The Global Chemical Industry in the Age of the Petrochemical Revolution

by Louis Galambos, Takashi Hikino, Vera Zamagni

Overview

This book fills a critical gap in modern economic and business history by presenting research by leading scholars to an international audience of academics, business executives, and policy makers. This research is presented in two clusters. The first cluster of studies explores four cross-cutting topics, including surveys of the changes in industry structure, corporate strategies, plant technologies, governmental policies, finance, and corporate governance. The second cluster of studies comprises nine country surveys that examine the experiences of representative nations in chemical production and foreign trade.

Product Details

ISBN-13:	9780521871051
Publisher:	Cambridge University Press
Publication date:	11/20/2006
Edition description:	First Edition
Pages:	540
Product dimensions:	6.22(w) x 9.25(h) x 1.42(d)

About the Author

Louis Galambos is Professor of History at The Johns Hopkins University in Baltimore, Maryland and the editor of The Papers of Dwight David Eisenhower. He is the coauthor of Networks of Innovation (Cambridge University Press, 1996), The Fall of the Bell System (Cambridge University Press, 1996), Anytime, Anywhere (Cambridge University Press, 2002), and Medicine, Science, and Merck (Cambridge University Press, 2004).

Takashi Hikino is an historian who has published many articles on international business and economic history. Educated at Wakayama and Hitotsubashi Universities in Japan, he has been a Senior Research Associate at the Harvard Business School and a Research Fellow at MIT's Center for International Studies. He currently teaches at Kyoto University in Japan.

Vera Zamagni has been Visiting Professor of European Economic History at the Bologna Centre of the Johns Hopkins University since 1973. Her published work consists of more than 70 essays, 7 volumes and 13 edited volumes covering the economic history of Italy 1860 to present in the context of European and world economic history of the last two centuries.

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Cambridge University Press
978-0-521-87105-1 - The global chemical industry in the age of the petrochemical revolution - by Edited by Louis Galambos, Takashi Hikino and Vera Zamagni
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Introduction

TAKASHI HIKINO, VERA ZAMAGNI,
AND LOUIS GALAMBOS

The modern chemical industry emerged during the Second Industrial Revolution of the late nineteenth and early twentieth centuries, alongside other capital intensive industries such as primary metals, electrical machinery, food processing, oil refining, and automobiles. These industries were prime movers in the global economy. All came to be dominated by large international businesses, most of which drew heavily upon scientific knowledge to achieve advances in process and product innovations. None was more geared to research and development than the chemical industry, which led the way in developing industrial laboratories and establishing links with universities and other research centers.

   Indeed, the evolution of the modern chemical industry provides many insights into the central strengths of the capitalist system in the twentieth and twenty-first centuries. These include its ability to respond to changes in its economic, political, and scientific and technological environments; its ability to remain innovative over the long term; and its ability to achieve high levels of operational efficiency in production and distribution of essential goods andservices. The chemical industry that spawned our modern age of pharmaceuticals, plastics, synthetic fibers, and building materials stands out as a leading example of what an alliance between the institutions of capitalism and of modern science and technology could accomplish.

   In chemicals and other Second Industrial Revolution industries, these accomplishments have come at a price, and the modern chemical industry can also provide insights into the problems stemming from industrial capitalism. These include wrenching changes for workers and communities, domestic and international political tensions, and the creation of environmental hazards. In the years before World War II, national governments were the primary agents dealing with these problems and determining the extent to which cartelization and mergers would shape the structure of chemical markets. In those decades, a few national “champions” with high degrees of market power emerged in each of the countries playing a leading role in chemical production.

