Maybe
it's because running all those giant chemical plants around the world
gives a company a keen sense of process. Perhaps it's the result of
mixing necessity and experience, with serendipity as a catalyst.
Whatever the reason, the Dow Chemical Co.'s "Strategic Guidance
Document for Joint Ventures" has got to be the most complete
company-specific compendium of best practices on the topic in
existence. At 300-plus pages, it guides Dow business leaders through a
JV's entire life cycle, from formation to ongoing management to
termination. "If a business leader is contemplating forming a joint
venture," says Randy Croyle, director of Dow's M&A Technology
Center, "we basically walk that leader through the salient sections. A
lot of the time, after they see the size of the document, they say,
'Boy -- I wonder if there isn't an easier way than doing a joint
venture?' "
Sometimes there is. Still, Dow has more than 75 JVs, ranging from
silicone giant Dow Corning, its oldest, to a huge petrochemical complex
soon to be built in the Persian Gulf nation of Oman. Some deals entail
transferring Dow plants, personnel and operations into new, co-owned
entities. Others, like the complex in Oman, are greenfield projects.
The majority are 50-50 deals, but there are other arrangements as well.
More are in the works, some potentially very large, and the company has
also exited 30 JVs since 2003. All told, says Croyle, equity earnings
from Dow's nonconsolidated JVs were $964 million last year, or 21% of
the company total.
Hard-earned money, to be sure. "JV structures are difficult and
challenging and are often less efficient," says Dan Scheid, CEO of
London-based MEGlobal, one of Dow's most far-reaching JVs. "If you
could achieve your business objectives yourself, you would want to do
it yourself."
Why doesn't Dow -- the world's largest chemical company, with $43
billion in sales last year -- go it alone more often? One reason is
simply the nature of the $1.7 trillion global chemical industry. Making
the materials that go into so many familiar products -- from textiles
to cell phones to cosmetics to autos to food wrap -- is a
capital-intensive business, pegged to economic cycles and characterized
by myriad paths to market and nearly as many technological specialties.
These dynamics naturally give rise to partnering. All the chemical
companies do it, sometimes even with direct competitors, and always
with a bunch of classic JV challenges (seconding of employees and
intellectual property safeguards, transfer pricing and governance, to
name only a few) piled high on the table.
| A vital part of strategy |
| Dow
currently has more than 75 joint ventures around the globe, and some
well-developed processes for forming, managing, reviewing and exiting
them. The JVs span Dow's product segments, providing access to
lower-cost feedstocks as well as new markets and technology.
Nonconsolidated JVs contributed $964 million in earnings in 2005, up
from about $100 million in 1998. |
The biggest
In
2005, seven JVs produced nearly 90% of Dow's JV-driven earnings. Three
were added to the portfolio in the course of Dow's 2001 acquisition of
Union Carbide Corp., now a Dow subsidiary; three involve the same
Kuwaiti partner. |
Compania Mega SA
Buenos Aires, Argentina |
28%
owned by Dow, which formed it in 1997 in partnership with Repsol YPF
and Petrobras. Provides feedstocks to a Dow petrochemical plant in
Bahia Blanca. |
Dow Corning Corp.
Midland, Mich. |
Founded
in 1943, Dow's oldest JV offers silicone technology and products and is
owned 50-50 with Corning Inc. In 2005, it had sales of $3.88 billion
and net income of $506.5 million. |
Equate
Petrochemical Co.
