow Chemical CEO Frank Popoff decided last year to begin "featuring" one of his top lieutenants at each of the company's quarterly review meetings with analysts. The object: put a favorable spin on Dow's performance. Operating earnings plunged 41.6 percent to $546 million last year--with accounting and other fourth-quarter charges, the bottom line dipped $496 million in the red. The broader industry has been buffeted by overcapacity and sluggish demand worldwide. As a result, some major brokerage houses have been less than enthusiastic about Dow's middle- to long-term possibilities. "This issue's 3- to 5-year capital appreciation prospects appear below average," wrote analyst Michael J. Rindos in a recent Value Line report.

But Popoff, 57, an energetic, engaging sort who took over as Dow president and CEO for cantankerous Paul F. Oreffice in 1987, effectively argues the counterpoint. The U.S. chemical industry, he says, is perhaps the most competitive in the world, with a productivity, by some estimates, superior even to that of Germany's. It is the leading industrial exporter in the U.S., having contributed roughly a $19 billion surplus to the balance of trade in 1991.

Dow Chemical, too, has substantial strengths, despite a marked decline from its peak earnings years of 1988-1989. That's partly because Popoff is a trend-maker often ahead of the industry learning curve. At one time, Dow was a passive rider on the chemical sector's boom-bust roller coaster. But under Popoff, the company--long a dominant player in plastics, commodity petrochemicals, and industrial chemicals--has successfully embraced a philosophy of diversification, moving into countercyclical, higher-margin industrial and consumer specialty consumer products. While the Midland, MI-based company derived some 67 percent of its operating income from basic chemicals and plastics products in 1989 and 12 percent from consumer specialties, through the first three quarters of 1992, the percentages stood at 7 percent and 62 percent, respectively. Dow's powerful brands, including Ziploc bags, Saran Wrap, Fantastik, and Dow Bathroom Cleaner (you know, "scrubbing bubbles") line supermarket shelves.

Popoff was also among the earliest to recognize the gain to be reaped in what he describes as a "substitution industry." "These days, there's plastic in cars, houses, and windows," Popoff says. "That means Dow competes head-to-head with those outside the industry, including steel and oil companies." Successfully, too. Dow expects in 1993 to be producing commercial quantities of a polyethylene based on its new Metalocene "Constrained Geometry Catalyst Technology" (CGCT). According to some estimates, 1.3 billion pounds of applications served by other plastics will now be opened to polyethylene, including a 130 million pound market in wire and cable products. Merrill Lynch Capital markets projects that Dow could capture a full 30 percent of this volume, which will be priced about 2-to-3 times the price of traditional polyethylene. Its competitors in the market are Italy's Montedison, Exxon (in collaboration with Mitsui), Union Carbide, and Mobil. But Dow has the drop on them. While these companies are just building CGCT plants, Dow's technology is a retrofit to existing solution plants.

Meanwhile, Popoff has made his biggest mark by softening Dow Chemical's combative countenance in the environmental arena. In the mid-1980s, under hard-nosed Oreffice, Dow fought the Environmental Protection Agency all the way to the Supreme Court to prevent airplane inspections of its factory emissions. But those days seem a distant memory. Popoff acknowledges, for example, the cost burden of Superfund and a host of new regulatory and emissions standards. The Clean Air Act, expected to impose costs on U.S. industry of nearly $30 billion, "is a big, big, hit," he says, adding: "Command-and-control regulation won't clean up the environment."

Nonetheless, he treads lightly, seeking at every turn to transform obstacle into opportunity. To the chagrin of some of his peers, Popoff, also chairman of the Chemical Manufacturers Association, preaches a doctrine of "product stewardship," under which a company voluntarily assumes responsibility for a product's life cycle, from synthesis to disposal. And perhaps even more radically, in a move some industry observes observers describe as tantamount to giving the inmates the keys to the asylum, Popoff has formed a Corporate Environmental Advisory Council, a liaison group that shares confidential plant and product information with environmental advocates.

Quite a shift for a company that produced napalm during the Vietnam War? Popoff shrugs and says, "Paul Oreffice's approach was a product of the times. In the 1980s, we were adversarial with the press, we were adversarial with environmentalists, and we were adversarial with the government. On net, we were losers. I'm not conciliatory by nature, but I will build a consensus if it serves our best interests."

