C&EN Northeast News Bureau

While some chemical industry competitors are chucking it all to make forays into more narrowly defined life sciences businesses, D uPont is just not going to do that, says company President and Chief Executive Officer Charles O. Holliday.

The 50-year-old executive, who has an industrial engineering degree from the University of Tennessee, Nashville, becomes chairman and CEO of DuPont on Jan. 1, just three years shy of the company's 200th anniversary. To position this stalwart of the chemical industry for its next century and the new millennium, Holliday, a 28-year veteran of DuPont, says the company will hold on to and augment its chemical businesses while also expanding its own burgeoning life sciences sector.

Competitors "have taken a different route," Holliday says. They have taken the "new tools" offered by the field of molecular biology and have more narrowly defined the problems they will attempt to solve. While competitors such as Novartis, Monsanto, and soon Aventis--the combination of Rhône-Poulenc's and Hoechst's life sciences businesses--"are taking themselves away from customers, we are electing to keep a wide range of customers so we can solve their problems with these new tools," Holliday tells C&EN in an exclusive interview.

DuPont is not ignoring the potential of the life sciences for the future health and benefit of the company's businesses. The company has spent nearly $6 billion on life sciences acquisitions over the past two years. Yet it has spent almost as much on chemical businesses, avoiding to all appearances the biotechnology "herd" mentality. It is not, Holliday says, "that we are trying to be arrogant. We just see molecular biology as a more powerful tool" that can be applied to a broad range of businesses.

Among DuPont's new life sciences competitors (C&EN, Nov. 23, page 17), Monsanto spun off its traditional chemical businesses into Solutia in September 1997. Hoechst transferred its specialty chemicals to Clariant in 1997. And Hoechst soon plans to spin off its Celanese basic chemicals and Ticona businesses as a single unit, to be called Celanese A.G., to shareholders as it sets out on a course to merge life sciences businesses with Rhône-Poulenc. Rhône-Poulenc sold 30% of the shares in its Rhodia chemicals business to the public this June, and it plans to divest the balance of its old-line chemicals businesses. Ciba and Sandoz jettisoned their chemicals operations, forming Novartis in 1996, so they could concentrate on the life sciences businesses.

Holliday says DuPont might have met the future much the same way as its competitors if DuPont were in their position. But given "where we are and what we've got," he says DuPont is on the right track to expand its revenues and earnings with fewer bumps along the way than in the recent past. Like Bayer and BASF, DuPont believes it has the mass, the scientific resources, and the financial wherewithal to pursue a dual course.

Throughout the recent chemical industry upheaval, DuPont has not exactly been a model of stability. After all, DuPont is not the well-oiled machine today that it was a year ago. Sales from continuing operations were $18.7 billion for the nine months ended Sept. 30, up 2% from the same period a year earlier. However, last year DuPont reported sales of $33.7 billion in the nine months ending in September.

The big difference is that DuPont is on its way out of the oil business. It is now reporting its Conoco subsidiary as a discontinued operation after it raised $4.2 billion in October in the successful public offering of 30% of Conoco's shares to the public. DuPont will offer the balance of shares to its stockholders next year. Add back Conoco sales of nearly $13 billion to DuPont's last nine-months results, and sales would have been down 6% to $31.6 billion--principally because of lower oil prices. Conoco's separation from DuPont means the disappearance of a contributor representing more than 40% of sales.

On a continuing basis, net income for the first nine months of 1998 was down 38% to $1.3 billion versus $2.1 billion reported in the same period a year ago. The latest net income figures reflect restructuring and employee separation costs, as well as charges for writing off costs associated with the acquisition of the 50% of DuPont Merck Pharmaceutical not already owned, but acquired in July; the acquisition of ICI's polyester business in December 1997; and the purchase of soy processor Protein Technologies in August 1997.