KSC Kuwait City, Kuwait |
42.5%
owned by Dow through Union Carbide; main partner is government-owned
Petrochemical Industries Co. Established in 1995; manufactures
polyethylene and ethylene glycol. |
Equipolymers
Zurich, Switzerland |
A
50-50 partnership with Kuwait's PIC. Founded in 2004 to manufacture and
market PET resins and produce PTA (purified terephthalic acid). Plants
in Italy and Germany. |
MEGlobal
London, U.K. |
Another
50-50 partnership with PIC, for the manufacture and marketing of
ethylene glycol. Formed in 2004, had 2005 sales of about $2.5 billion. |
The Optimal Group
Kerteh, Terengganu, Malaysia |
Formed
by Union Carbide in 1998. Partnership with Petronas, Malaysia's
state-owned oil corporation, has three units: an olefins company, 27.5%
owned by Dow, and glycol and chemicals companies, both 50% owned. |
The Siam Group
Bangkok, Thailand |
Formed in 1987 by Dow (49% owner)
and
Siam Cement Public Co. Ltd.; comprises five operating companies
manufacturing polyurethanes, polyethylene, polystyrene, styrene and
latex. |
| |
The Exits
Dow regularly evaluates JVs and since 2003 has pruned more than 30. |
Dow Cargill
Minneapolis, Minn. |
In
January 2005 Dow sold its 50% stake to partner Cargill. Formed in 1997
to commercialize polyactic-acid-based biopolymers, the business
progressed more slowly than Dow had hoped. |
DuPont Dow Elastomers
Wilmington, Del. |
In
January 2005 DuPont bought out Dow's remaining interest for $87
million; venture later paid an $84 million fine for U.S. antitrust
violation. DuPont had previously announced it would direct the response
to a Justice Department probe and assume the majority of liabilities. |
UOP LLC
Des Plaines, Ill. |
In
October 2005, Carbide sold its 50% interest in this petrochemical and
refining technology venture to partner Honeywell, for $825 million. Dow
considered the holding nonstrategic. |
| |
Under construction
Major JVs in the works |
Olefins II
Shuaiba, Kuwait |
50-50 partnership with PIC. Ehylene and derivatives complex now under construction. |
Oman Petrochemical Complex
Sohar, Oman |
Announced
July 2004; owned 50% by Dow, 25% by government of Oman and 25% by Oman
Oil Co. Will supply Asian markets. Annual sales projected at
$1 billion; construction to begin May 2006. |
World-scale HPPO plant
Antwerp, Belgium |
A
50-50 partnership with Germany's BASF. Construction of plant begins
this year; follow-on to R&D partnership to develop this cleaner
propylene oxide manufacturing technology. |
| |
| Under consideration |
Coal-to-olefins projects with Shenhua Group
|
Studies with China's largest coal company could lead to large-scale plants around Yulin city in Shaanxi province. |
| Russia |
A JV is currently in due diligence phase. |
|
|
| Monitoring the JVs |
| Dow does regular strategic business reviews of its ventures, with the larger ones scrutinized every 2 to 3 years. |
| Six elements are examined: |
- Strategic objective
- Financial performance
- Structure and governance
- Operations
- Risks
- External environment
|
|
|
| The feedstock factor |
| Driving
many of Dow's JVs is the rising cost of one of its main raw materials,
natural gas, in the U.S. Energy and feedstocks accounted for 50% of
Dow's global costs in 2005, up from 29% in 2002. |
|
Country |
2005 avg. natural gas price per million BTUs |
| United States |
$8.85 |
| Belgium |
6.95 |
| China |
5.05 |
| Bolivia |
1.65 |
| Russia |
1.20 |
| Oman |
1.00 |
| Saudi Arabia |
0.75 |
|
|
| Dow's businesses |
| Dow had net income of $4.5 billion on record sales of $46.3 billion in 2005 |
|
Operating segment |
Dow's 2005 sales ($bill.) |
| Plastics |
$11.82 |
| Performance plastics |
11.39 |
| Performance chemicals |
7.71 |
| Hydrocarbons & energy |
6.06 |
| Chemicals |
5.66 |
| Agricultural sciences |
3.36 |
| Other |
0.30 |
| |
|
Region |
Dow's 2005 sales ($bill.) |
| United States |
$17.52 |
| Europe |
16.62 |
| Rest of world |
12.16 |
|
|
In recent years, an even more powerful factor has taken
hold: soaring U.S. prices for natural gas and crude oil, the raw
material (or feedstock) for much of what Midland, Mich.-based Dow
makes. Combined with the rising demand for Dow's products in the
developing world, especially in Asia, the need for so-called advantaged
feedstocks is shifting more and more of Dow's investment focus from the
U.S. to the Mideast, with China and Russia also looming large. For a
natural resource-based business looking to expand in those parts of the
world, joint ventures with local partners are usually matters of law.
And knowing how to put the ventures together, and how to apply lessons
learned in one venture to future relationships, gets really important.
