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Lab-To-Market Connection
Specialty chemical companies try to ward off commoditization of their
products with a mix of marketing, formulation, and basic R&D
Rick Mullin
C&EN
April 21, 2008
Volume 86, Number 16
pp. 15-23

Stephen F. Kirk, president of Lubrizol Additives, has his mind on his portfolio. It is
represented in a chart on the wall in his office. The chart, however, does not include any
chemical names or core competencies in chemistry. What Kirk refers to as a portfolio is a
collection of methods for expanding the specialties business.

RESEARCH HUB Ciba Specialty Chemicals is establishing central laboratories for each of its businesses.

"I have the words ‘Additives Growth' written in the middle, and nine boxes going around
it," Kirk says, describing the chart. These boxes, he explains, cover new product
differentiation initiatives, product performance upgrades, niche product development,
product improvement, margin management, expansion into adjacent markets,
acquisitions, geographic expansion, and growth with key customers. "We work all nine
boxes hard," he says.
Specialty chemicals are, in fact, synonymous with hard work. And also with flux. The
sector is perhaps best defined as made up of chemicals purchased for their performance
characteristics rather than their molecular specificity. It consists of an ever-shifting array
of products ranging from true specialties that command a premium price for the work
they do, to others that are almost indistinguishable from commodities.
Keeping its specialty chemicals "true" rather than "commodity-like" is a focal point of
working the boxes at Lubrizol, Kirk says. In the chemical industry more broadly, the
desire to keep specialties "special" has led in recent years to restructured marketing and
research regimes among firms supplying performance ingredients to makers of paint,
soap, electronics, sneakers, and other consumer products.
It has also led to confusion, according to Jonathan Goldhill, senior vice president with
consulting firm Kline & Co., one of several analysts watching the evolution of specialty
chemicals. Although growth in the industry was once linked directly to innovation in
research and development, it is now also a matter of downstream product design,
application engineering, and marketing—innovation efforts that extend far beyond the
laboratory.
At the same time, according to Goldhill, the specialties sector is experiencing an
encroaching commoditization—a maturing of markets that has caused the business to
behave much like the basic chemicals sector, where growth rates bear little correlation to
rates of spending on R&D.

BACK TO THE FUTURE Lubrizol sees its decades-old business in fuel and lube additives as meeting today's sustainability demands.

This phenomenon, he notes, is also a reflection of technology maturity among the

industry's customers. "We see it with Apple and the iPod," he says, referring to the
leading product in the portable MP3 player market. "They spend less on R&D than others
in the sector. They have a design and business model advantage." Similarly,
differentiation for specialty chemical companies will be achieved largely outside of the
basic research laboratory, Goldhill says.
Chris Cardinal, a chemicals consultant at CRA International, sees research as a nuanced
proposition. "R&D is a factor in innovation," he says, "but it is not so much a matter of
how much you spend. It is a matter of how you spend it." And success in the lab, he says,
is largely a matter of how well companies can innovate with products that are already on
the shelf. "Think about 3M," Cardinal says. "They do acrylate and polyester material
R&D, but they customize. They stack technologies, combining a composite and an
adhesive window film to create window layers."
Paul Bjacek, an analyst with Accenture, calls R&D an increasingly sophisticated
proposition in which companies need to be on the lookout for opportunities to grab talent
globally. He notes that China and India are of growing importance in establishing global
research efforts, not only because they are home to more than 2 billion potenial
customers but also because they are minting scientists. "There are fewer engineers and
scientists in the U.S.," he says, "while India and China are graduating 100,000 a year."
Attractive profit margins are a defining attribute of specialty chemicals. Chemistry alone,
however, will not necessarily provide the extra value needed to justify these margins,
according to the consultants, and there are fewer true specialty companies as a result.
"Are companies making a conscious decision to remain specialty companies?" Cardinal
asks. "Will they focus on product differentiation or will they cut research spending in
order to maintain margins?" He contends that only 10–20% of some specialty stalwarts'
portfolios are truly specialty, while the rest of their businesses center on basic
oleochemicals and other commodity-like products that were once specialty but are no
longer.
Among the companies the consultants say have committed to cultivating specialty
chemical portfolios are Dow Chemical, Ciba Specialty Chemicals, BASF, and Lubrizol,
each of which has been "working the boxes" on growth strategies.
"We are specialties top to bottom," Lubrizol's Kirk says, speaking of the lube and fuel
additives business he manages; the company also runs a personal care and coating
chemicals business, Advanced Materials, which it acquired with the purchase of Noveon
in 2004. "We focus on creating technologies that improve the quality and performance of
customers' products. We consider ourselves a technology-based company."
Kirk says Lubrizol spends 5–7% of revenues on R&D, a third of which goes to basic
chemical research and the rest to developing new applications for existing chemistry. "It
is that basic spending that keeps our technology fresh, our pipeline full, and our platform
up to date."
DIVERSE BUSINESS U.S. specialty chemical industry is composed of myriad sectors.
a High = greater than 6.0%, average = 4.0–6.0%, below average = less than 4.0%. b Excludes nonformulated products. c Excludes
fertilizers. d Includes specialty products only. e Low-volume, high-priced types only.