Sidebar: New DuPont at a glance

Without those and other charges, DuPont recorded after-tax operating income from continuing businesses of $2.5 billion, just about level with the same period in 1997. Add back Conoco's $687 million contribution, and DuPont would have reported some $3.1 billion in after-tax operating income. Conoco would have contributed only 22% of DuPont's after-tax operating income in 1998. If DuPont including Conoco is compared with a year ago, after-tax operating income would have been down 9% for the nine-month period ending Sept. 30.

Given the imminent disposal of Conoco, DuPont is a decidedly diversified chemical-based enterprise with an eye on the potential that biology has to offer its businesses when interfaced with chemistry. What is left is a slimmer, trimmer, faster moving DuPont determined to adapt to a changing world, and likely to remain the largest U.S. chemical producer in 1998 based on annual sales--ahead of Dow Chemical, Exxon, and General Electric--the second, third, and fourth largest producers in 1997, respectively (C&EN, May 4, page 22).

Wall Street investment analysts are sanguine about DuPont's prospects, particularly once the company and the rest of the industry get past the effects the Asian economic crisis has had on industry sales and earnings. New York City-based Morgan Stanley Dean Witter analyst Leslie C. Ravitz says, "DuPont has very strong chemical businesses with large competitive advantages and global platforms." Because of the sale of Conoco stock, "DuPont's balance sheet should be the strongest it has been in years. DuPont easily has the wherewithal to carry out its strategic plans."

CIBC Oppenheimer analyst Jeffrey R. Spetalnick, also based in New York City, comments that as "DuPont's business is being refocused on higher value, stable-growth businesses, I would expect that its earnings growth will become more consistent."

John E. Roberts, first vice president at Merrill Lynch, New York City, says that Holliday "does not appear to be taking any vacations from reshaping DuPont's direction." The company is on its way "to a stronger business portfolio," he adds, with a strategy that is "roughly a hybrid of the life science emphasis at Monsanto and the stable diversified earnings performance at General Electric or AlliedSignal."

DuPont has a way to go before it can offer the stable sales and earnings growth it hopes to achieve. To do this, it aligned its chemicals and specialties businesses in April into three distinct conceptual groups: life sciences, differentiated businesses, and foundation businesses. "They are only strategy groupings," cautions Holliday. The organization is not meant to supplant the long-standing operating businesses classification in the company's sales and earnings reports into chemicals, fibers, polymers, life sciences, and diversified businesses.

The life sciences strategy group comprises the agricultural products, pharmaceuticals, and biotechnology businesses. Differentiated businesses encompass such operations as spandex, spunbonded olefin, titanium dioxide, and automotive materials and finishes. The foundation businesses include nylon, polyester, and engineering polymers.

The groupings will allow business leaders to consider how they might use "this biology tool" and increase the "knowledge content" their businesses offer, Holliday says. As the group businesses examine the biology tool, they will attempt to understand how molecular biology can enhance the products they offer, he explains. The emphasis on "knowledge content" is meant to get business leaders to see how they can offer a service enhancement such as a design capability or insurance in addition to the polymers or chemical products themselves.

Holliday is not necessarily encouraging DuPont's businesses to use biology to solve existing problems. He is more eager to have the businesses tackle new problems with genetic engineering, which would imply that advances will come sooner in pharmaceutical and agricultural applications. "If we could solve problems we could never envision solving before, the payoff might be greater than if we solved an existing problem at a lower cost. So it's just that experience says that people will pay more if you solve a new problem."

The use of biomass may provide new raw materials for existing products in the future, but it may be many years before that occurs, Holliday says. He is not sure if that transition will occur in his time. However, at the biotechnology panel discussion at the World Economic Forum in Davos, Switzerland, in February, he acknowledged that, in the long run, biotechnology techniques offer opportunities to "replace raw material, energy, and capital-intensive processes with low-temperature, low-pressure, nontoxic, zero-waste, and cheaper routes to products important to society."

