INSIGHT: Dow brings forward cutbacks as downturn bites

08 December 2008 17:44  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--CEO Andrew Liveris last week promised a revised cost structure for Dow Chemical as it responded to new realities but the extent of the cutback was not clear.

Yet Liveris has long talked of a “transformation” for the largest US chemicals maker. The “asset light” approach has changed the company as will the acquisition of the specialties maker Rohm and Haas, which is likely to be completed in the first quarter of next year.

Dow’s recent aim has been to lighten the asset footprint to get away from cyclicality and to focus more on important end-use markets. A company that is much closer to important industries and distanced from the oil barrel can, on the one hand, hope to grow faster and, on the other, avoid the worst of upstream (petro) chemical uncertainties.

In creating K-Dow with Kuwait’s PIC, Dow has taken a major step, the impacts of which may not be immediately apparent. But Liveris outlined some of his aspirations for the venture last week.

K-Dow will run a sizeable chunk of Dow’s upstream petrochemicals and plastics portfolio. And it can be seen now that Dow’s structure will effectively be re-written when the K-Dow asset light venture is up and running and the Rohm and Haas acquisition fully absorbed.

Dow says it will significantly cut back on shared services and on the corporate centre as it changes. The corporate realignment will, in Dow’s words, “accelerate the company’s ability to shed high-cost assets and centralised functional structures”.

Dow is going to run three business models for the different parts of its business: joint ventures; the agriculture, health and performance products operations; and an advanced materials and market-facing group.

By doing that it sees an opportunity to cut out high cost plants – 20 in total it says now – and eliminate 5,000 full-time jobs, or 11% of it global workforce. These are sizeable cutbacks which are being made in addition to the temporary idling of some 180 plants worldwide and the cutting of 6,000 contractor jobs.

Dow has always been run lean, but these cuts represent a further significant step in the quest for real efficiency and cost effectiveness.

Savings of $700m (€553m) a year are expected by 2010 from these cutbacks. They can be made in addition to the anticipated Rohm and Haas acquisition cost savings of $800m a year, which are said to be achievable in the same timeframe.

Dow will need the savings in the short as well as the longer term. Current business can be little short of dreadful given the sharp slowdown in the key automobile and construction markets.

The recession in the US and other major economies will hit the company hard in the fourth quarter of this year and well into 2009.

Not much can be expected in the way of a recovery in the first half of 2009, at least.

The poor outlook for US chemicals was highlighted last week when the American Chemistry Council’s chief economist, Kevin Swift, suggested that US chemicals output could fall by more than 5% next year amid a significant global slowdown.

Dow is being transformed but management is also reacting to events. “Today’s restructuring is designed to support the Dow of tomorrow. However, we are accelerating the implementation of these measures as the current world economy has deteriorated sharply, and we must adjust ourselves to the severity of this downturn,” Liveris said in a prepared statement.

“Transformation, by definition, requires a commitment to working differently,” he added. “We are moving from a highly centralised and standardised approach, to operating three very different business models with a lean and efficient corporate centre.”

The cutbacks linked to the new business structures will largely be made in support services with some jobs going at the corporate centre.

Some 2,000 jobs will transfer with the sale of businesses currently in the Dow Portfolio Optimization group, which back in February included film products, synthetic rubber and speciality copolymers, among other businesses.

In the face of the downturn Dow has idled 30% of its production capacity. And, for the past three months, according to Liveris, has been working on “code red”.

The entire industrial supply chain outside food and health is in a recessionary mode, he said on Monday.

The strategically oriented cutbacks will go some way to help the company preserve cash but management also wants to cut the cash requirement in 2009 by as much as $2.5bn.

It will do that through reduced working capital, given expected lower feedstock and energy costs, lower capital spending and some restructuring.

($1 = €0.79) 

For more on Dow Chemical visit ICIS company intelligence
To discuss issues facing the chemical industry go to ICIS connect


By: Nigel Davis
+44 20 8652 3214



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