The formula for power and profit

Shaping the Industrial Century
April 29, 2005

The chemical industry has many enemies. Indeed, the word "chemical", as used by environmentalists, means toxic, polluting and dangerous. Many now believe that the sooner we stop using chemicals and put an end to the industry that makes them, the better our lives and the planet will be.

The chemical industry finds it hard to defend itself against such prejudice, and we hear little about the way it enriches our lives. Not that Shaping the Industrial Century is meant to be a panegyric. It isn't.

Instead its author, Alfred Chandler Jr, emeritus professor of business history at Harvard University, recounts the rise and fall of the major companies. Thus we learn that the damage caused by environmental activism has been as nothing compared with what company managers themselves could achieve.

The evolution of the chemical industry began in the second Industrial Revolution of 1880-1910. Its golden years were the 1940s to 1960s, when it produced fertilisers, plastics, fabrics, medicines, detergents and healing drugs at affordable prices. At the same time, it made vast profits because its raw material, oil, was so cheap. But when petroleum prices shot up in the 1970s, the industry was faced with a very different future and global companies based in America and Europe began a slow decline.

Even so, some are still large; Dow Chemical sold $40 billion (£21 billion) of products last year, from which it made profits of $2.5 billion.

Others, such as Britain's ICI, are now only shadows of their former selves, while Germany's Hoechst and France's Rhone-Poulenc disappeared through mergers. Indeed, such was the turmoil in the industry in the 1990s that hardly a month went by without chemical companies merging, seeking protection from creditors or lawyers or just going bankrupt.

Chandler has written an account of the industry's turbulent century that is analytical and lucid. He identifies three things needed for success:investing in research, avoiding diversification and knowing the company's limitations. While the first two of these are well explained, the third remains a somewhat vague concept. Successful companies in the early days pursued what Chandler calls the virtuous strategy:strengthening the firm's learning base by investing in research and forming links with leading academics. The result was that by the 1920s, it had become virtually impossible for newcomers to join the ranks of the big companies because the barriers to entry were too high. Meanwhile, any chemical company diversifying into pharmaceuticals generally regretted it. While that was a logical step to take later in the century, it invariably brought disaster in the early years.

Shaping the Industrial Century is in four parts. The first is a short overview; the second concerns the chemical industries in America and Europe; the third deals with the pharmaceutical industries in those areas; and the fourth is titled "The paths of learning", which - rather oddly - is about the rise and fall of the US electronics giant RCA. Chandler uses this as an extreme example of success that turned into failure as a result of RCA's becoming a conglomerate. The chemical giants that endangered themselves by taking that route in the 1960s and 1970s survived only by selling in the 1980s the non-chemical companies they had so expensively acquired, and they generally ended up the worse for the experience.

Ironically, it is these case histories that provide the most fascinating read.

Pharmaceutical companies were less prone to making such mistakes, although some did, and even those that flourish may still be vulnerable. They may be safe from the vagaries of raw material prices, but they are exposed to the vagaries of drug tests. Even when they complete these successfully, they may run into the brick wall of rare side-effects and have to withdraw product. Such companies can invest hundreds of millions of dollars for no return, but successful drugs can reap huge rewards, as in the case of Viagra, earning $1 billion a year or more.

Chandler does a remarkable job of covering the development of two industries that changed the world in the 20th century. Over the years, I have read several books that depict the colourful story of individual chemical companies, but here is one that paints them all on the same canvas. My only disappointment is that he has not speculated about their fate in this century. No doubt chemical and pharmaceutical companies will continue to create wealth and bring health - and continue to earn nothing but censure from their growing number of critics.

John Emsley is a chemist based at Cambridge University who writes popular science books.

Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries

Author - Alfred D. Chandler Jr
Publisher - Harvard University Press
Pages - 352
Price - £19.95
ISBN - 0 674 01720 X

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