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january 2013 THE QUARTERLY NEWSLETTER OF KOCH COMPANIES
After another year of record results in 2012, Koch Industries is pushing ahead with billions of dollars’ worth of expansions, acquisitions and improvements in 2013. In just one month, last December, Koch companies announced several significant developments that typify the growth and dynamism of the company. On Dec. 13, Georgia-Pacific announced its pending purchase of Temple-Inland Building Products assets from International Paper for $750 million. Temple-Inland, founded in 1893, operates 16 facilities in seven southern states plus Pennsylvania. It makes a variety of products for residential and commercial construction, including gypsum, lumber, fiberboard and particle board. Less than a week later, Koch announced it had purchased a minority stake (about 45 percent) in Guardian Industries, a privately held manufacturer of architectural glass, automotive components and specialized coatings for plastics. Based in Auburn Hills, Mich., Guardian has nearly 18,000 employees in 25 countries, including Russia, Thailand, Poland and India. It also has a presence in 22 states. Ron Vaupel, the former head of Koch’s business development group, is now the president and CEO of Guardian. Last December was also the month Flint Hills Resources acquired a Nebraska ethanol plant, INVISTA acquired a Dutch manufacturing facility and Koch Nitrogen acquired South Dakotabased Farmers Plant Food, Inc. These transactions are in addition to the hundreds of millions of dollars’ worth of plant expansions and improvements for FHR’s Pine Bend and Corpus Christi refinery complexes announced earlier in the fourth quarter.
To accomplish so much growth in so many different areas, one of the first challenges to overcome is finding the right employees. Koch already has at least 2,500 open positions across all its companies. Finding even more people with the virtue and talents to succeed in the company’s marketbased culture is a constant challenge. Space constraints have become an issue, too. At Koch Industries’ Wichita headquarters, more than 1 million square feet of office space is no longer enough. In December, Koch Industries announced plans to build a 210,000-square-foot office building (pictured above) on its Wichita campus. When completed in 2015, the three-story building will have enough room for 745 additional employees. Another and even more worrisome concern is the ongoing challenge of an everworsening regulatory environment. It is difficult to justify billions in investments and the creation of thousands of new jobs if policymakers – whether in Brussels, Santiago, Toronto or Washington – keep making the rules more restrictive and costly. “In a difficult environment like this,” Koch said, “the one constant has to be our commitment to our MBM® Guiding Principles. If we lose our integrity, fail to be compliant or stop creating long-term value, we cannot succeed.”
One of the common threads throughout all this activity is a very strong emphasis on innovation. Charles Koch, the chairman and CEO of Koch Industries, routinely challenges business leaders to make innovation a key part of their vision and then build the necessary capabilities. “When we say innovation, we’re not just talking about new technology or products,” Koch said. “We need innovation in every aspect of the company, including compliance, recruitment, purchasing and legal services, to name a few. “If we’re structuring an acquisition or other transaction, we need to think of ways to improve that process to the benefit of all concerned, rather than just using the same old boilerplate. “Innovation can help us be safer, more productive, less wasteful, more energyefficient and more customer-focused. “We have to drive innovation faster than our competitors to have any hope of longterm success.”
Post-election letters Year in review
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Perspective: Charles Koch The other Rock Islands
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December – Koch company employees provided for almost 2,300 needy children during 2012 Salvation Army Angel Tree campaigns in (left-right) Wichita – 1,325 angels, Pine Bend – 283 angels, and Atlanta – 660 angels. All three of those totals were records. This was the 21st year for the Angel Tree campaign in Wichita.
The same public that is screaming for job creation fails to realize that successful businesses produce jobs, drive the economy and grow our GDP. About 10 years ago, I was talking to a lady who does pedicures for a living. She told me she was from Ukraine, where she and her husband worked as engineers until they emigrated to the U.S. in 1979. I felt sorry for her, because, based on her occupation, I felt she had failed to achieve the American Dream. When I asked if she missed Ukraine, she sharply replied “No!” and told me that she and her husband had raised two sons Dear Charles and David, Regarding what we might have done better and what we might do better for the next election… I have been in the television business for a long time and I know it is not possible to sell a bad product when another choice is perceived to possibly be better. It is easy to create an image, but very difficult to change an image. My bottom line is that the Republicans made it extremely difficult, if not impossible, to convince the American people to vote for their candidates. Charles and David, please know that you can count on me, my wife and our family to stand foursquare with your ongoing efforts to preserve our unique American way of life.
