In the News
Transcript of Interview with Andrew Liveris, CEO of Dow Chemical Company.
This interview of Dow Chemical Company CEO, Andrew Liveris, was conducted by the representatives of the Wall Street Journal at the ECO:nomics conference in Santa Barbara, March 12-14, 2008.
Wall Street Journal (WSJ):
We’ve been having a conversation about the high cost of energy and how difficult that has been for your business. And yet at the same time, your organization has joined USCAP, a group of companies that is arguing for carbon caps in the country, which will arguably raise the price of energy. What is the thinking there?
Andrew Liveris (AL):
It does seem like kind of an oxymoron. You’re quite right. We’ve talked a lot and I think most of the audience had read that the Dow Chemical Company, representing a manufacturer in this country, has suffered mightily from energy costs that have increased in 2002 from $8 billion a year to $26 billion last year. Yet, we’re still here and we’ve managed to find our answers, which I’m sure we’re going to talk about. When you really look at what’s happened on energy, it isn’t just their absolute levels going up. It’s really got a lot to do with volatility and uncertainty. USCAP and Trade and what that subscribes to is really, as you heard from Jeff last night and as you’ll hear from Jim soon, the one thing it means to a manufacturer is a signal, a price signal, something that hopefully has stability associated with it. I can work with stability. If my outputs are moving around based on market prices globally, which mine do, and my input’s moving around based on all the instability in energy, then frankly, making margins is truly a tough business in our business. And I go for stability of inputs, and hopefully stability of outputs, but a cap and trade system gives me a more stable price signal than anything else. And, at the end of the day, the overriding statement I have to make about being part of USCAP and being in this discussion is that we have to be at the table. The industrials have to be there. Utilities have to be there, transport has to be there, NGOs have to be there, but the industrials have to be there because we’re global players. If I get demand destruction because of regulations in the United States, I would move and I am moving.
WSJ:
Where are you doing most of your business these days and why?
AL:
My company has always been multi-national, global. Over the last six CEOs, five have been foreigners. We started out very international back in the ‘60s. That is what I would call a great set of seeds and roots around the world. Today, 70% of our business is overseas. That’s not an unusual number anymore. Lots of companies are doing this, especially industrials. But our numbers have increased incredibly. Over the last three or four years, our numbers have gone from 62% to 70%. I derive 28% of my income, that’s revenues and income, from the (inaudible, maybe grid). That number was only 12% five years ago.
WSJ:
You are benefiting right now from doing business in countries that don’t have many environmental rules, places like China and India. Now presumably, if the environmental community were to get its way and we were to have a global system, that benefit wouldn’t exist for you anymore. And yet, that’s still what you want to see?
AL:
Environmental standards have to be exported from the best places. Our company, wherever we operate, we bring the best standards in place whether they’re local standards, the standards of the U.S. (interference). I remember as a young manager in Thailand – I ran the Dow Thai corporation for three years – I had placed Dow standards, which were actually better than U.S. standards at the time, on environmental protection and for about seven to eight years, we competed against people who didn’t have those standards. But today, those same people have risen to our level. In China, we are working (inaudible), we’re a member of EPA (inaudible), and right now, as we speak, there are 100 Dow engineers on the ground in China making their plants more efficient, pro bono because it helps us. Global companies have to go to the highest standards, we earn our way every day and we’re around for a hundred years because we do that.
WSJ:
Do you think that Dow as a company has a responsibility to do this? Is that what motivates you or do you think there are business opportunities in it?
AL:
It’s all of the above. Frankly, in 1995, the then-leaders of Dow put together some pretty bold and ambitious 10-year environmental health and safety goals in place. They were, at the time, considered unreachable. We didn’t have the technology. Energy efficiency was one of those. We said we’d reduce our energy per pound of parts produced by 20%. We actually did 38%. We found out what did $1 million invested, $5 million returned, and that’s when oil and gas weren’t the price they are today. In 2005, we put our 2015 goals in place. The then-team, of course led by myself, and our board looked at the world and said, ‘Our goal on the planet is of course profit, but profit at what cost?’ And frankly, the opportunity now presented by the emergence of 1.3 million people in China becoming consumers like the United States, the opportunity presented in other emerging countries, does give birth to sustainable chemistry, sustainable business. And what we did is we put out our 2015 goals with that in mind, like General Electric. Our activities said that we would develop business opportunities around four major end uses: affordable housing; clean water; affordable energy; and nutrition. These have become business opportunities.