   World War II was a major watershed for the industry, for the national champions, and for the governments that had encouraged their development. During the postwar years, petroleum (and, to a lesser extent, natural-gas-based feedstocks) replaced coal and agricultural inputs, a transition that called for major innovations, as did the development of new environmental controls in country after country. The petrochemical revolution tested the flexibility and innovative capacity of all of the institutions – private corporations, governments, and nonprofit organizations – associated with the chemical industries and their responses provide a central concern of this book. All of these institutions were hierarchical and bureaucratic, and Joseph A. Schumpeter, the great analyst of innovation, contended that bureaucracy was inherently opposed to innovation. Business bureaucracies, he predicted, would coalesce with government bureaucracies and inevitably stifle innovation.¹ To the contrary, said Alfred D. Chandler, Jr., the leading historian of modern business. Large multinational corporations in chemicals (and electronics), he said, “succeeded by following virtuous strategies – that is, they used the profits and learning from each generation of new products to commercialize the next generation, and they defined their strategic boundaries around the capabilities in their integrated learning bases.” Chandler gave less attention to the political setting than Schumpeter and focused primarily on the internal aspects, the strategies, structures, and capabilities of the leading firms. These capabilities, he said, “provided the internal dynamic for the continuing growth of the enterprise....Such a process of growth has provided this bureaucratic institution [that is, the corporation] with the internal dynamic that has made it powerful and enabled it to maintain its position of dominance as markets and technologies have changed and as world wars and depressions have come and gone.”²

   World War II and the petrochemical revolution certainly tested all of the organizations involved in the chemical industries. Following the war, competition was fierce as American chemical firms challenged the previously undisputed leaders in Germany, where in the 1930s the switch from coal to oil had first taken place. The petrochemical revolution enhanced the capital-using and scale-oriented characteristics of chemical technology. With this, the international chemical industry experienced massive expansion of upstream basic petrochemicals such as ethylene, propylene, and butylene for the production of plastics, synthetic rubber and synthetic fibers. By 1970, as a result, world plastics consumption by weight exceeded that of nonferrous metals, whereas synthetic fibers account today for more than half of the world’s fiber consumption.

   All major chemical firms and many petroleum companies in the industrialized countries invested massive resources in petrochemical facilities in an effort to exploit economies of scale. Meanwhile, several other nations, spearheaded by Japan, became significant producers in the global chemical industry through the rapid growth of basic petrochemical production. The number of players in the industry increased significantly, as did the competition. As John Kenley Smith writes in his chapter: “The headlong rush into chemicals demonstrated the power of markets to reduce prices, but also contributed to wasteful over-investment and undermined organizational capabilities.” In particular, the oil companies, which were very large and had the raw material the industry now needed, were able to make massive investments in petrochemical plants. These organizations often lacked the research and marketing know-how that were indispensable for lasting success, but in the short-term, they transformed the competitive setting in the industry.

   Then two politically induced, external events once again transformed the industry. The oil shocks of 1973–74 and 1980–81 drastically altered the economic viability of the chemical industry by increasing costs of production in a substantial way and by slowing the rate of growth of consumption. The firms responded in various ways and with various levels of difficulty to this challenge. One segment of the industry moved into downstream fine and specialty chemical production, which was much more R&D-intensive than upstream, basic chemical making. Another segment continued to concentrate on the large commodity-producing upstream facilities, which confronted excess capacity worldwide and had to be drastically reorganized. The chemical industry thus experienced restructuring and downsizing in the 1980s before other major Second Industrial Revolution industries were forced to introduce similar measures.

   The pharmaceutical branch of the chemical industry also experienced a decisive transition in the postwar years. Here, too, American firms became significant competitors to a European industry severely damaged by the war. Massive U.S. public investments in basic research and in the training of scientific personnel created an innovation system that became the world leader in the medical sciences by the 1950s and 1960s. When the science base for pharmaceutical innovation began to shift away from organic chemistry and toward biochemistry and enzymology, American firms were able to push ahead of their European rivals in new drug development. So, too, when molecular genetics and biotechnology became the hot medical sciences of the 1980s and 1990s. American pharmaceutical firms and biotechs and the American-based subsidiaries of European firms were best positioned to take advantage of the new science and technology. Japanese pharmaceutical firms also made considerable advances during these years but still lagged their European and American competitors in innovative capacity.

