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Dow and DuPont Need To Prove Sceptics Wrong

Business, China, Company Strategy, Economics, Environment, Europe, Sustainability, Technology, US

By John RichardsonDowDuPont

UNLESS you live on Mars, you will have obviously read about the ground-breaking climate change deal reached in Paris over the weekend.

Sure, it will only come into force if 55 countries responsible for at least 55% of emissions ratify the deal. And we know that in the US in particular, given the huge political divide, the Obama administration is going to have a tough battle on its hands.

Still, though, it is amazing that so many countries signed on the dotted line to a deal that will potentially lead to intrusive, independent re-examination of climate change policies every five years. In effect, countries have opened themselves up to the same kind of repeated external evaluations that led up to the Paris talks. On paper, this latest deal therefore goes much further than the 1997 Kyoto Protocol.

You will also have to be living on Mars to have missed the other big news this morning: The now confirmed Dow Chemical and DuPont merger, which I first discussed last Friday when the deal was just a  strong rumour.

The chemicals industry needs an explosion of new innovation to cope with the fact that the debate about human-made climate change is over, as the Paris deal further underlines. It is no exaggeration to say that chemicals and polymers producers will lose their very licenses to operate unless they find  more sustainable solutions through greater innovation.

But is there a risk that Dow and DuPont  will instead cut back on R&D spending? Yes, is the conclusion of Andrew Hartung, former head of business development for DuPont and Pepsico, who wrote in Forbes:

The companies are no closer aligned with market trends than before.  In fact, lacking people in innovation positions (product development, R&D and marketing) they are very likely to become even further removed from the leading trends that could create breakthrough products.

Competition will be reduced short-term, so there will be less price pressure.  But longer-term innovation will shift to larger companies like BASF or Bayer, or smaller companies like Monsanto and Syngenta.  Or even companies currently not on the industry radar – as well as universities.  DuPont and Dow will be removed from the leading edge of competition – the innovation edge – and will much more likely miss the next wave of products in all markets as new competitors emerge, and existing competitors intensify competition.

There will be no resources to develop or manage new innovations that emerge internally, or externally.  The much smaller staffs will have no bandwidth to explore new technologies, new products, new go-to-market channels or new ways of doing business.  There will be no resources for white space teams to explore market shifts, consider major threats to their “core,” or develop potentially disruptive businesses that will generate future growth.  They will stagnate as overworked employees pour all their effort into defending the old core businesses, which will become outdated.

Elsewhere you can easily also read about the role that activist investors played in this deal. The suggestion is that they are more interested in short-term equity values than in long-term growth.

All of this may be grossly unfair, and I hope Dow and DuPont executives come out of their corner fighting, to first provide the words that discredit these views – and then follow up the words with concrete action.

The thing is that the chemicals industry as a whole, not just Dow and DuPont, has to re-invent itself to find its place in a New Normal  world where sustainability will not be the only challenge. So too will affordability because of demographics.

The speed of change will be quit dizzying over the next five years, leaving those companies that fail to sufficiently innovate trapped in a cycle of ever-bigger mergers, spin-offs and other cost cutting initiatives.

Last Wednesday, I discussed the disruption taking place in one just major end-use industry for chemicals and polymers – autos.

On this theme, here is another example of this extraordinary pace of disruption: How internal combustion engines and, of course, cars are getting smaller thanks to improved engine technology. An engine as small as small as just 660ccs might soon be delivering the same horsepower, but with much better fuel economy as an old two-litre plus gasoline guzzler. Smaller cars mean less demand growth for plastics.

“But surely, this is something I only have to worry about in the far distant future? For the time being, plastics demand in key-end industries like autos is soaring.”

No. As fellow blogger Paul Hodges points out in this excellent post, light-weight steel has already started to eat into market share for plastics in the US.