Stanley S. Hubbard Chairman and CEO Hubbard Broadcasting, Inc. Saint Paul, Minn.
who were in college and pursuing their own American Dreams. Then she said something I’ll never forget: “What the rest of the world sees and this country fails to realize is that, in America, your poor people are fat.” This speaks volumes to the prosperity we have all enjoyed. I fear that if government continues to gain favor and power, we’re on a collision course with real poverty.
District sales manager American Cast Iron Pipe Co. Lake Mary, Fla.
Dear Charles, The Dean of the Graduate School of Princeton University often began speeches by saying: “What should be said often goes unsaid…and so he said it.” I am grateful for your leadership in many causes of liberty. I am also grateful to be included in your bi-annual conferences. I am the same age as you, and in the past five years I have returned to work in the hope that I can generate more significant dollars for the worthy causes Christopher Jarrett you espouse.
Nate Bachman The Bachman Group Cincinnati, Ohio
It’s really good seeing Koch get some positive recognition, including the great cover story in the Dec. 24 issue of Forbes and a very positive editorial in The Wichita Eagle after your announcement of expansion plans. I think your story is one that should be continuously pushed to our legislators
and economic development officials in Topeka. Yours is the most positive economic development in Wichita in several years, and the most positive story for the state in 2012. Compare that with the “border wars” in Kansas City, where Kansas and Missouri are giving away tax dollars to companies that move across the border, with a net zero gain. What could be more senseless than luring companies to move where they don’t need to relocate? I am encouraging the Wichita Independent Business Association to make Koch “Exhibit A” in economic development. Studies tell us that approximately 90 percent of economic growth comes through existing businesses. The key is making the economic climate beneficial to all businesses and let the free market determine the winners.
Pete Schrepferman Johnstone Supply Co. Wichita, Kan.
We are so thankful for the Fred and Mary Koch Foundation’s continued partnership in helping us forge freedom in the hearts and minds of young people. This idea of “forging freedom” was first envisioned during General Washington’s trying winter at Valley Forge (a scene that adorns the cover of our annual review). In the winter of 1777, a time when progress seemed hopeless, Washington rallied his men, and during that
winter developed his troops into a unified fighting force. Looking at the national stage, it’s easy to feel discouraged. Unemployment threatens to climb higher and our debt continues to grow, but “the greatness of America,” wrote Alexis de Tocqueville, “lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.” Last year, we readied 519,999 students to begin the process of repairing those faults. What’s more, we equipped 4,892 teachers, who will each impact 100 students a year with historically grounded materials to tell the true story of our heroic Founders. Together, we will restore a constitutional culture.
Tony Woodlief President Bill of Rights Institute Arlington, Va.
Charles and David Koch
Dear Mr. Koch, Thank you, thank you, thank you – to your brother David and you – for being such fine and patriotic Americans. The courageous and principled stands that you take to help us retain and restore our liberty are truly inspiring. You are doing so much good for so many.
Larry Saunders Registered commodities rep. Franklin, Tenn.
Thank you for Koch Industries’ investment of $375,000. By choosing to invest in our organizational structure, Koch will allow us to realize greater efficiencies, serve more kids and create a more sustainable model for future little brothers and little sisters. We value our long-term relationship with Koch Industries and its many amazing employees who have invested their money – and more importantly, their time – to change the life of a child. Thousands of Kansas kids have benefitted from that investment.
Dan Soliday, CEO Kansas Big Brothers Big Sisters Wichita, Kan.
Dear Mr. Koch, I want to thank you and your family for all you have done during this past election. The results are tough to acknowledge; however, the efforts that you put forth make me very proud of the company I work for.
Dear Charles, I wanted to write you a note of personal thanks for all that you, Liz and David are doing on behalf of all of us, to try to Gretchen Chartier educate the American public about the Koch Industries, Inc. destructive direction that our country Scottsdale, Ariz. (and the world, for that matter) is going. By speaking out publicly you are undertaking courageous work. It is shocking to see what the “enemies of truth” write and say about you. I can see that I need to ensure that our students are being educated in the innate value of freedom. They need to understand that it is freedom that unlocks the human spirit, unleashing it to do great things. Stay strong and courageous, knowing that there are many others standing with you.
