International Petrochemicals: Five Steps To A Winning Focus
Darry W. Callahan, President
Chevron Chemical Company
Dewitt Petrochemical World Review Conference
I believe our industry can expect a bright future but only if we prepare for it. In today's business climate, I'm convinced, there are basically five keys to a winning focus. First, we must work smart -- that is, do everything in our power to fully leverage our intellectual capital. Second, especially in the "take-no-prisoners" world of our global petrochemicals industry, we need to know exactly what businesses we should -- and should not -- be in. Third, we must stay flexible in our personal, cultural and financial relationships. Fourth, we need to be selective about where and how we do business. And, fifth and finally, we must be aware of a "secret ingredient" that winds up being more important than anything else I can think of.
I'll cover each of these points in detail later on. How we manage these five factors based on my experience will spell success for your companies -- and mine too.
Actually, I never dreamed I'd have a job like this where I'd be standing in front of a distinguished industry group as head of a petrochemical company that has 5,000 employees, customers in 80 countries and a presence as one of the top global marketers in our business.
Like many of you may have, I grew up poor. My family lived in rural Oregon, and until I started grade school we didn't have electricity. I wanted to be a logger, but one of my first jobs was as a gravedigger for the local cemetery.
I can still remember when I was 12, drilling through hard-pan rock with a gasoline-powered jackhammer. The worst assignment was digging next to an occupied grave in the rain. Believe me, when the adjacent grave leaked into the one you were digging, you were guaranteed some of the most significant smells this side of butyl thiol.
But every dollar I earned went for schooling, and that started me on the career I have today. That job and others did something even more important: They taught me respect for how hard other people work. And they gave me confidence that, if need be, I could do just about anything to survive.
Most of you could tell similar stories about your struggles to build your careers, your lives and your families. I want you to remember those lessons as we talk about our worldwide petrochemical business; you'll find all of them valuable, many useful and some that could prove critical to your success.
TOUGH OUT THE TOUGH TIMES
Let's be blunt: The Asian economic miracle has turned into the Asian economic nightmare. In some Asian countries, per capital gross domestic product fell by nearly half between 1996 and 1998. Even Japan dropped almost 15 percent in two years. As a result, U.S. petrochemical exports to the Far East fell 25 percent last year compared to 1997 -- roughly $2 billion. That falloff, by the way, accounted for 90 percent of the total decline in U.S. petrochemical exports last year.
Some of the biggest players in our business are hurting. My own company -- probably yours too -- is scaling back on people and projects, husbanding capital and resources. In fact, we've just announced a $76 million cost-cutting plan that will include moving our company headquarters here to Houston.
It's painful, but a competitive necessity.
We're in a huge, capacity-driven slump. Right now at least, the only economy in the world that's working well is our own, and the markets we were counting on are as dead as the cadavers I buried in Roseberg, Ore.
So what's the solution? Hunker down? Snatch all our capital off the table? Trot to the sidelines?
No way. The only real solution is that we ride it out -- "tough out" the tough times. Why, because we're heroic? No, because global competition won't let us do anything else; what's different today is that -- more than ever -- to be successful you must be ready for success.
In this climate, it's OK to slow down, change your strategy or cancel some projects. Anything else would be foolhardy.
But the name of today's game is market share. You've got to maintain position and stay in touch with your customer base. The big boys won't slink into the weeds just because of a downturn. And if you don't grow along with them, you won't have the scale to control costs, run efficient plants and grow profits later on. We all know what happened to Texaco and ARCO in the petrochemical business: They committed the crime of "ungrowing," of getting too small. It happened to my own company's agricultural chemical operation. We had great market recognition and quality. But we didn't have enough product coming out of the pipeline to cover research and other costs. We were just too little, and we wound up out of that business.
BE READY FOR SUCCESS
A famous general once said, "wise people learn when they can, fools when they must." I believe we in the petrochemical business can learn an important lesson from our own history. In four words, it's this: Be ready for success. This cycle will bottom. In fact, this year, 1999, may be the trough. That doesn't mean the Asian crisis is over. Jobs and wages are still down, but the pace of decline appears to be slowing, and there are signs of stirring. Some forecasters think South Korea's economy will grow by 2 percent this year. That's hardly robust, but it's a lot better than the 6 percent shrinkage South Korean experienced in 1998. Beginning as early as next year, our own Chemical Manufacturers Association projects growth rates of 4 percent to 6 percent for many Asian economies. My company's analysts think we'll be approaching "boom" demand by around 2003 and tight supplies because of cancelled future capacity.