Here's where the serendipity comes in. As Croyle explains, it stems
from Dow's acquisition of Union Carbide Corp. in 1999. The addition of
Carbide, now a wholly owned subsidiary, has shaped up as a success on
several fronts; together with a cyclical upturn, it helps account for
Dow CEO Andrew Liveris' ability to announce $4.5 billion in profits for
2005. What Carbide also brought was a number of significant JVs,
including Equate Petrochemical Co. KSC, co-owned with Petrochemical
Industries Co. of Kuwait, which became Dow's partner in two subsequent
deals (see chart). Says Croyle: "We've been able to leverage this
knowledge and experience, particularly in the Middle East. Now we have
within the last four years created a number of very large JVs."
Building on Union Carbide's JV experience wasn't a big priority in
1999. Back then, the focus was on the integration task, the biggest
project Dow had ever tackled. Croyle, who began his career at Dow in
1973 and has held various manufacturing and business positions, moved
over from a job as global director for manufacturing and engineering
(responsible for change management initiatives) to direct a new program
management office charged with leading the integration. When that heavy
lifting was complete, Dow's leaders decided not to sunset the office
but to rechristen it the M&A Technology Center (they could have
said "expertise," but these folks are engineers, after all) and use it
to support M&A activity.
The M&A Technology Center is small; it's just Croyle and four
other full-timers. The center reports into Dow's operations
organization but works with all of Dow's business, functional and
geographic areas. There are other, transaction-focused deal specialists
in Dow's finance and legal organizations, among other places, and they
all team up as needed to support Dow's various initiatives.
In the early going, the M&A center did quite a bit of work on
divestitures. Then in 2001, Croyle recounts, Dow CFO Pedro Reinhard
turned to him in a meeting. "He said, 'Randy, would you just take a
look at joint ventures? We've got a lot of 'em. Take a look at what our
process is for forming JVs and managing JVs. Do we have the appropriate
discipline and governance?' "
That was the genesis of the strategic guidance document, a
repository of policies, guidelines and best practices. Croyle's
research involved plenty of travel and about 100 interviews. "I'd go
into a person's office and say, 'OK, tell me about joint
ventures,' " he recalls. "And every one of them had a hanging
folder in their file cabinet, and they'd say, 'Well, this is what I
know about JVs.' And there were documents that were very recent, and
there were documents that were 20, 30, 40 years old." When Croyle and
his small team were finished, they had captured the company's
institutional memory on JVs.
One especially valuable memory belongs to Scheid, whose experience
with JVs began in 1988 when he was named director of new business
development in Union Carbide's Polyolefins Division. The model Scheid
started working on then was for Carbide to offer technology, market
access and operating expertise in exchange for participation in an
ongoing business or an advantaged feedstock position. In 1995, this
model provided the basis for Carbide's formation of Equate with PIC in
Kuwait and Polimeri Europa SpA with EniChem SpA in Italy. In 1998
Carbide applied it again, this time with Malaysia's Petroliam Nasional
Bhd known as Petronas, to form the Optimal Group. The many JV
experiences on Scheid's résumé include service on a Carbide JV board in
Japan and as the initial CEO of Polimeri Europa. "I do have a bit of a
reputation for having been dragged through a number of these," says
Scheid with a laugh. And maybe even for enjoying them: He played the
leading role in the formation of MEGlobal, the big venture with PIC
that he now leads (see box).
Croyle and his team continue to refresh the strategic guidance
document as Dow gains still more experience in joint venturing. With
the 75 or so ventures in the portfolio pretty evenly distributed across
Dow's product segments, there's a varied body of work to draw upon. For
starters, commodity businesses such as ethylene glycol operate on a
much larger revenue scale than some of the performance products
ventures; the sales of MEGlobal, which manufactures and markets EG,
were $2.5 billion in 2005. By contrast, Dow Reichhold Specialty Latex
LLC -- the Research Triangle Park, N.C., venture into which Dow spun
its specialty latex business in 2001 -- had $258 million in sales last
year.