   These developments brought pharmaceuticals and the rest of the chemical industries to the edge of the Third Industrial Revolution and another wave of reorganizations and restructurings. The new technology of what has also been called the information age–microwave transmission, the transistor, the integrated circuit, the computer, and then the Internet – had begun very early to impact all of the chemical industries. Computer controls reduced the work forces needed to process chemicals, including pharmaceuticals. Ultimately, this changed the balance of power between management and labor by making it possible for supervisory personnel to run the plants and break strikes.

   Other changes in the industry’s context also fostered change within the industry. The development in Europe of a new and vigorous antitrust policy made the traditional forms of cartelization difficult to implement. The industry had a long and intricate experience with cartels, an experience that had involved American as well as the leading European firms. Meanwhile, a series of ecological disasters brought a wave of new government regulations and forced producers to develop sophisticated process and product innovations that would better protect their employees, customers, and local communities. During these same years, the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) were reducing national barriers to trade and the breakdown of the Bretton Woods system of controls was fostering a truly global, market-oriented financial system. The long era of the national champions in chemicals was not entirely over, but it appeared to be drawing to an end. In pharmaceuticals, the new science and technological context created a surge of new drugs and preventive medicines, driving growth in this branch of the industry and utimately encouraging firms to focus on their core pharmaceutical activities and then to seek through mergers, acquisitions and strategic alliances to sustain high growth rates.

   Despite all of these challenging changes, the bureaucratic firms of the global chemical industries have, on balance, remained innovative and successful. In that regard, Chandler has clearly trumped Schumpeter. As the essays in this volume indicate, however, Chandler’s synthesis needs to be supplemented with more thoroughgoing analysis of the public, private, and nonprofit institutions that constitute essential elements of the chemical industry’s environment.³ Together, this combination of institutions has enabled the chemical industry to grow in the ten years from 1992 to 2002, at an average rate of 3.3 percent in the EU, 2 percent in the United States, and 1.4 percent in Japan, everywhere outperforming the growth rate for the rest of the manufacturing sector. The distribution of the world chemical production in 2002 can be seen in Figure I.1: the EU still produces 29 percent and the United States 26 percent of the world output of chemical products, whereas Japan makes 10 percent. From the geographical share of world exports and imports reported in Figure I.2, it can be seen that the EU still commands 55 percent of world exports, with a large trade surplus (only 46 percent of imports), whereas the United States has an almost balanced trade at around 15 percent.

Figure I.1. Geographical breakdown of world chemical sales.

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Figure I.2. Regional shares in world trade in chemicals.

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   As illustrated in Table I.1, the major enterprises in today’s global chemical industry still include some of the traditional leaders that had secured their market dominating positions well before World War II, but they are now joined by the chemical divisions of a number of oil companies. Other new entries include Huntsman of the United States, which emerged through active buyouts of commodity chemical operations of other enterprises, and Saudi Basic Industries Corporation (SABIC), which was established by the government of Saudi Arabia as the central force of the nation’s industrialization efforts. Most of these companies, however, both old and new, have changed radically during recent years. Even more complex is the picture of pharmaceutical companies reported in Table I.2 because of the extensive processes of mergers that will be discussed in the present collection, and because of the disproportionate presence of the United States. The list comes from the Fortune 2003 global 500, and refers to 2002. It reports fourteen companies, but Pharmacia has since been acquired by Pfizer, so that at the time of this writing the companies number thirteen and Pfizer is on top. But new mergers are still being announced, as will be discussed later.