Still, the strategy groups are meant to get the businesses to achieve what Holliday calls "sustainable growth" now. Holliday says: "We believe that just pumping out more and more pounds of material--even if we could do it at lower cost and greater efficiency--is not going to give us the type of growth pattern we want. So we are looking at how we can put out the same number of pounds with more knowledge content that has more value to our customers." And with greater knowledge content over time comes use of less material, and therefore fewer emissions into the environment, Holliday says.

The strategic groupings were not meant to create a pyramidal organization, Holliday points out. He had no intention of forming an organization in which the foundation and differentiated businesses would fuel the growth of the newer life sciences businesses. "We are out to optimize every one of our businesses. We are not out to have one beat the other," Holliday says. But he adds that his charge to the foundation businesses also includes the requirement that they examine cash flows in those businesses. Many were absorbing more cash than they were returning to the corporation, he says.

"We thought they could learn from each other as they worked on their strategies together," he says. "The strategy is to optimize each one of the businesses to get the most shareholder value." However, he acknowledges that "in any portfolio, some businesses will be up one year and others will be down."

Like most chemical industry businesses, DuPont has a number of businesses whose operations are in trouble this year. Charges against earnings that the company took this past year included $108 million for employee separations and $78 million for the closing of nylon manufacturing facilities. In August, DuPont said it would curtail polyester filament fiber production at a North Carolina facility and indefinitely idle a facility in South Carolina, affecting between 600 and 700 workers.

Holliday attributes the low profitability of the polyester business to "the supply-demand imbalance" in Asia. Together with its own operations, the ICI polyester raw materials, bottle polymer, and film acquisition in December 1997 puts DuPont in "a low-cost position with the very best technology and innovative products that are better than most others," Holliday notes. "We think we can fare better than most through this difficult time."

Trying to cope in the competitive polyester fibers business, DuPont has formed a joint venture in Mexico with Alpek, a subsidiary of the Mexican industrial group Alfa, to both produce and market polyester fiber in Mexico and the U.S. DuPont already has joint ventures with Alpek to produce nylon and spandex fibers. The polyester venture allows DuPont to "improve its competitive position," Holliday says. He adds, "I can't suddenly fix the polyester business. It will take some time to straighten out. I wouldn't want to guess how long. Obviously earnings will be affected," he admits.

As DuPont rides out the effect that the Asian economic crisis is having on its businesses, it is positioning itself to take advantage of the stronger financial position that the disposal of Conoco offers. With the public sale of Conoco shares, DuPont also transferred a little more than $5 billion of its debt to Conoco. That puts DuPont in a better position should it need to borrow money for future acquisitions.

Because DuPont plans to swap Conoco shares for outstanding DuPont shares, it gives DuPont further financial leeway. "If we sold Conoco and paid a tax on it, we would be sitting there with the cash, and we would have to put that money to work," Holliday says. But swapping shares "gives us flexibility. We don't have a tax leak, and we can just issue more stock when we need to." But he assures shareholders: "We will reinvest the Conoco money appropriately. The nice thing is we don't have to be in a hurry."

As it moves to spin off Conoco, DuPont is likely to continue a strategy of expanding its strongest businesses. Recent purchases include many life sciences-related deals: Protein Technologies and a 20% interest in seed producer Pioneer Hi-Bred in 1997 and the purchase of the half of DuPont Merck it did not already own earlier this year. On the chemicals side, the purchase of ICI's titanium dioxide business is still pending, but DuPont purchased ICI's polyester businesses in 1997 and agreed at the end of October to buy the Herberts automotive coatings business from Hoechst.

The purchase of ICI's Tioxide titanium dioxide business has been pending since July 1997. When and if the deal closes, it promises to boost DuPont's worldwide market share for the paper and paint pigment to about 35% from 25%. ICI recently succeeded in completing the sale of its half of a titanium dioxide joint venture in Lake Charles, La., to NL Industries' Kronos, but the DuPont ICI deal still awaits approval from the Federal Trade Commission before it can go through.

"It is taking longer than we thought. No question about that," Holliday says. "We feel it's moving along very well right now. We're not backing away from it. We think it's a great acquisition."