Meanwhile, the Asian market is big and getting bigger -- 1.8 billion people -- nearly a third of the world's population. Together, they produce 26 percent of the world's goods and services worth, in round numbers, $8 trillion. And, despite the Far East's problems, the U.S. chemical industry had a strong year in 1998, with shipments off just a fraction from 1997's record of $391 billion.
FIVE KEYS TO A WINNING FOCUS
I'm convinced that when our turnaround does come, international success will be driven by five factors. They include a not-so-secret-ingredient I'll talk about that later. Each factor reflects our experience at Chevron Chemical Co. And each depends on thinking ahead, on being ready for success.
The first key is WORKING SMART.
One of Chevron's bright young analysts tags all her e-mails with the phrase, "Steal shamelessly, share continually." Now, this lady's not an idea thief. But she is trying to encourage something that's become a watchword at Chevron. It's called knowledge sharing or knowledge management. It means making sure business and technical information gets to every employee who needs it.
Something I'm very proud of happened recently: Chevron was named in an independent survey of Fortune 500 executives as the No. 1 petroleum company for its knowledge management skills. Now that doesn't say we've got the best brains or the most brainpower, but it does suggest we're getting better at using the brains we do have -- that we're learning to work smarter.
A few weeks ago in Singapore, we opened the Far East's first world-scale fuel and lube additives plant. We didn't approach this as an isolated exercise, as a project to be re-engineered from the ground up. We sent a team around to every plant our Oronite Additives division has. We cherry-picked the best ideas we saw. From Day One, the employee who would manage the plant was in charge of its entire development and execution, including design. That design, by the way, lets us quickly double capacity and at lower added costs as demand builds.
We've got one of those fancy corporate names for the process we used, but I just call it, "go slow at first to go fast later." Some people get frustrated with it, when they're at the front end and it looks cumbersome. But once they've seen a project come in on time and under budget -- and I've seen a lot of those -- they're believers. Incidentally, We followed the same process at our big Aromax® plant in Saudi Arabia and saved more than $30 million.
The second success factor is KNOWING YOUR BUSINESS.
In other words, "grow what you're good at." In my company's case, we're good at commodity petrochemicals, ethylenes, benzenes, paraxylenes. These, of course, are very cyclical, so we've tried to balance the peaks and valleys with our Oronite additives. And it helps. Our corporation may barely be getting $14 dollars a barrel for crude, but a 55-gallon drum of OLOA, as we call Oronite Lube Oil Additives, brings better than $300. And that's pretty steady, regardless of crude price swings.
Knowing your business is extra important in the international arena, when you're juggling different cultures, political systems, religions, languages and operating environments. In our case we've hopped from Venezuela to South East Asia to the Middle East -- all in the past three years. It sure helps to have a high-comfort zone with the operating and technical side of your projects.
You may have heard of our big plant in Pascagoula that's based on a process we've named Aromax. In Saudi Arabia, we joined in a 50-50 venture with 65 individual Saudi investors to build a similar facility. It was the first entirely privately financed petrochemical enterprise in that nation's history. Risky? Maybe, but we knew we had a secure naptha feedstock, and we knew our Aromax process could convert naptha to benzene and cyclohexane. We knew Saudi styrene-makers needed benzene, and we knew there'd be strong cyclohexane markets in Europe and Asia.
And guess what? Our Saudi partners were open to some of those work smart ideas. So we set up some virtual teams with the experts at our other Aromax plant in Pascagoula. The next thing you know, they're all deep into knowledge sharing. The upshot is that when our Saudi plant opens later this year it'll be a kind of "Aromax II" with better conversion rates and longer catalyst run times. What if we'd tried to build an acrylonitrile-butadiene-styrene (ABS) or propylene oxide plant? I shudder to guess.
Another success factor is FLEXIBILITY.
Someone once said that life is a series of collisions with the future. One thing I know: If you hope to survive the bumps, you've got to bend but not break. Especially in our international business, it's important to remain flexible.