Table I.1. Worldwide Sales 2002

Company		In mio euro	In mio USD	Country
1		BASF	32,216	30,441		EU
2		Bayer	29,624	27,992		EU
3		Dow Chemical	29,034	27,434		US
4		DuPont	25,406	24,006		US
5		ExxonMobil	21,494	20,310		US
6		Atofina	19,672	18,588		EU
7		Mitsubishi Chemical	15,967	15,088		Japan
8		Akzo Nobel	14,002	13,231		EU
9		BP	13,236	12,507		EU
10		Shell	12,160	11,490		EU
11		Degussa	11,765	11,117		EU
12		Asahi Kasei	10,097	9,541		Japan
13		ICI	9,740	9,203		EU
14		Sabic	9,604	9,075		Saudi
15		Sumitomo Chemical	9,400	8,882		Japan
16		Takeda	8,849	8,362		Japan
17		Linde	8,726	8,245		EU
18		Sasol	8,678	8,199		South Africa
19		Dainippon Inks & Chemicals (DIC)	8,138	7,690		Japan
20		General Electric	8,071	7,626		US
21		Ashland	7,983	7,543		US
22		Solvay	7,918	7,482		EU
23		Air Liquide	7,900	7,465		EU
24		Merck KGaA	7,473	7,061		EU
25		Huntsman	7,408	7,000		US
26		Sinopec	7,327	6,923		China
27		Sekisui Chemical	6,765	6,393		Japan
28		DSM	6,665	6,298		EU
29		Rhodia	6,617	6,252		EU
30		Basell	6,500	6,142		EU
Sources: Chemical Insight & Cefic-ITC (International Trade and Competitiveness) Analysis.

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Table I.2. Pharmaceutical Firms in the Top Global 500 in 2002

	Country	Revenues $mil	Employees
Merck	USA	51,790	77,300
Johnson & Johnson	USA	36,298	108,300
Pfizer	USA	35,281	98,000
GlaxoSmithKline	UK	31,874	104,499
Novartis	Switzerland	20,822	72,877
Aventis	France	19,497	78,099
Roche	Switzerland	19,096	69,659
Bristol-Myers-Squibb	USA	18,199	44,000
Astra-Zeneca	UK	18,032	58,700
Abbott Laboratories	USA	17,685	71,819
Pharmacia	USA	16,929	43,000
Wyeth	USA	14,584	52,762
Eli Lilly	USA	11,078	43,700
Shering-Plough	USA	10,180	30,500
Source: Fortune 2003.

   Compared with other knowledge-based, high-technology industries, the chemical industry has also been remarkably stable in terms of national and geographical leadership. This is particularly true because of the resilience of most European nations and their enterprises. In computer manufacturing, by contrast, once significant European countries have all struggled in recent decades. In consumer electronics, both Europe and the United States have lost significant market shares. In both industries, Japan and other East Asian economies have steadily expanded their presence. As set forth in Tables I.1 and I.2 and in the Figures, however, the leading chemical-producing firms in Europe and the United States have for the most part successfully transformed themselves from producers of upstream, basic-chemical commodities into leaders in the manufacturing of downstream, fine, and specialty chemical products and in so doing, have preserved their dominant position in this key global industry. Comparing the two world leaders, the EU is still stronger overall than the United States, but in pharmaceuticals, the United States has rapidly gained a significant position because of the excellence of the nation’s research centers and its immense domestic market.⁴ The leading European companies have all established operations in the United States to take advantage of a market largely free of price controls and a research establishment that can be tapped for personnel and new ideas.

   Japan and the other East Asian emerging economies, which have been so prominent in other major industries, have yet to make deep inroads into the chemical industry, a subject discussed in some detail in Hikino’s chapter in this book. In particular, Japanese chemical producers, which have experienced a large quantitative growth in output, have nevertheless continued to concentrate primarily on their domestic market.⁵ In this case, the distinctive structure of their firms and interfirm networks have guided them toward the home market rather than exports.