As for the more recent Herberts deal, once it gets government approvals, it will fit in with DuPont's auto paints business "like a puzzle piece," says analyst Theodore S. Semegran of New York City-based investment bankers Brown Brothers Harriman. "The deal will make the combined $3.7 billion coatings business the leading coatings global supplier to the automotive industry." He adds that "some investors may view this deal as a diversion by DuPont from its goal of expanding its life sciences activities. In reality, this transaction gives DuPont a global position in an already very high return business."

The acquisition, Holliday says, will make DuPont's automotive business a stronger player in Europe and will expand DuPont's technology capability as well. "We bought a lot of technology that is different from ours. For instance, they are in powder coatings, we are not." The "geographic bulk" that the Herberts acquisition will also give DuPont allows it to spread its own advanced computer color-matching technology to Herberts' auto body shop customers in Europe.

Herberts has only a small presence in Asia. Of 37 manufacturing facilities it will bring to DuPont, only three are in Asia. Herberts also has a number of minority interest joint ventures in the Asia-Pacific region. And DuPont has long had ambitious plans in Asia, where Holliday first served as vice president, then as president, and finally as chairman of the Asia-Pacific region, based in Japan between 1990 and 1995.

Growth for Asia now "is clearly going to be delayed," he says. When it does resume, "it is not going back to the unrealistic growth rates" of prior years. "But I think the fundamentals are there. Once Asia gets through this hurdle, it is going to grow relatively fast versus the rest of the world." Although the financial system is "out of whack," the situation "offers a good opportunity to buy some things," he adds.

In August, DuPont took advantage of one of those opportunities when it signed an agreement to purchase the spandex business of Tongkook Synthetic Fibers of South Korea. "We are looking for other good opportunities," Holliday says. He recently told attendees at a conference in Japan that "we have historically used acquisitions almost as much as research to grow and develop new businesses. And we have been very successful at capitalizing on the symbiotic relationships between our acquisitions and research strategy."

In China, where government controls on investments are numerous, DuPont is confident that it can navigate to a longer term position of strength. In China, unlike in South Korea, DuPont is planning to increase its presence largely through building infrastructure rather than by buying existing businesses. A long-planned $900 million nylon precursors facility that DuPont will build in concert with BASF is slowly moving through a host of approvals. First announced in April 1996, the partners in the caprolactam and hexamethylenediamine production venture said this past April that they chose Dongfang on China's Hainan Island as the site for their plant.

Start-up and completion of construction on the nylon precursors facility depends on "where market demand is going to be" over the next few years, Holliday points out. For now, he is "impressed with what the government in China is doing to move the country forward. China is going to be very important to DuPont in the long term. But the Chinese can't make the same mistakes others in Asia have made when they tried to grow too fast. They have got a pragmatic leadership."

Holliday says that DuPont once had hopes that Asia would account for 20% of sales, but that target is not realistic for now. Sales into Asia were 14% of DuPont's overall sales at their high point a few years ago, he says. The economic crisis in Asia, as well as similar crises now in Russia and Brazil, leads Holliday to believe that examining the percent of sales a company has from different parts of the world may not be that meaningful.

He argues now that "we've got to think local and resource global." If a car can be built more cost-effectively in one part of the world than in another part where it may be sold, it doesn't matter to DuPont. "We just want to make sure our products are serving those automotive material needs," he notes.

"Astute companies will see past this crisis, which is very real. I'm not taking away from it at all. But if you can see past it, you have to ask where are the opportunities going to be in the future? Are they going to be in Brazil? Are they going to be in Russia? Will there be multiple opportunities in Russia, or will just a few things make sense?" Holliday asks.

To answer these questions, DuPont tracks developing countries' gross domestic product per capita. When this measure of a country's average output of goods and services per person reaches a certain target level, which Holliday declines to reveal, "we find they need a lot of our stuff." DuPont tries to start creating an infrastructure in a developing country a few years before it reaches the predetermined target level, "so we can be first" before competitors arrive.