Tom Davis President and headmaster Wichita Collegiate School Wichita, Kan.
Koch Industries is Kansas Big Brothers Big Sisters’ largest corporate donor. Almost 50 Koch company volunteers in Wichita are “bigs” for at-risk children.
I just read Charles Koch’s editorial in Newsmax, “Why we fight for economic freedom.” If you ever bump into Mr. Koch, please convey to him my utmost appreciation for everything he has done in the cause of freedom and liberty. I know he and his brother have spent vast sums trying to restore a modicum of common sense to our fellow Americans, and I know that it has been an uphill battle. But, without the Kochs’ efforts, it’s likely our country would now be all but thoroughly socialized. If there’s ever anything I can do to help the cause and it is remotely within my capability to do so, he need but ask.
Dave Gell Ammonia buyer Keokuk, Iowa Newsmax also published an interview with David Koch, who discussed the need for greater economic freedom and better policy-making in Washington.
Dear Charles, This is a short note of thanks and appreciation for your efforts promoting free enterprise and limited government. It saddens me that you have received threats of violence against you and your loved ones for expressing your convictions. If more people knew you as “Charles” instead of the totally biased caricature the media portrays, you wouldn’t have as many haters. Thanks again for taking the stands that you have.
Dakin Cramer Financial consultant (retired) Wichita, Kan.
Dear Mr. Koch, I have intended to write you ever since my retirement from Koch Industries in 2004. I have obviously procrastinated, but hope you will share this with David and both your families. Having endured another political season that is so troubling, I wanted to tell you of my appreciation for the time I spent with Koch. I never felt that I was just an employee. The lessons of business and life that I learned watching you have always been something special.
As a former fighter pilot, I have said many times that there were parts of business that terrified me more than combat, but I never once felt I was working for or with individuals who were underhanded or lacking in compassion for the welfare of others. It troubles me greatly to see the heart and soul of our nation, the free enterprise system, characterized as something evil and only for the ultrawealthy. I have seen you and David vilified in TV ads and have done all I can to set the record straight. I suppose these TV shots are the price you pay for sticking your head up to support and speak for the American heritage we hold so dear. Thank you for helping to fight the good fight and please know that you have touched many people (myself included) with your straightforward, honest approach to what you believe.
Charles A. “Butch” Rose Former Koch Aviation manager Land O’ Lakes, Fla.
As a Flint Hills Resources employee, am I free to copy and send any part of the Discovery newsletter that I want, or are there restrictions? Mr. Koch’s “Perspective” in the July issue is something I would like to share with friends and customers.
Charles Boan FHR marketing manager Rosemount, Minn.
We encourage employees of Koch companies to share Discovery articles with whomever they wish. To assure worldwide access, every issue is posted at www.kochind.com.
To “like” and follow Koch companies and leaders – including Georgia-Pacific, INVISTA, Flint Hills Resources, Matador Ranch, Koch Pipeline and Charles Koch – visit Koch Industries’ Facebook page. Letters and other submissions become the property of Koch Industries, Inc., and may be reproduced in whole or in part, including your name, for any purpose and in any manner. Letters may be edited for length or clarity.
Editorial board Philip Ellender Rich Fink Jeff Gentry Dale Gibbens Greg Guest Charles Koch Jim Mahoney Dave Robertson
January 2013 | Volume 19 | Number 1 Questions? Comments? Contact: Rod Learned 316.828.6136 firstname.lastname@example.org Publication design Amber Vogts Jessica Buchanan Koch Creative Group www.kochind.com
©2013, Koch Industries, Inc. Koch is an EOE. M/F/D/V.
1998 – Former Koch pilot Butch Rose receiving a service award from Charles Koch.
15 Georgia-Pacific completes the sale of its stake in a joint venture in Turkey. 13 Georgia-Pacific co-sponsors the national premiere of the PBS documentary, Slavery by Another Name, raising awareness about a little-known aspect of American history.
Georgia-Pacific Professional receives two Partners in Performance Awards from Grainger, including Green Supplier of the Year.
KS&T launches a global natural gas and LNG trading business.
KII and Koch company employees in Wichita donate and raise more than $200,000 for Kansas Big Brothers Big Sisters.