We need to be flexible in our relationships. It's not enough to be "open" to different cultures and customs. We need to become local companies -- part of the local community -- committed to protecting local environments and providing as many jobs for local residents as possible. My company feels so strongly about this that we typically limit the number of expatriate employees to 2 percent to 3 percent of a project's payroll. Of our 1,200 employees working outside the United States, fewer than 40 are expats.
We should be flexible, too, about our financial arrangements and partnerships. We're learning that the only good international stake doesn't have to be a 100 percent stake. Our stake in paraxylene and benzene sales in Indonesia is the kind that can preserve market access while guaranteeing both host and company a fair rate of return.
In tough times, risk sharing makes sense. It's often a better choice than full or no capitalization. In Saudi Arabia, we're happy with half of a very big plant. We get a lot of uplift from our technology, but we didn't put up all of the capital. We've spread our risk.
Perhaps the most important aspect of flexibility is patience. Don't expect to cut a deal on your first trip. There's no such thing as instant trust. And whether your name is Chevron Chemical or "XYZ" Chemical, you must earn trust. Relationships take time to develop, to gain an understanding of the people and the countries where you hope to do business.
Smack in the middle of our Saudi project, we had to stop work for 18 months and put the whole project on warm idle while the government clarified an important policy. We turned to our partners, those 65 prominent businessmen I mentioned, and put these very delicate negotiations in their hands. Patience and our willingness to trust them paid off.
The fourth factor in success is BEING SELECTIVE.
I've always felt that the power to choose is the greatest power we have. Think about it. In our business, we've got to pick:
- the right kinds of business to do;
- the right places to do business;
- the right people to do business with.
And, especially when business conditions are difficult, our success will gauged by how well we exercise that power of choice, how good we are at being selective.
At my company, we evaluate new proposals by first asking whether the project will land us in the top quartile of competitors. Next, have we nailed down an assured feedstock at the right price? Can our technology optimize that feedstock's value? And, finally, are we close enough to markets to squeeze some logistics costs? Our second Aromax plant followed a careful review of potential alternates. The Saudi location offered an attractive feedstock, a natural technology fit and access to growing markets. Before choosing Singapore for the Oronite plant, we considered sites in the United States and Malayasia. But Singapore best completed the points on that same analytical triangle: feedstock availability, technological advantage and market potential.
The fifth success factor is an area of choice that's more important than all the others. It's the "secret" ingredient I referred to earlier. Of course, I'm talking about PEOPLE, the people you work with. To show this, I'm going to introduce some folks who play starring roles in what may be the most ambitious international project Chevron Chemical Co. has ever undertaken -- our polystyrene plant in Zhangjiagang, China.
Located on the banks of the Yangtze River 70 miles above Shanghai, Zhangjiagang will be our corporation's first plant of any kind in China. When it opens next year with 100,000 tons of capacity, it will be China's first privately owned polystyrene plant. As in Singapore, its processes are being cherry-picked from -- and will improve upon -- those at its sister plant in Marietta, Ohio. The results will be better vacuum and rubber syrup systems, polymer pumps and other gear.
There's one other first about Zhangjiagang, and it's a big one: This will be Chevron Chemical Co.'s first operation where English is not the primary language.
So for all these reasons, finding the right people is a critical success factor for our China project. And that's why I wanted you to "meet" a few of our employees, to get a sense of their diverse backgrounds and to understand how carefully we've chosen them. Most of the operators at Zhangjiagang will have logged two years of Chevron experience before the plant even opens. Their recruitment and training will have taken 12 months each. For technical training, we'll have flown them to Marietta, Ohio, and back to China -- a distance of nearly15,000 miles -- at least four times. We started renting cars, houses and classroom space in Marietta months before they were even hired.
The point is just this: People are the competitive edge. Getting through the tough times, being ready for success, working smart, sticking to what we know and being flexible and selective -- it all boils down to people.
Somebody once asked George Herman Ruth what he thought about when he struck out. "I think about hitting home runs," replied the King of Swat. That's how the Babe toughed out the tough times -- by focusing on the future and not the past, by being ready for success. It's how we should react too. Our business will improve. Asia's economic crisis will pass. And we will prosper -- so long as we work smart, know our business, stay flexible and selective, and never forget the importance of people.
I don't know about the rest of you, but I don't have much choice. I must succeed. I promised my wife, "No matter what, honey, I'll never go back to my old job."
Updated: March 1999