The trick here, Holliday says, is picking the right time to go into a developing country. If DuPont goes in too soon, then initial costs are too high. If DuPont goes in too late, "then local people have bought technology from someone else. So picking the right time is critical," he says.

DuPont boasts that "we make the products that make your life better," but, like other chemical industry companies, it has had product liability problems to resolve. Although developing countries may clamor for DuPont's products, many consumers have attacked DuPont in the U.S. because they allege that the company's products have been defective. Among the charges leveled against the company's products in recent years is the assertion that the fungicide Benlate (benomyl) damaged crops, or that the Teflon fluorocarbon resin used in temporomandibular jaw implants did not perform adequately, or that acetal resins used in plumbing systems failed in use.

Holliday says DuPont thinks there is indeed a need for product liability reform. "We've been encouraging it." Regarding Teflon used in jaw implants, DuPont never intended those products for use in implantable medical devices. "We've created processes so that we know where our stuff is being used so we can stand behind their application," Holliday says. As for charges against Benlate fungicide, it is a product "that's perfect and has always been perfect." Benlate, still involved in a few pending court cases, is something of a "poster child" for tort law reform as DuPont sees it.

Complications first developed for Benlate when contract processor Terra Industries, Sioux City, Iowa, paid $60 million over an incident in 1989 involving contamination of Benlate with atrazine, a potent herbicide. DuPont itself paid $500 million between June 1991 and November 1992 to settle claims before it completed and revealed its own research exonerating Benlate in 1992.

Holliday is critical of the great number of product liability cases that companies have to defend themselves against in the U.S. "Is that really right for society?" he asks. "We have to be careful about just changing the whole system, because people have a right to be protected. But still I think it is a system out of balance."

One reason that chemical companies like DuPont are relatively frequent targets of liability suits is the industry's beleaguered public image. Often neither juries nor plaintiffs have respect for or much understanding of science. The chemical industry has tried to change public perception of the industry through the Chemical Manufacturers Association's Responsible Care program, but industry leaders acknowledge that not much measurable progress has been made. Some have called for independent third-party verification of company operations to assure the public that a plant operates safely.

Holliday does not think much of that idea. He points out that each chemical process is so different that it would be very difficult for a third party to examine the many processes going on at a production site and to vouch for their safe operation. "The reason we have such a great safety record is because we hold the people who operate our plants directly accountable," Holliday adds.

He fears that if a third party were to validate the safe operation of a plant, the plant operators would gain a false sense of confidence and let their guard down. "Third-party verification is so contrary to everything that we have done that I can't warm up to it very much. It sounds good when you say it fast, but I'm not sure the results would be very good."

Although third-party verification is not on Holliday's agenda, worker diversity is. "We are looking for diversity in terms of gender, race, and nationality. We are also looking for people who think differently and come to DuPont with different backgrounds and different experiences and who may dress differently," Holliday says.

In an increasingly competitive global market, DuPont wants to employ the people who have the perspective to "ask the right questions," Holliday says. "The questions we ask ourselves in this company, we generally answer pretty well. When we miss one, it's because we didn't ask the right questions. And diversity can help make sure we are asking the right questions."

The diverse employees DuPont hopes to hire will have to be especially nimble in the next year or two. As they add the biology tool to the research tool kit of this science-based company, and as they work to absorb recent acquisitions and adjust to the spin-off of Conoco, they will face a bumpy year in 1999. Holliday cautions, "We have got the Asian crisis. We are not exactly sure where the U.S. economy is going to go or where the European economy is going to go. We've got efforts under way to handle computer glitches the year 2000 may bring. So if you ever needed contingency plans, I think 1999 is the year for that."

But in five years, Holliday says, "we are going to be a faster growing company in terms of revenues and earnings. We'll be more consistent and less cyclical. And five years from now when we have a problem, we are really going to see this biology tool in addition to other science tools as one very important way to go."

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