WSJ:
The business community is very powerful if it’s united. At what point did the business community decide that it wasn’t simply going to band together and go to Washington and say that we don’t want this at all? Because you probably could make some headway if everyone was there together.
AL:
I’m a scientist. We looked at the science over and over, and we saw that human kind does have an impact. Our imprint on the planet matters. Is it a cycle plus humankind? Maybe. But we have to start doing something about this. The countries who put together USCAP firmly believe the science is the starting point. Once you’ve gone there, then you start getting solutions. Out of people like Dow, we are problem-solvers, we’re engineers. If everyone in the U.S. achieved in terms of energy efficiency what we achieved as a company, there’d be not one drop of oil imported to this country from anywhere else.
WSJ:
Do you think it’s feasible to reduce global carbon emissions by more than half by 2050?
AL:
(interference)…since 1990 by 25% under the absolute emissions numbers. Globally, not just U.S. So this isn’t just shutting factories down, this is being smarter about input. My answer is obvious: we can reach for it.
WSJ:
So you think you can do it largely through efficiency?
Al:
Efficiency and conservation. Last time I checked, if you don’t burn something, you’re not going to emit CO2. What an interesting starting point. We’re a wasteful society. Let’s get some really gutsy stuff out there and teach consumers. Why are we afraid of that?
WSJ:
When you have an energy policy that starts to become so regulated by Washington, you open up the possibility that businesses can use that regulation to hoard their own against their competitors, for instance, and I believe that Dow has been a proponent of higher CAFE standards because you make products that would work better with more fuel-efficient cars, so it’s to your advantage. Isn’t there a risk that this is how we begin to do our market economics, that it instead becomes a fight over who can handicap and help each other in Washington?
AL:
We are in favor of higher CAFE standards and they are being put in place. All the big motor companies in the U.S. understand what they have to do to be more efficient and they will get there at the speed that their affordability model can take them. Now, to the extent that the government needs to be involved to set those standards, I believe the time has come, and you’re listening to a free-marketeur here, that the hand of the government needs to be involved in setting these price signals and setting these standards as a government should do, rather than the worst-case, sub-optimized state-by-state. That would be horrendous for all of us! Can you imagine operating in this country with 50 sets of regulations? I think that would be a nightmare. So let’s get all around the table and set standards on renewable, set standards on transport, set standards on utilities, set standards on industry. A little caveat: At the end of the day, I have to make money for my shareholders. I’m putting a flag toward the U.S. and toward Washington, and I’m saying ‘Do you want industry?’ Because I go to plenty of places that want industry. They want my average $75,000 per year. That’s high-tech. That’s a double-degree, it’s a single-degree. Chemical engineers, scientists I employ. Right now, I’ve got the equivalent of $60 billion of capital being spent on projects around the world. Not one of those dollars in the U.S. 60,000 jobs to be created at those salary levels. If you want that, I need a coherent energy policy where you give me a price signal. Where I can marry all these standards you’re putting together and come out with a case to invest. Because when I invest, my assets are on the ground 30, 40, 50 years.
WSJ:
So you’re saying that even if a climate policy in this country significantly raises prices, you would keep jobs here and not move them to a company that didn’t have that sort of cost built-in?
AL:
The word energy now needs to be broken into its component parts. But the ultimate answer is yes, let me not divert away from what you asked. You’ve got to be there at the table with all forms of energy. For example, this country has 80 TCF of natural gas, a lot of this coast, that is verboten by archaic regulations. In fact, that’s the proven. The probable is 400 TCF. One more time, if we tap all of that, not one drop of oil has to be imported into this country in energy equivalents. We have a dash to gas going on – we have no gas! We can’t access the gas. So what’s happening is gasoline prices are going up, power prices are going up, industry’s moving with its feet. Put natural gas back on the table from the outer continental shelf (OCS). The technology exists. It’s been done everywhere else. Put nuclear back on the table. Clean coal – drive us there through a price signal, cap-and-trade, again. Renewables – wind, solar. Every option has to be put on the table. And if that happens, and the overwhelming price on energy on a (inaudible) goes up, so be it. That’s the price of being on the planet.