The Metropolitan Museum of Art announces David H. Koch’s $65 million gift for renovation of its Fifth Avenue plaza.
11 KMS announces the launch of its new website: www.kochmembrane.com. 17 Georgia-Pacific completes the sale of its consumer tissue business in Italy. 27 KII’s Wichita campus receives Clean Air & Sustainability award. 30 Jim Hannan, Georgia-Pacific CEO and president, is recognized by the National Safety Council as one of nine business leaders who “get it” when it comes to safety.
B R U A RY
12 Koch Industries sponsors Green School Grants to promote innovative environmental ideas in classrooms. 15 Koch Exploration Canada receives conditional approval for its Gemini oil recovery project in Alberta. 21 INVISTA announces expansion of its nylon facility in Rozenburg, the Netherlands.
Koch Pipeline receives the American Petroleum Institute’s Distinguished Award for Outstanding Safety and Outstanding Environmental Performance as well as (for the second year in a row) API’s Environmental Performance Award for large pipeline operators. 17 After 97 tornadoes touch down in Kansas in one night (the state’s annual average is 57), KII announces $300,000 in tornado relief donations. 12 Union Pacific Railroad awards three Koch businesses – FHR, GP Chemicals and Koch Sulfur Products – Pinnacle Awards for safe transport of hazardous materials.
29 INVISTA resolves its indemnity lawsuit (arising from the 2004 acquisition of INVISTA from DuPont) on a favorable basis. 22 Koch Alaska Pipeline Co. gives notice of its intent to relinquish its 3.08 percent interest in the Trans-Alaska Pipeline System. 4 FHR Renewables establishes a joint development relationship with Edeniq, with an eye toward integrating cellulosic and corn-based ethanol production technologies.
The U.S. becomes the country with the highest corporate tax rate (among developed nations).
A PR I L
FHR Corpus Christi announces it will voluntarily post publicly available emissions reports on its website. David H. Koch agrees to donate $35 million to fund a new Dinosaur Hall at the Smithsonian’s National Museum of Natural History. 17 INVISTA unveils new, energy-efficient and environmentally-friendly technology for producing nylon intermediates.
25 Georgia-Pacific’s Brawny brand, in partnership with Wounded Warrior Project™ , launches its “Support Our Heroes” campaign to help meet the needs of injured service members and their families through financial contributions and consumer promotions.
Matador Cattle Company expands its Akaushi breeding program by sending pure-bred cattle from Spring Creek Ranch in Kansas to both its Matador, Texas, and Dillon, Mont., ranches.
23 FHR announces it is evaluating a $250 million project to process more Eagle Ford crude oil at its West Refinery in Corpus Christi, Texas. 14 INVISTA’s Orange, Texas, facility is chosen as the first to receive an investment of more than $100 million in next-generation nylon technology.
Y E A R R E V I E W
INVISTA and biotechnology firm LanzaTech enter an agreement to jointly develop a bio-based butadiene process. (Used in the production of synthetic rubber and various plastics, butadiene is an important intermediate chemical.)
GP sells its reusable plastic container business to Tosca, Ltd. Launch of the “new” kochind.com.
A U G U ST
J U LY
Koch Pipeline starts up a 250,000-barrels-perday pipeline to carry Eagle Ford crude from Pettus to Corpus Christi, Texas. 3 In Texas, Matador Ranch, Optimized Process Designs, Koch Pipeline and Flint Hills Resources distribute more than $80,000 to local emergency responders and community fire departments. 19 GP completes the €1.32 billion sale of its European tissue business to SCA. 25
1 0 Charles Koch’s op-ed on cronyism appears in the Wall Street Journal. 14 The Quivira Council of the Boy Scouts of America announces it received a cash donation from KII which, along with the company’s donation of 5 acres of land, will help enable construction of a new Boy Scout Center. 14 INVISTA’s Athens, Ga., site celebrates earning VPP STAR status. (Nearly 100 Koch company sites have earned either federal or state STAR certification. VPP STAR status is OSHA’s highest safety designation.) 18 GP announces plans to ramp up production at its oriented strand board facility in Clarendon County, S.C., in early 2013. 26 KII and the Fred and Mary Koch Foundation announce $814,000 in funding to support diversity programs at Kansas State University.