Another contrast is the one between partnering with a state-owned
entity like Petronas, with low-priced raw materials as the objective,
and making a deal with South Korea's LG Corp., 50% owner of LG Dow
Polycarbonate. Dow formed the latter venture in 1999 largely to improve
its access to Asian markets for the high-performance plastic used in
cell phones and auto headlights, among other things. Dow transferred
its Asia-Pacific polycarbonate market franchise to the JV as it started
up a new plant in Yeosu, South Korea, in 2001.
In turn, the deal with LG Corp. -- an electronics and telecom giant
as well as Asia's biggest chemical company -- is different from the
technology-driven deal Dow has with its global competitor BASF AG. In
2002, Dow and Ludwigshafen, Germany-based BASF formed an R&D
venture to work on a cleaner way of making the reactive chemical
propylene oxide. This month the two companies announced a manufacturing
JV based on the co-developed technology, with construction on a new
hydrogen peroxide to propylene oxide, or HPPO, plant to begin this year
at a BASF site in Antwerp, Belgium. Says Croyle: "The challenge there
is, we think we're a pretty good chemical company, and they think
they're a pretty good chemical company, and there's lots of discussions
about whose engineering standards and work processes we should use. But
basically, if both partners are committed to making it work, it will
work."
Still, Dow's JV model has some defining characteristics no matter
where it's applied. Start at the top, with the joint venture board.
Croyle reckons the optimal size for a 50-50 venture is three members
from each partner. The trio from Dow typically consists of a business
leader and a finance executive, complemented by a specialist relevant
to that particular venture -- a manufacturing pro for a heavy
manufacturing venture, or an R&D person for a technology-driven
deal, for example.
At startup, the board members are able to refer to a checklist found
at the end of the strategic guidance document. What should the JV have
in place from the beginning? Governance items -- a code of conduct, an
auditing program -- are key. So are operational safeguards, such as a
crisis management plan. Boards typically meet quarterly, and the
company requires its major ventures to submit a quarterly
Sarbanes-Oxley attestation. Though most of these ventures fall outside
that law because they are neither public nor U.S. companies, Dow still
wants to verify that they have good financial controls in place.
Of course, the board doesn't run the venture day-to-day.
That's the job of the JV employees, many of them seconded from Dow,
especially when partners lack a deep pool of managerial talent. Dow
looks to fill key positions -- the CEO or the CFO slot at the venture,
or, in a manufacturing JV, a COO job. Dow employees naturally have lots
of questions about what a secondment (usually lasting two to three
years) will mean for them, which is why the JV guidance document has a
meaty section on the topic. Are these popular assignments? "Well," says
Croyle, "that depends on where you're going. It's really an
opportunity, a great learning experience, to be part of a smaller
company, but to be able to reach back into the parents for expertise
that the JV might need."
It's part of the M&A Technology Center's role to facilitate
those contacts and also to make sure that any transfer of know-how is
within the bounds of the deal. "If there aren't agreements in place
that cover what they're looking for, then let's get them in place,"
Croyle says. How to protect a particular piece of technology can be a
judgment call. If the right IP agreements are in place, and there's
pretty good assurance that the technology will stay in the JV and not
get passed around in the partner (who may, after all, be a competitor
in other product lines) then transferring that technology can be the
right decision. But there is another option: Provide the technology in
a black box, as a service to the venture.
If all that sounds less than perfectly efficient, well, it is. Dow
is ever mindful of the tradeoffs JVs entail, and where another tool
will get the job done -- buying capacity rights at a new plant somebody
else is building, say, or doing a licensing deal -- the company will
use it. The company also knows that a JV that was judged a logical
solution at one point may no longer be one, or may not have worked out
as expected. That's the reason for the regular strategic business
reviews the company has instituted, which reassess such fundamentals as
a venture's strategic objective and legal, financial and environmental
risks (see chart for complete list). The major ventures get reviewed
every two to three years.
For a company as large as Dow, and so interlaced with the global
economy, change is a constant. Geopolitical risk is a fact of life,
especially in the Middle East. Other kinds of things can go wrong as
well: DuPont Dow Elastomers, a synthetic rubber venture that Dow exited
last year, paid an $84 million fine for a U.S. antitrust violation.