The platform at Lubrizol's additives division is a portfolio of formulated products based

on building block chemistries that the company customizes for clients and reformulates
as fuel efficiency and environmental standards evolve in the U.S. and Europe. Keeping
ahead of the curve on regulatory changes is a means of attaining a competitive advantage,
Kirk says.
So is process efficiency—the upgrading of automation systems and streamlining of
manufacturing plants, which is funded from the applications development portion of the
R&D budget. Lubrizol is also looking for growth by moving into markets adjacent to
ones it already serves, according to Kirk, including metalworking additives and synthetic
refrigeration lubricants.
Like most specialty chemical companies, Lubrizol has been serving global markets for a
long time. "Our customers are oil companies and their lubricant marketing divisions," he
says. "They tend to be global. They work closely with car and truck companies and they
want global consistency in their products. We are driven by our customer base to think
globally. To them it means marketing the same lubricant in China that they do in France."
This requires a consistent approach to technology services globally.
"We have historically made technology investments in three continents," Kirk says of the
Ohio-based company. "The biggest is the center at our headquarters. And we have been
in Europe and Japan a long time." Although Japan is the smallest operation, mostly
serving the host country, it is increasingly charged with cultivating business elsewhere in
Asia. "Someday," he says, "we will have research centers in China and India." The
company recently announced plans to build an additives plant in China's Tianjin Harbor
Industrial Park.
Most specialties-oriented chemical companies have a similar mix of growth strategies at
work, though the emphases vary.

Fernandez (Rohm & Haas), Henning (Dow)

Developing niche markets is the primary function of Rohm and Haas's process
chemicals and new platforms business, which includes biocides, personal care
ingredients, and ion-exchange resins. Though grouped aside from the company's primary
businesses in coatings and electronics chemicals, many of what the company calls its
niche products are sizable. "Some are $400 million businesses," says Guillermo Novo,
vice president of the new group.
According to Novo, although the businesses he manages have traditionally grown
through the introduction of new chemicals, these chemistries have matured in recent
years. Products have come off patent, he says, but many of the company's existing
chemistries can be applied to new markets in innovative ways. "Now, for example,
instead of developing a new molecule, we look at how we can use material science to
improve the performance of existing biocides," Novo says.
Then there is the marketing angle, exemplified by a joint venture Rohm and Haas formed
last year with Chemical Specialties Inc., a subsidiary of Rockwood Holdings. Called
Viance, the venture will market a new wood preservative that combines Rohm and Haas's
4,5-dichloro-2-n-octyl-4-isothiazolin-3-one (DCOIT) biocide and a stabilizing polymer.
The product, EcoVance, allows DCOIT to effectively penetrate pressure-treated wood,
Novo says. "We have the technology, they have the route to market," he says of his
company and its partner.
Rohm and Haas's $2.2 billion-per-year paint and coatings materials business has spent the
past three years establishing a distributed R&D infrastructure. Basic research, which had
been conducted entirely in Spring House, Pa., is now also done at the company's new
research center in Shanghai and in Hanko, Finland, where Rohm and Haas recently
acquired Finndisp, an emulsions manufacturer, according to Luis Fernandez, vice
president of paint and coatings materials.
The company is also extending its reach through partnerships with universities,
customers, and other suppliers, Fernandez says. For example, the firm recently developed
a formaldehyde-absorbing paint with a coatings manufacturer for the Malaysian market.
"We work with coproducers with specific knowledge of technologies we don't have," he
notes.
According to Fernandez, 30% of the company's R&D budget is spent on basic research,
with a comparable amount on developing applications for known chemistry, and the rest
on formulation research. The overall objective, he adds, is creating value in maturing
markets.
"All industries have an element of commoditization," he says. "You have to continue to
develop solutions that no one else can develop." He notes that there is plenty of room for
differentiation in application development and formulation. "There is an eight to 20 times
price differential between the cheapest and most expensive can of paint in most
countries," he says. "People will pay for the differentiated product."
At Dow Chemical, specialties growth is managed in major end use markets through
networks of related businesses called "market-facing" groups. "Our programs play a
critical role in our long-term profitability outlook," says Carol Dudley, vice president of
market-facing business development and licensing. "When you connect markets to
research—when you target unmet product needs—it does make a difference."
Dow established market-facing groups for the agricultural, automotive, and building
industries several years ago. Last year, the firm added market-facing coatings, fabric and
surface care, and footwear groups.