Dedication of the Habitat for Humanity home built by 430 Koch company volunteers, family members and friends in June. This was Koch’s sixth Habitat home in Wichita. 25 INVISTA establishes a new textile research center – its first in mainland China. 27 The first crude oil moves from FHR’s new Ingleside dock.
31 For 2012, Koch companies earn 119 awards for safety, environmental excellence, community stewardship, innovation and customer service (and 565 such awards since 2009). 24 Charles Koch appears on the cover of Forbes magazine, where he discusses his philosophy for improving well-being in society. 19 Koch purchases a 45 percent interest in Guardian Industries, a global, privately-owned maker of architectural glass, specialty plastics coatings and building products.
30 Koch Fertilizer announces it will add a $10 million, state-of-the-art control center to its facility in Ft. Dodge, Iowa. 23 GP reports its Bucket Brigade program has totaled more than $1 million in donations to community fire departments across the U.S. 16 INVISTA Performance Surfaces & Materials invests $20 million to optimize its North American carpet fiber capacity, which will increase production at its Camden, S.C., site. 7 3
13 Georgia-Pacific announces an agreement to acquire the assets of the Temple-Inland Building Products business from International Paper Co., for $750 million. 13 KII reveals plans for a major expansion of its Wichita campus. 13 KCBX buys a Chicago petcoke storage and distribution facility. FHR acquires an ethanol plant in Fairmont, Neb. KS&T expands its global nat gas trading program to include the U.K.natural balancing point and French Point d’Exchange Gaz.
Georgia-Pacific announces it will contribute truckloads of consumer products to support Hurricane Sandy relief efforts in the Northeast. Georgia-Pacific receives the Better Practices, Better Planet 2020 Sustainability Award from the American Forest & Paper Association for comprehensive energy management programs at GP’s manufacturing facilities. 12 FHR’s Pine Bend Facility is awarded an international habitat conservation award from the Wildlife Habitat Council. 16 FHR announces it will make $400 million in improvements to its Pine Bend Refinery, allowing it to reduce emissions while improving efficiency and reliability. 26 FHR, GP and INVISTA sites are further recognized after the KII Energy Leadership Conference for substantially reducing energy intensity and energy consumption. 27 Nutrients for Life, sponsored by Koch Fertilizer, launches a free program to show Kansas school kids how science can help feed the world’s growing population.
China – INVISTA’s fourth textile research center – its first in mainland China – is now open.
A hexamethylene diamine molecule. HMD is an essential Shanghai – Steve Kromer (standing) is overseeing one of component of many popular INVISTA products. the largest capital projects in KII’s history.
China – It has been more than 30 years since INVISTA built an HMD (hexamethylene diamine) plant. But that is about to change in a big way, as the company moves forward with plans to construct the most energy-efficient HMD plant in the world. HMD is a colorless, organic compound essential for making nylon polymers, including those that go into several of INVISTA’s signature products, such as STAINMASTER® carpet fiber, automotive air bag fiber, TORZEN® reinforced plastic resin and nylon for apparel. On Jan. 5, INVISTA announced it received Environmental Impact Assessment approval from the Shanghai Environmental Protection Bureau to build an HMD plant at the Shanghai Chemical Industry Park in China. The EIA approval is a big step forward in INVISTA’s plans to have a new plant up and running there by mid-2015. When completed, the plant will be able to produce 215,000 tons of HMD per year. It will also feature INVISTA’s best and most innovative technology.
nylon facility in China,” Kromer said. “The phases that follow will employ technology innovations developed at other INVISTA locations around the world.”
