DowDuPont CEO expects lift from China stimulus, 5G networks

The Chinese government’s latest stimulus measures should give a boost to economic activity in the coming months following the demand shock in December, said the CEO of DowDuPont.

“China is phenomenal at stimulating its economy. In two to three months, it should really loosen things up,” said Ed Breen, CEO of DowDuPont, at a meeting of the Chemical Marketing & Economics Group in New York on 7 March.

The severe downturn in China in December 2018 came as a shock to the chemical industry – a “fascinating” phenomenon, he noted.

The cause of the downturn started in September when “China really tightened and put the screws on lending, especially shadow banking. Then all of a sudden, consumer spending just started to slow through September, October and November,” said Breen.

Then in December, China auto builds plunged 18% after a decade of growth while smartphone sales cratered 20%. “It’s incredible what happened,” he said.

US-CHINA TRADE SLAMMED SENTIMENT

While the tightening of lending started the China slowdown, the US-China tariffs really slammed sentiment, in turn hitting the brakes on purchasing by the consumer.

The actual direct impact from the tariffs on business was minimal for DowDuPont but the sentiment shift was huge, he said.

“When the tariffs hit, we probably lost around $50m in the supply chain – nothing [for a company the size of DowDuPont]. But it really spooked the Chinese consumer, as the stock market dropped 25% on the tariff talk,” said Breen.

However, with China undertaking its latest stimulus measures to loosen lending, “we think that will play out well”, he added.

GLOBAL ECONOMIC RISKS

Yet for the worldwide economy, “the percent chance of global recession is higher than it was a year ago. Europe is clearly slowing, China is clearly slowing, but the US is hanging in nicely, and the worldwide consumer is hanging in nicely,” said Breen.

As for the weakness in China automotive and smartphones, “we love those two end markets that dropped off”, said Breen.

DuPont, the specialty chemicals company to be separated from DowDuPont on 1 June, is poised to benefit from the secular growth trends within automotive, he noted.

“Our two biggest areas in auto are lightweighting and electrifying vehicles. If global auto sales are zero [growth], we’ll grow at plus 10%. If they fall 5%, we’ll grow at plus 5%,” said Breen.

“We’re studying the secular trends, and then throwing our dollars in them – hybrids, fully electric vehicles, autonomous vehicles,” he added.

5G NETWORKS

5G telecommunications networks should also offer big growth opportunities for DuPont.

“5G is coming and will use heavy data rates. We are already in intimate relationships with all the wireless carriers and smartphone [manufacturers],” said Breen.

DuPont’s electronics & imaging segment plans to capitalise on the megatrend it identifies as “digital revolution & connectivity” with new polymers and materials. This megatrend includes 5G and big data, artificial intelligence (AI) and the Internet of Things (IoT).

“In the 5G world, there are more opportunities for us, as this puts stress on the smartphone. We are doubling down on this,” said Breen.

And the opportunity could start paying off soon. “You’re not going to buy a $1,000 phone in the coming holiday season unless it’s 5G,” said Breen.

R&D DRIVEN GROWTH

DuPont overall plans to spend around $900m annually on R&D to drive innovation-led growth, he said.

With earnings before interest, tax, depreciation and amortisation (EBITDA) margins of 28-29%, DuPont is “at the top of the food chain” for specialty chemicals companies, said Breen.

“We want to be compared to industrial companies like Honeywell and 3M, and we benchmark well with them,” he added.

And DuPont’s R&D engine is dramatically different from that of the “old” DuPont, the CEO noted.

“DuPont was spending $220m in central R&D, which had no P&L and wasn’t tied to any particular business or industry. R&D is now tied to business. We don’t want everyone just playing in the sandbox,” said Breen.

“Now we get more oomph and a heck of a payback from it. If you’re going to spend a lot like a pharma company, you must be disciplined and track progress maniacally,” he added.

ACTIVE PORTFOLIO MANAGEMENT

For such a diverse specialty chemicals company as DuPont, active portfolio management is critical.

The company already plans to divest about 10% of its portfolio – businesses that are growing more slowly and not in secular growth areas, the CEO said.

On mergers and acquisitions, Breen sees a number of tuck-in acquisition opportunities.

“These are like spending incrementally and are very safe. If we buy a company that fits in a secular growth area, and pump their product through our global platform, that’s the gravy of it,” said Breen.

“What’s great about DuPont is that it will generate $2bn in excess cash year in and year out. And a good management team better not blow $2bn,” he added. ■