Herbert Dow, founder of Dow Chemical, took on competitors and the German bromine cartel

Source: ECN

2008/05/08

Legendary Herbert Dow  failed several times before finding the formula for success. Breaking the German bromine cartel was the icing on the cake

Guest columnist:
Neil Gussman & Joseph Chang
Chemical Heritage Foundation & ICIS

NOT BACKING down from a fight is a quality that can get you killed, or make you a mint. If you think business today is cutthroat, go back 100 years. Just as in the business boom of the 1990s, start-up companies in the 1890s lived on venture capital.

Before the turn of the 19th century, the town of Midland in Michigan, US, was sitting atop an alkali basin, and was inhabited mostly by tough men looking to make a buck in the budding bromine business.

Herbert Dow was one of those ambitious young men, trying again and again to build a business on what was then a new, almost frontier, region. Like the young dot-com entrepreneurs of the 1990s, Herbert Dow was just months out of college when he started his first company. In 1889, Dow was a 23-year-old graduate of Case School of Applied Science (now Case Western Reserve University) in Ohio, US.

As a college project, he had developed a method for extracting bromine from brine in a one-step process, instead of the multistep process of evaporation, oxidation and distillation required at that time.

With the ink barely dry on his diploma, Dow convinced a group of investors in Canton, Ohio, to form Canton Chemical and produce bromine based on his process.

The company opened for business, produced a little bromine, and shut down. While the process showed promise, the new company ran out of money long before it had worked through all the kinks in Dow's method of bromine extraction.

BROMINE BATTLES

The next year, 1890, Dow went to Cleveland, Ohio, found new investors, and raised enough money to start Midland Chemical on the banks of the Tittabawassee River, in Midland, Michigan. This time, the process worked, and the plant produced bromine in commercial quantities.

But the fledgling company shortly ran into trouble because Dow, now 24, refused to deal with the US bromine "pool," as it was known, that controlled the market in Michigan. Dow was promptly fired. The new plant superintendent worked with the cartel, and the profits from the plant went to the investors - not the inventor.

Undaunted, Dow moved into a barn down the street from the plant that ousted him and started company number three. By this time, Dow had developed an electrolytic process to produce chlorine.

As with the bromine process, he was sure the chlor-alkali process would be a commercial success. But an hour after he threw the switch on this start-up, the production cell exploded.

Dow left the wreckage in Midland, returned to Cleveland, and raised still more money. This time he set up a plant in Navarre, Ohio, just south of Canton, and edged closer to success. He brought the process to commercial viability, but the business failed.

By now, Dow was convinced that the process was right and that Midland was the best place for the business. Dow was also convincing. In 1897, Dow, now 31 years old, persuaded an even larger group of Cleveland investors to back him in building a chlor-alkali business in Midland.

This last start-up, bankrolled with $83,333 in capital to build a new bleach plant, would be known as Dow Chemical.

By the dawn of the 20th Century, Dow Chemical was firmly in charge of business in Midland. As Dow predicted, chlorine demand had grown quickly.

In a moment of revenge granted to few entrepreneurs, the 34-year-old Dow bought Midland Chemical from the people who had ousted him ten years earlier.

In the decades that followed, Dow expanded his business. In addition to chlorine and bromine, Dow Chemical produced calcium, magnesium, iodine and sodium compounds, and became the world's largest producer of then-popular Epsom salts.

HERBERT VS. GOLIATH

Before that success, though, Dow would take on the powerful German bromine cartel Bromkonvention, which set the world price of bromine. The cartel threatened to flood the US market with cheap product if Dow chose to enter the international market.

Dow did just that in 1904, selling bromine in England and undercutting the cartel.

Herbert Dow received a surprise visit from cartel representative Hermann Jacobsohn who stormed into his office and said: "Don't you know you cannot export bromides?" Dow said he knew nothing of the sort.

In early 1905, Bromkonvention followed through on its threat, cutting the price of potassium bromide in half in the US from 30 cents/lb, to 15 cents/lb, while holding the price at 40 cents/lb in Europe. Other bromide prices were also halved.

Another visit was paid by Jacobsohn, who threatened a price war to run Dow out of business if he did not desist. The cartel was backed by the German government and had ample financial resources to win, he argued.

Herbert Dow would have none of it, and dismissed the astonished Jacobsohn, who said: "You don't know what you are doing."

Dow quickly plotted his strategy. He secretly began buying up German bromides on the US market for 12-15 cents/lb and then shipped them to Germany to be sold for about 27 cents/lb on the European market.

The German cartel, which was bleeding money selling below cost, couldn't understand how Dow could still be in business. They cut their price to 12 cents/lb and then to 10.5 cents/lb.

Dow was rolling in cash - and perhaps laughter - as he nearly doubled profits in this overseas arbitrage.

After a series of negotiations between Dow and Bromkonvention in 1907, the cartel began to withdraw from the US market, while Dow slowed and then stopped shipments to Germany.

The rest of the world could rejoice, as it became a free market arena.

WAR BOOM

When the blockade of Germany during World War I caused shortages in many critical chemicals, the company produced dyes, metals and other products critical for the US economy and war effort.

The post-war economic boom greatly increased demand for cars and, as a result, for gasoline, the production of which used large quantities of bromine. With domestic bromine reserves dwindling, Dow invented a process for extracting the high-demand halogen from seawater. It was to be the last chemical innovation he made before his death in 1930.

Business history of the 1990s is full of stories about people who were millionaires one month, then were scratching around for backing the next, and then millionaires again a year later.

More than a century earlier, Herbert Dow did the same, walking the hard road of turning good ideas into good business.



DIGGING INTO DOW HISTORY

This article is based on a speech givenby Herbert (Ted) Doan on his accept-ance of the 2002 Petrochemical Heritage Award. Doan is a former chairman of Dow Chemical and grandson of Herbert Dow. It is also based on Growth Company - Dow Chemical's First Century, by E.N. Brandt,who has been Dow Chemical's official histor-ian since 1983.

❯❯ Neil Gussman is the communications manager for Chemical Heritage Foundation, a library, museum and center for scholars in Philadelphia, US. For the past five years he has written the column "We're History" on oddities in the history of chemistry for Chemical Engineering Progress magazine, and news articles for Chemical Heritage magazine. He also reviews books on the history of chemistry and chemical weapons for Books and Culture magazine.