According to Steve Kromer, INVISTA’s Shanghai-based senior vice president who is leading the project for INVISTA’s Intermediates business, work on this new plant has involved resources from Koch companies which have extensive experience with petrochemical plants and contributed knowledge to the planning process. “HMD is the first phase of an integrated
its Victoria plant. “It is an ambitious goal to do all this by the end of the decade, but we believe our team is up to the challenge,” Greenfield said. Production from the Shanghai plant is From Texas to Shanghai intended for customers in the Asia-Pacific Both the process design and execution region, where about one-fifth of phases of this project have been quite INVISTA’s employees currently complicated and innovative. live and work. “The company plans to follow this invest- Jeff Gentry, INVISTA chairman and ment in HMD with an investment in its CEO, said: “The project team has done most advanced proprietary ADN technol- an outstanding job of understanding and ogy, which resulted from more than advancing our commitment to environ$40 million in research and development mental excellence while navigating the during the past four years and was led often complex permitting and process primarily by the team at our research lab requirements associated with a project in Orange, Texas,” Kromer said. of such scope.” He noted that the project’s early front-end Innovation = growth engineering and process design were led Gentry sees the shared knowledge by a team from the Gulf Coast of Texas, and innovation that are going into the with significant support from China. Shanghai plant as a way of expanding “Now, two years after the Texas team some of INVISTA’s other capabilities. started its work, leadership for the design Gentry says the Shanghai project will completion and execution phases has also benefit INVISTA Intermediates’ vishifted to the local team here in Shanghai.” sion for aggressive growth in its EngineerINVISTA has two sizeable plants in Texas ing Polymers business, which produces – one in Victoria and the other in Orange reinforced polymers for cars, electronics and other high-performance applications. – with combined employment of more than 1,300 people. “We want to expand and improve our compounding capabilities to produce According to Bill Greenfield, executive reinforced products for Engineering vice president of INVISTA Nylon Intermediates, the knowledge gained from the Polymer applications all around the company’s current project to implement world,” Gentry said. its new ADN technology in Orange will “By sharing our knowledge and leverbe incorporated into the new ADN plant aging our innovations, we can bring in China. additional and significant value to the downstream market. Ultimately, the business will use the learnings from the Orange and China “That’s great news for INVISTA employprojects to implement new technology at ees and customers everywhere.”
Charles Koch Perspective
Chairman and CEO, Koch Industries, Inc.
The Financial Crisis and the Free Market Cure by John Allison For 25 years, John Allison was CEO of BB&T, one of the nation’s biggest and soundest banks. As a result of that experience, his view of the financial crisis is based on reality, not politics or media spin. In his book, Allison discusses six fundamental themes: 1. Government policy is the primary cause of the financial crisis. 2. Government policy created a bubble in residential real estate. 3. Individual financial institutions (including Wall Street) made very serious mistakes that contributed to the crisis. 4. Almost every governmental action taken since the crisis started, even those that may help in the short term, will reduce our standard of living in the long term. 5. The deeper causes of our financial challenges are philosophical, not economic. 6. If we do not change direction soon, the United States will be in very serious financial trouble in 20 to 25 years. Allison’s book – which includes a hearty recommendation from Charles Koch on the cover – is a stiff tonic for anyone who wants to get a grip on financial reality.
When someone asks me what last November’s election results mean for our country, my answer is simple: They are part of a trend that, if not reversed, will destroy the American dream. The majority of those elected last fall, both Democrats and Republicans, seem determined to continue the spending, borrowing, taxing and money printing that got us in this mess. Their compromise to prevent us from going off the imaginary “fiscal cliff ” does nothing to address our trilliondollar annual deficits and liabilities exceeding $100 trillion. This is America’s real fiscal cliff. The deficits and debts of the U.S. threaten our future as a nation. They are exacerbated by massive government spending, rampant corporate cronyism and the escalation in destructive regulations. Together, these things hurt business, reduce employment and lower the standard of living for the overwhelming majority of Americans. No nation can maintain its living standards by continuing to consume more than it produces. Ultimately, its standard of living is determined by the ability to produce goods and services that make people’s lives better. To bring this about, the government must pursue policies that enable individual productivity to be maximized rather than extend the crippling policies we have experienced in recent years.
“No nation can maintain its living standards by continuing to consume more than it produces.”
Cause and effect
When considering the effect of U.S. government policies on Koch Industries, consider that 85 percent of our employees live and work in the U.S., and the great majority of our assets are here. Koch is eager to make large investments – billions of dollars’ worth, in fact – in further improvements for many of those facilities. By doing so, we can make better, lower-cost products, reduce emissions and energy consumption, and create new job opportunities.
“This is not the land of security. People did not get on a boat and travel to Jamestown to be secure. America is the land of opportunity – the opportunity to be great, and the opportunity to fail and try again.”