Cargill Dow Polymers LLC, a 50-50 partnership with the agricultural
powerhouse created to commercialize eco-friendly biopolymers, didn't
progress as Dow hoped; Dow exited that one last year as well. Dow
doesn't even want to be globalizing as aggressively as it is. "U.S.
energy policies still encourage companies like ours to move their jobs,
manufacturing facilities and tax revenues to other countries," CEO
Liveris told Congress last fall, arguing for freer access to natural
gas in the Gulf of Mexico and elsewhere.
Perhaps Dow's JV process is best thought of this way: not a cure-all
by any means, but a good way of getting certain things done in a
complicated world. And give the Dow folks credit: Like the other
processes they're better known for, they've worked hard to improve this
one.
Launching a global JV
Ethylene glycol is a clear, odorless liquid, sweet tasting (but
don't ever taste it) and slightly viscous, made from ethylene, which is
typically made from natural gas. A building block for antifreeze,
polyester fibers and resins used in plastic bottles, EG is a mature
commodity chemical, but the market for it is growing at an unusually
brisk 5% to 6% a year. It's easy to see why Dow Chemical Co. likes the
ethylene glycol business.
But how Dow assembled its main EG platform -- MEGlobal, a
50-50 joint venture with Petrochemical Industries Co. of Kuwait and the
world's largest marketer of the stuff -- is a more complicated story.
It begins in 2001 with an initial sketch of the business concept
prepared by Dan Scheid, MEGlobal's founding CEO. "It actually came out
not all that much different," says Scheid, who was leading the relevant
part of Dow's business at the time.
Scheid's sketch covered a lot, starting with the synergistic EG
positions of Union Carbide Corp. (the world's largest producer) and Dow
Chemical (strengths in integration and distribution) when Dow acquired
Carbide in 1999. Also to be considered were the joint ventures that
underpinned Carbide's position: Equate Petrochemical Co., co-owned with
PIC, and Optimal Group, co-owned with Malaysia's Petroliam Nasional
Bhd. Competing in the business required low-cost feedstocks, and thus
continued reliance on JVs. If those multiple JVs went to market through
multiple channels, then Dow risked diluting its leadership position.
"So it made more sense to focus the market participation of all the
current and future ethylene glycol investments through a single
entity," says Scheid.
And so MEGlobal, launched in June 2004, came together this way: Dow
contributed its two manufacturing plants in Alberta, Canada; a related
75% share in a glycol JV with a Taiwanese company; long-term
raw-material supply agreements; rights to operating technology; the
leading EG market position; plus the great majority of the venture's
200 or so employees. PIC contributed cash to buy a 50% share in the
carved-out business. Equate subsequently signed a contract to market
its ethylene glycol through the new venture, and its EG marketing and
related support functions were moved over to MEGlobal. The venture's
headquarters was established in London, a good place to run a global
business. MEGlobal now has revenue of about $2.5 billion a year,
marketing about 3 million metric tons of EG, about 1 million of which
it makes itself, at those Canadian plants.
Scheid, a veteran joint venturer who joined Dow via the Union
Carbide acquisition, divides the JV process into three phases:
conceptual, negotiation and implementation. It was in that crucial
third phase, he says, that Randy Croyle and the M&A Technology
Center contributed most directly to the formation of MEGlobal. "The
implementation effort needs to start even before the negotiations are
done," he says.
The heart of the task was to carve out the ethylene oxide/ethylene
glycol business that Scheid had been running at Dow and set it up as a
new company.The venture still uses Dow for some business services, such
as purchasing and treasury, but may do otherwise in the future. Plant
services will remain with Dow, since MEGlobal plants are located at
larger Dow sites. Scheid says he found the most complexity on the
financial side, setting up the plumbing needed for a global company --
drop boxes and bank accounts and VAT Tax numbers and the like.
All in all, the transition was an extremely smooth one. ME Global
has done well in a strong market for EG and continues to build its
capabilities. What's ahead? For Scheid, the answer is retirement; he's
looking forward to pursuing personal interests. He'll be succeeded by
Henry Roth, who moves over from a job as senior vice president at
Equate. As for the organization Scheid first sketched five years ago,
it's sure to play a central role as Dow and its partners expand in EG.
That, after all, was the point of MEGlobal. - Kenneth Klee
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