Kirk (Lubrizol), Riese-Martin (Clariant)

Today, about two-thirds of Dow's $1.3 billion in annual spending on R&D goes toward
growth—basic research and application development. The rest is spent on product
support—research associated with maintaining product portfolios. "In the past, it was the
other way around," Dudley says. She attributes the shift to the connection made between
marketing and R&D under Dow's new chief technology officer, William F. Banholzer,
former vice president of global technology at General Electric. "Now, one-third of our
revenue comes from products introduced in the last five years."
Under the market-facing model, Dow has shifted its focus from selling specific products
to marketing formulation and application expertise. "When we supplied the coatings
industry, we used to offer solvents, latexes, and polyurethanes," she says. "Coating
customers had to come to Dow. Today, we go to the market and we are product-agnostic.
We change products to meet customer needs. We address the market as the market, not as
an individual purchaser of epoxy or polyurethane. We go as Dow to the auto industry and
look for supplier relationships."
Recently, Dow's automotive unit agreed to manufacture a finished car filter for a
customer. "It includes a specialized soot-control catalyst that goes on the kind of diesel
engines that will be used in 50% of the vehicles in Europe," Dudley says. "We are not
afraid to move into making a part if it is the right thing for Dow."
Dow has several specialty chemical businesses outside the market-facing regimen, each
with particular growth challenges. Mark Henning, general manager of Dow's biocides
business, sees a renewed interest in chemical production done in the U.S. "Over the last
several years, there has been a lot of excitement and movement and scrambling to find
low-cost specialty production sites," he says. This has led to a rush on India and China.
"We have spent an inordinate amount of time focusing on that," he adds, "and I see an
inflection point starting last year."
In 2007, he notes, the Chinese government made significant reductions in value-added
tax rebates for most specialty and fine chemicals exports, a move that increased the cost
of exporting from China by 10–15%. Energy costs and fluctuating currency exchange
rates also crimped the country's competitiveness.
Henning says Dow's biocides division is based on 18 active chemistries that go into
industrial applications including pulp and paper, water treatment, paint, and oil and gas.
He says his division has also taken a market focus, carving out new uses and geographies
through formulation and application research. "Biocides are a clear example of an area
where we will have no new chemistries," says Henning, noting the regulatory challenges
in the U.S. and Europe to bringing new molecules to the market. "We will take existing
chemicals and apply them where biocides are needed and value can be delivered."
For its part, Ciba has undertaken a reorganization of R&D in an effort to centralize
research in each of its six main product areas: protection and stabilizing chemistries,
color components, polymerization and curing chemicals, interface and rheology
additives, paper strength and coating chemicals, and solid/liquid separations. The
program will establish centralized research laboratories and management for global R&D
in each area.
"We are doing this now, really, to sustain our competence in each of these areas," says
Martin Riediker, Ciba's chief innovation officer. "Over time, they have been dispersed.
We want to bundle them again."
 Like Dudley at Dow, Riediker speaks of the importance of linking the lab to the market.
Implementing top-down management of resources will help focus the businesses on the
core elements of innovation at Ciba—process improvement, application development,
and development of new technologies. "We want to make sure we allocate funds to the
products with the highest potential for success," he says.