- John Allison
But ever-more restrictive permitting requirements for building new plants or improving old ones make it challenging for us and other businesses to expand and improve our products and facilities. Such obstacles undermine U.S. competitiveness and jobs. Today’s permitting process for large plants can delay approvals for years and greatly increase the project cost, often making it uneconomic. Onerous occupational licensing requirements and other unnecessary regulations impede business start-ups, making it difficult, and at times, impossible for entrepreneurs to launch new ventures. This not only hinders people from improving their lot in life, it reduces innovation and limits competition. On top of all this, blatant cronyism – the favorable treatment of a few at the expense of many – undermines the power of a free economy in which businesses properly earn a profit only by benefitting others. For crony corporations, the chief focus is pleasing government, not satisfying customers. Crony favors, such as subsidies and mandates, waste resources and increase costs for consumers while hurting productive competitors. Cronyism also helps unprofitable companies stay in business, even when those businesses are undermining the nation’s social welfare. Citizens everywhere need to understand that productivity and innovation are lost when their government takes over an increasing share of the economy through spending, regulation and subsidies. Consequently, fewer goods and services are available. Those that remain come at higher prices with lower quality. In the end, there are shortages of virtually everything, as we saw in the old Soviet Union and see today in the new Venezuela.
Governments that truly want the best for their citizens – most especially the poor – should not undermine productivity and innovation. Innovation is one of Koch’s six core capabilities and represents one of our greatest competitive advantages. We define innovation as the discipline of discovering, developing and commercializing new ways of making people’s lives better. We live better lives because of the creative genius of people with innovative ideas who had the courage and initiative to bring those ideas to life. Less-invasive surgical techniques, smart phones and the Internet are innovations that have helped us all. But the need for innovation is not limited to the world of technology. Innovation is just as important for business organization and for understanding customers and meeting their needs. It is the driver of what economist Joseph Schumpeter famously called “creative destruction.” Although the term may sound slightly ominous, creative destruction is the very positive process of transformation by which innovation replaces older and inferior methods and products with new and better ones. I like Abraham Maslow’s perspective on innovation: Each new invention, each great discovery creates turmoil behind the lines. The people who have settled down comfortably are shaken and disturbed out of their comfort. They must learn new ways of doing things. They must see things in a different way… It is clear that any great discovery, any new invention, anything which requires a reorganization of the conquered territory will be fought against, and will not be accepted easily.
With this in mind, we should not be and diversity of business opportunities, surprised to encounter significant resisboth internal and external. tance to innovation – especially from Just as important is the fact that we are those businesses that rely on government building capabilities to do all of this even favors for their existence instead of better in the future. This is how we are creating value for society and bettering able to expand our employment and people’s lives. increase the number and quality of I suspect it is because we have spoken out opportunities for existing employees. so strongly in favor of economic freedom What if more businesses focused on and innovation, and against cronyism practicing Principled Entrepreneurship™ and fiscal irresponsibility, that we have rather than seeking political favors? What been the target of so many political and if they tried to profit by benefitting others media attacks. (a win-win philosophy) rather than by Special interests feel threatened at the persuading the government to take from prospect of rules and policies that are no others (a win-lose mentality that is really longer rigged and don’t offer unearned a lose-lose proposition)? I am convinced advantages. They shudder at the thought those businesses would be much better of having to compete, without subsidies off for the long term – and so would or other special treatment, for voluntary almost everyone else. customers in an undistorted marketplace. Many attackers Principled Entrepreneurship have falsely tried to lump us in with the cronies who seek govMaximizing long-term profitability by producing ernment protection and special products and services that make people’s lives treatment. The truth is just the better while using less resources and always opposite. At Koch we consistently oppose such policies as acting lawfully and with integrity. a matter of principle, including those that might benefit us. The real harm from today’s destructive public policy is not just to start-ups and Although one of our companies, Flint entrepreneurs. Poorer Americans are Hills Resources, owns and operates five those who suffer most from a governethanol plants, we were happy to see ment that attempts to control people’s the ethanol tax credit expire at the end lives instead of letting them be free to of 2011 and would be even happier to create and produce. It is the poor who see the ethanol mandate end, just as we would all energy subsidies and mandates. bear the brunt of higher unemployment, lower-paying jobs and products with Making people’s lives better higher costs and lower quality, as they do when less innovation leads to fewer In spite of such a poor political and new products. economic environment, many Koch companies have been achieving record November’s election results underscore results, as some of our critics are quick to a dangerous trend in the United States. point out. How has this been possible? That trend is for the problems I’ve outI believe we owe our success to our focus lined to grow worse, not better. Current policies – especially those that favor a few on Principled Entrepreneurship™ and at the expense of many – are putting the to the significant increase in the undereconomic wellbeing of America at risk. standing and practice of Market-Based These policies have global consequences. Management®, or MBM®, throughout Koch companies. As a result, we have As a company, we are committed to doimproved our compliance, safety and ing what is right in every aspect of our environmental performance, and brought business. That is why we will continue doing everything we can to persuade about a marked increase in innovation politicians to put what is good for the across the board. We are also generating country first, before it is too late. a significant increase in the number, size
1955 – A loading rack at the Rock Island Refinery in Indianapolis built by Simmons, Winkler and Kincannon.