Increasingly, it does. By cutting down on its toxic waste, the company discovered, it saves millions of dollars a year in disposal costs.

Bulgarian-born Popoff emigrated to Terre Haute, IN, with his parents at age five. He joined Dow in 1959 after earning a bachelor's degree and an MBA from Indiana University. In December, he replaced Oreffice as Dow's chairman. CE editor J.P. Donlon recently caught up with Popoff in New York.

A WORLD OF DIVERSITY

In the early 1980s, chemical companies, including Dow, tried to "recession-proof" themselves by moving from basic chemicals into high-margin consumer and industrial specialty products. Has that strategy been successful?

The short answer is yes. Dow Chemical diversified into chemical-based specialties, such as pharmaceuticals, and agricultural and consumer products. Our brand names include Saran Wrap and Ziploc plastic bags. This has enabled us to avoid the industry's traditional boom-bust cycles.

In specialty products, technology and the human element are more important than raw materials and energy. So Dow, once an 80 percent basic chemicals company, aims over time to diversify in equal thirds--consumer specialties, basic chemicals, and industrial specialties.

Aside from lower margins and a profit squeeze, how has the sluggish economy affected the chemical business?

It has hastened the consolidation of the industry and weeded out the weaker companies. So the difference between the best and worst producer is closer than ever.

Any signs of an upturn?

We're starting to come out of it already. But the upturn is fragile, and we've had a couple of false starts. What drives any turn-around? Industrial spending, government spending, consumer spending, and exports. Exports have been excellent, but they are a product of a good overseas demand. And foreign economies are not doing well--either in the Pacific Rim or in Europe.

Industrial spending is modest. Government spending is obviously down. So we are dependent on the consumer to pull us out of trouble. And, of course, the consumer reads the headlines and doesn't know whether to be confident or not.

Two particular obstacles in Europe are state-supported enterprises in the EC and Eastern European producers who are flooding the market with products. How do you plan to cope?

Eastern Europe does export, sometimes aggressively, for no other reason than to garner foreign exchange. But one thing that works in our favor is that the state-owned companies aren't terribly efficient producers.

The bottom line is: Producer beware. We intend to stick to fundamentals and enhance our reputation as a low-cost producer.

INNOVATION OR BUST

You've spoken about a management crisis in the chemical industry.

I told the Chemical Manufacturers Association: We're America's leading industry exporter. We contributed a $19 billion surplus to the balance of trade in 1991. So why are we plagued with overcapacity and thinning profit margins? The answer is the industry's management is probably more preoccupied with building the next plant ahead of the competition than with seeking superior returns.

We're an industry of chemists and engineers. I fall into that category. And maybe we're a little more passionate about our technology and little less thoughtful about performing the basics and supplying what our customers demand.

We have good people. But I like to chide them because a kind of market-share mentality exists out there at the cost of profitability.

Aside from diversification, what strategies or trends will boost the bottom line?

We have to recognize and capitalize on the fact that we are a substitution industry. These days, there's plastic in cars, houses, and windows. That means Dow competes head-to-head with those outside the industry, including steel and oil companies. That presents us with substantial opportunities. But on the flip side, steel and aluminum firms are in the polymer business.

The EC Commission has accused chemical firms in Europe of price-fixing, raising the hackles of many chief executives. But more recently the commission has approved a deal between Britain's ICI and Du Pont to swap businesses. Is this a sign the commission is going to be a MITI-like organization and try to carve up the markets?

I think an industrial policy, a la the Japanese, is not in the cards for Europe. The price-fixing cartel misconception has been around for a long time. But in Europe there are disparate competitors who can't agree on anything, let alone price. Today's margins are testimony to the fact that price-fixing only works when product is short; and when product is short, clubs and cartels aren't necessary.

Price-fixing has been a niggling concern of the commission; it is rooted in the European environment of the 1930s. However, there's little evidence to substantiate that charge. Clubs don't work. Too many people in the world have an ability to fill any kind of vacuum or void created by an agreement.