New products at Ciba include a nanoencapsulization

technology that allows light stabilizers to be applied
in water-based coatings, as well as lubricant
additives formulated to meet European eco-labeling
standards.
At Clariant, which recently divested its life
sciences businesses, the specialties operations have
been going through a reordering to better align
research and marketing resources to customer needs,
according to Monika Riese-Martin, head of
corporate development. "In the last two years, we
WEAK LINK In the chemical industry, no clear correlation have identified which of the businesses are more
between R&D spending and growth. product-oriented and which are more application-
NOTE: Data from top 50 chemical companies worldwide by oriented," she says.
revenues (companies where reliable data were unavailable were Clariant is now organized into four divisions:
excluded); Data were adjusted to exclude nonchemical activities.
SOURCES: Kline & Co., company data textile, leather, and paper chemicals; pigments and
additives; functional chemicals; and color and color
additives masterbatches. Clariant is managing the 40% of its businesses that are product-
oriented with "an intense focus on efficiency" and the 60% of its businesses that are
service-oriented with a combination of cost leadership and application and service know-
how.
Most specialty chemical development work is being done within the context of a strategic
push called Clariant 2010. "We are going to focus on operational excellence, somewhat
on portfolio management, and really try to be more stringent in implementation and
paying attention to the consequences of how we manage our businesses," Riese-Martin
says. "Some of our businesses are more knowledge intensive, more on the specialty side
of the scale. What we want to do when we focus on operational excellence is make sure
these businesses have what they need."
At FMC, specialty chemical managers are trying to expand both mature businesses
serving food and pharmaceutical markets and newer businesses such as a just-formed
health care ventures unit, which is moving natural products and biopolymers into wound
care and other novel applications. The company's lithium division is also looking for new
applications in energy, electronics, and other industrial markets.
According to Theodore H. Butz, vice president of the firm's specialty chemical division,
growth comes down to innovation, and innovation often comes from no-nonsense
applications development work.
"There is a rejuvenation in the lab," Butz says. "If you look at trends in the specialty
chemical industry 12 years ago, all anyone talked about was the ultimate highest value-
added ingredient. Foo-foo dust. And somebody would be willing to pay for it." But
competition had a commoditizing effect, he says. "We needed to rethink how to grow,
especially in the U.S., Europe, and Japan. We needed to innovate out of low growth."
In FMC's lithium division, some of that growth is coming from new product
development. "There are a million and two uses," Butz says. "The trick is to know when
to go on to something else when you go down a dead alley." He notes that FMC cut short
a foray into lithium-cobalt batteries. "It is very competitive, and cobalt is very volatile in
price," he says.
Butz assesses FMC's specialties portfolio as 35% high-value specialties and 20%
cyclical, commodity-like materials. The rest of it falls somewhere in the middle. Product
life-cycle management is an important concern at FMC, Butz says, where some
businesses in the health care area are experiencing "embryonic" growth while others,
such as the food ingredients business, seek to rise above price competition and create
value through applications work with customers.
At Chemtura's performance specialties division, which manufactures urethanes and
petroleum additives and fluids, technical service and application research has driven
growth to some extent. Still, there are limits to what can be achieved merely with new
formulas of old chemicals, according to David J. Sikora, vice president of chemical
technology for the division.
"In some of the areas we know best, the industry has hit the wall on formulation to a
certain degree," Sikora says. "There is a need for new molecules to make step changes."
In polymer and petroleum additives, he adds, Chemtura is actively filing patent
applications for plastic and lubricant antioxidants.
During the past year, Sikora's division introduced four new products: Barinate B-70, a
barium sulfate-based corrosion inhibitor for industrial lubricating oils; Naugalube 810, a
nonphosphorus, nonsulfur antiwear additive for engine oil; Naugard 431 Plus, a liquid
phenolic antioxidant additive for polyolefins that replaces solid antioxidants; and Weston
NPF705, a phosphite-based plastics antioxidant that replaces nonylphenol-containing
phosphites.
"It isn't typical for us to introduce four products in one year," Sikora says. "But the
company is seeing years of work coming to fruition at this point; we are harvesting fruit
of seeds planted five or six years ago." Much of the product development of recent years
is aimed at keeping ahead of environmental regulations. "The dial is turned up for greener
materials and low pollution. And we are not going to reach the point of regulations being
relaxed. Products are being introduced as new things come up on the radar screen. It's a
great marketing driver for us."
Environmentally friendly products are just one of many drivers at work in specialties
research, where the diversity of chemistries and end markets are reflected in the diversity
of growth strategies. The one constant is that chemistry alone cannot guarantee the
growth that companies are looking for, be the market a fast-growing one like health care
or a mature one like paint.
"It's a diverse area, with a lot of unique chemicals," Accenture's Bjacek says. "But paint
is dog-eat-dog. There is no way you are going to avoid a down cycle."