TWO COMPLEMENTARY RESEARCH APPROACHES:
THEMATIC AND NATIONAL

In spite of the centrality of the modern international chemical industry to the history of the world economy in the second half of the twentieth century – and its distinguished record of successful adaptation – research on this subject remains embryonic. With the notable exceptions of the general volumes by Haber,⁶ Aftalion,⁷ Arora-Landau-Rosenberg,⁸ and Chandler,⁹ there are only few academic studies of chemical industries within the leading industrial nations for the postwar period, and even fewer scholarly works that take a comparative perspective. This gap is especially remarkable when we compare it with the large number of scholarly studies of other major industries, including automobiles, electronics, and computers. This neglect is especially acute for the years following the second oil shock, a watershed that wrought fundamental transformations in the global chemical industry.

   The present volume aims precisely at filling this critical gap in modern economic and business history, by presenting research by leading scholars to an international audience of academics, business executives, and policy makers. This research is presented in two clusters. The first cluster of studies explores five crosscutting topics, including surveys of the changes in industry structure, corporate strategies, plant technologies, governmental policies, finance, and corporate governance. The second cluster of studies comprises nine country surveys that examine the experiences of representative nations in chemical production and foreign trade. By combining the similar historical cases of a few nations (such as Sweden, Norway, and Finland), these authors are able to deal with eleven chemical-producing nations, including all the leading ones and some of the important followers.

   The book opens with a chapter by Cesaroni-Gambardella-Mariani sketching the history of the world modern chemical industry since its nineteenth-century origins. The authors’ employ a networking analysis, a useful tool in the chemical industry, where networks have played a leading strategic role within the industry (interfirm networking includes collusion, cartelization, mergers); between the industry and the research centers; between the industry and the plants’ suppliers; and also between the industry and the users of its products. Given this feature of the chemical industry, countries where networking has proved easier, either because of the natural propensity of the agents to coordinate their efforts or because of the role played by governments, have been the ones registering more lasting success.

   Harm Schröter, in the second chapter of this book, provides a thought-provoking analysis of the strategies followed by the fifteen world leader companies across the period of restructuring of the industry after the oil crises. He starts by photographing the situation in the early 1970s and checks changes at intervals of about ten years. In the first period there were no new entries, and only a few of the fifteen companies adjusted their strategies. Although a much more radical change of strategies took place in the second period, up to the early 1990s, the fifteen companies remained the same. However, by now they were not as representative of the world chemical industry as they had been before, because some of the purely pharmaceutical companies originally excluded from the sample on the grounds that they were too narrowly specialized had become larger and more economically significant.

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© Cambridge University Press

Table of Contents

Introduction Takashi Hikino, Vera Zamagni and Louis Galambros; Part I. Cross Cutting Ideas: 1. The evolution of networks in the chemical industry Alfonso Gambardella, Fabrizio Cesaroni and Myriam Mariani; 2. Competitive strategies of the world's largest chemical companies Harm Schröter; 3. Financial systems and corporate strategy in the chemical industry Marco Da Rin; 4. Government environmental policies and the chemical industry Wyn Grant; Part II. World Players: Leaders: 5. The German chemical industry after World War II Ulrich Wengenroth; 6. The American chemical industry since the petrochemical evolution John Kenly Smith; Part III. Competitors: 7. The export-dependence of the Swiss chemical industry and the internationalization of Swiss chemical firms (1950–2000) Margrit Müller; 8. The petrochemical industry in the Nordic countries, 1960–2000: some development patterns Gunnar Nerheim; 9. Repositioning of European chemical groups and changes in innovation management: the case of the French Chemical Industry Florence Charue Duboc; 10. The resilience of the British Chemical Industry Wyn Grant; 11. The development and struggle of the Japanese chemical enterprises since the petrochemical revolution Takashi Hikino; Part IV. European Followers: 12. The rise and fall of the Italian petrochemical industry (1950s–1990s) Vera Zamagni; 13. The global accommodation of a latecomer: the Spanish chemical industry since the petrochemical revolution; Conclusion: some final observances Vera Zamagni and Louis Galambros; Appendix I. The chemical industry in the post Second World War period: a quantitative assessment Renato Giannetti; Appendix II. Selected bibliography.