From 1959 to 1968, what is now known as Koch Industries was known as Rock Island.
Lewis Winkler (above) and Fred Koch became business partners in 1925.
The other Rock Islands
It’s hardly surprising when a familyowned company uses the family name for its businesses. Koch Fertilizer, Koch Minerals, Koch Pipeline, Koch Supply & Trading and Koch Industries are obvious examples of this. What is surprising is how significant a seemingly random name, Rock Island, has been in Koch’s history. It was also Rock Island Oil and Refining Company that acquired a fleet of Douglas A-26 Invader bomber airplanes in 1959. Fred had his engineers modify those planes in hopes of selling them as luxury business aircraft. In 1959, Rock Island and Wood River Oil and Refining Co. (co-founded by Fred Koch in 1940) merged and the name of the firm was changed to the Rock Island Oil and Refining Co. That was the same year Rock Island Oil and Refining bought a 35 percent share of Great Northern Oil, owner of Pine Bend Refinery, for $5 million. It was only after Fred Koch died in 1967 that Rock Island Oil and Refining was renamed Koch Industries. But even then, the Rock Island name didn’t disappear. will we be confused with ‘Rock Island’ companies engaged in other businesses.”
Rock Island redux
The story begins
In 1946, the Rock Island Oil and Refining Company was formed (with Fred Koch as president) to acquire assets of the Rock Island Oil and Rock Island Refining companies of Duncan, Okla. When L.B. Simmons, Fred’s uncle, built that Rock Island refinery in 1921, he reputedly named it after his previous employer, the Rock Island Railroad. That Oklahoma refinery was the first to install the popular Winkler-Koch thermal cracking process developed by Fred Koch in 1927. The Rock Island Refinery was shut down in 1949 and sold in 1953, but the Rock Island Oil crude gathering system had a bright future with Koch. That small business was the foundation for what became the largest crude oil gathering system in North America. It was the Rock Island Oil and Refining Company that acquired much of the Matador Ranch in 1952, including rights to the famous “flying V” and “50” cattle and horse brands.
End of the line?
It wasn’t until Jan. 1, 1972 that the Rock Island name was officially retired by Koch Industries. In a letter to employees written a month earlier, Rock Island Oil’s president, Sterling Varner, explained how the Koch name would become a unifying standard. “Rock Island Oil Company will change its name to Koch Oil Company,” Varner wrote. “Matador Chemical Company will become Koch Chemical Co., Inc., and Great Northern Oil Company will become Koch Refining Company. “While many of us will miss the name we have used over the years, no longer
Not surprisingly, L.B. Simmons used the Rock Island name again in 1940 when he partnered with Lewis Winkler (who had co-founded Winkler-Koch Engineering in 1925) and L.E. Kincannon to form Rock Island Refining Corp. That company built an independent refinery in Indianapolis. (Fred Koch was not part of that project.) That same year, Fred Koch and two other partners co-founded Wood River Oil and Refining Company, which built an independent refinery near St. Louis. Both refineries were completed in 1941 and both sets of owners suffered greatly when World War II prompted a crude oil shortage, and excess profits taxes hammered their new businesses.
The Hoosier Refinery
During the post-war boom years, Rock Island Refining Corp. was one of the sponsors of the Hoosier Hundred, a shorter, dirt-track version of the famous Indianapolis 500 race. (Race fans take note: Tulsan John Zink designed and sponsored consecutive Indy 500-winning cars in 1955 and 1956. Certain assets of his company were later acquired by what is now Koch Chemical Technology Group.) The Rock Island Refinery in Indianapolis was eventually acquired by Marathon Oil Co., which closed that facility in 1993.
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