The problem with today's economy is there are no more niche markets. The market you thought would always be yours--whether by virtue of geography, proprietary technology, relationship to the customer, or other factors--is no longer yours. Those days are gone. In a global economy, we will probably see the demise of clubs and cartels and of industrial policy.

So you're not afraid of Fortress Europe?

No. We export to Europe, but very little. We produce there about 90 percent of what we sell there.

Changing gears slightly, let me say this: The issues we've been talking about aren't the only barriers to trade. Taxation is another obstacle, as are environmental issues.

I'm a member of the Business Council for Sustainable Development. I attended the Earth Summit in Rio. Someone asked me, "How do you feel about a carbon tax? Isn't that the environmentally correct thing to do, to protect the environment from carbon dioxide?"

And I said, "A carbon tax and other, similar initiatives take an environmental issue and turn it into a tax and trade issue. It's a good example of how not to get the job done."

No two countries or trading blocs would deal with the carbon tax issue in the same way--certainly not in quantity or time. That means competitive advantage would be shifted not for trade reasons but for environmental ones toward the area without the carbon tax. Then, the area with the tax would establish a countervailing duty.

Now you've rendered a tough question even less soluble in the final analysis.

COST OF CLEAN AIR

The Clean Air Act is estimated to cost industry at least $30 billion. What will be the impact on Dow?

The law addressed three specific problems: ozone non-attainment, acid rain, and air toxics. Ozone is the oil and automotive industries' problem. Acid rain is a utility issue. We have to deal with air toxics.

The Clean Air Act will take the percentage of GNP that goes to the environment from about 2.1 percent to maybe 2.5 percent. Some argue the figure may be as high as 3 percent. It's a big, big hit.

On the whole, utilities, car makers, and oil companies will bear the brunt. Only 10 percent of the total will fall on the chemical industry. But that's still a lot. It's a burden to bear. Some standards are very stiff and not terribly realistic. People in Washington are writing regulations as we speak. But command-and-control regulation won't clean up the environment.

Even so, I don't think we can afford to say, "Stop, we're going to have a debate on the environment." We simply reserve the right to debate what doesn't work and take steps to adjust it.

CONCILIATORY APPROACH

At Dow Chemical, you have environmental advisers who form an internal council. This certainly represents a contrast to the policies of your predecessor.

I believe you're referring to our Corporate Environmental Advisory Council. Let me explain some of the reasons we decided to set up such a group.

The 1980s was an adversarial time. People challenged each other. But I think that's an expensive way to address a problem. The answer is volunteerism.

Getting back to air toxics, here's an example: The chemical industry went to the Environmental Protection Agency and said, "We will commit to reductions in air toxics if you allow us to use the best technology available and mandate to us what we must achieve without telling us how to do so." And the EPA bought that compromise.

If you are allowed to do it yourself, I challenge if there's really a huge environmental cost. We feel pollution prevention is the ultimate answer in our business. Pollution is tantamount to waste. It is yield that doesn't materialize.

What are the keys to remaining competitive in the global environment of the 1990s?

Competitiveness isn't just productivity or more output per unit of input. It also involves the additional training of people. It's the cost of capital. It's legal reform--that's about a $200 billion anchor around our neck. It's accounting standards. It's tax and trade issues.

But perhaps the most important issue is education. We need teachers. We need students--kids who will study math and science. We need an educated public. Technology is the output of the development and use of education.

You've been Dow's CEO for the past five years. Looking ahead to the next five years, what do you most want to accomplish?

I want to continue to develop our real strength: our people. Because we're becoming a people-intensive and technology-intensive industry--more than a raw materials, energy-intensive, commodities industry--we need to liberate and empower people to do their jobs. That will produce workers and managers with the guts to take a chance. That will drive further diversification and growth.

We're 62,000 people now, just as we were 10 years ago. We haven't added many people, but the ones we have are doing important things, and their output is terrific. I want that to continue. I want to see a rock-solid, 18 percent to 20 percent minimum return on equity.

That benchmark is important to me because I am a CEO. But I also own 80,000 Dow shares, with options for a couple more. I have to watch those things.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Dow Chemical CEO Frank Popoff
Publication:Chief Executive (U.S.)
Article Type:Cover Story
Date:Mar 1, 1993
Words:2499
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