WSJ:
But how do you make that education pitch? There are a lot of environmentalists who say ‘I’m an environmentalist, so I don’t drill.’ Your argument seems to be that you have to drill in order to have some of these other programs that help the environment.
AL:
Well remember, I’ve given you my big caveat. I’m investing everywhere (inaudible). So why am I here trying to hurt capitalists? I don’t need the grief. But getting every piece of the puzzle, NGOs included, to the table to get a coherent policy together will take a willpower we have not seen since the Manhattan project, World War II. The country has the skill, it just needs the will. This country is blessed with the best scientists, the best universities, the best freedom model. We will get it together, maybe, again. Maybe, eventually, beating my head against the wall in Washington [will make a difference]. It’s necessary to pull the world together and to say ‘I will give a piece,’ like you said with high energy prices, ‘I will give a piece.’ But everyone else needs to come with that attitude, not take a piece.
WSJ:
Make a prediction. When will the cats come up with sufficient legislation?
AL:
I’m not a cat herder; let’s make that clear. But it is, ultimately, the politicians who will have to get off their wish list, their one easy answer to the complex task of putting this all together. One may ask, ‘Why hasn’t this administration done anything about it?’ I don’t know I’m not a politician and I don’t aspire to be, but it’s very necessary and that is why companies like Dow are so active in things like USCAP and equivalents, to try to take a holistic approach. But I can’t give you a prediction. When is an energy crisis too bad? Is it $5 gasoline? Is it $20 natural gas? In Michigan, the average consumer’s heating bill has doubled in the last four years. It’s now 38% of disposable income. That’s a big number. Stops that consumer spending at least (inaudible). So when does it break our backs so that we collectively get together and handle it?
Audience Question:
In your talk and in the previous two talks, there are two threads going on and it seems to me that they’re getting blurred. On one side, we’re trying to solve this problem. Someone asked Jeffrey Immelt if he thought we could get to 60-80% emission reduction by 2050, which seems like a strange question to ask a CEO. On the other side, we’re hearing market drivers. Jeffery Immelt saying regulation is coming and the energy policies we have are stagnant. Can we just drop the first question? Are we really just talking about a market shift and could we replace the word ‘environment’ with anything else?
AL:
I’m think it’s just a simple equation. Inputs, conversion, outputs. You take inputs, conversion and have the wrong outputs, you generate waste. Waste means bad environmental enhancements. I think we’ve seen that in all sorts of places. Do you remember the acid rain issue? The Clean Air Act fixed that. We got a price signal from government to get smarter on the inputs. So, I think if I have to overwhelmingly answer your question, I have to put the word energy up there and get to work.
WSJ:
But if you’re not trying to hit that 60-80% mark, why are we doing this? Remember, this is what people say needs to happen in order to stop or reverse climate change. If you don’t hit that goal, what are you doing?
AL:
Well again, in response to your very first question, I used the word stability. Volatility, uncertainty kills demand. The second-largest exporter out of this country for four decades, after aerospace, is chemicals and plastics. Today, the country is a net importer. We have demand-destructed 3 million manufacturing jobs. That’s the price that we’re paying. Because the price of your toothbrush, and the price of your iPod – it’s a hidden signal. I need a more firm signal because I play in a global market. So that’s why we need a signal that stipulates 50-60% of it.
Audience Question:
You said that in 1995, when Dow put out those goals, that they were unreachable and you didn’t have the technology. And yet, you exceeded them. Thinking about the future, how did you do it? What made the difference?
AL:
Well, by establishing the signal within our own corporation and having that behind us, we discovered an amazing thing. Amazing things happen when you have skills. Already, of my $1.4 billion-a-year R&D budget, we’re allocating $200 million to breakthough solutions-energy, water, health and nutrition. Amazing things are happening. I’m already launching a replacement for the solar cell. You’ll be able to go to Lowe’s, or Wal-Mart, sorry, and buy the tile and siding of the house if you so choose and have it be the solar cell. That did not exist two years ago. I’ve already launched a diesel-particular filter that will totally meet U.S. emission, not just EU emissions, and increase fuel efficiency in Rick Wagner’s cars, which I believe he and others will adopt. So all these things would not have happened if we hadn’t put that signal out for 2050. You put the signal out to a science-based company, you say there’s a market opportunity by addressing the planet’s problems, amazing things happen. We saw it in ‘95 and 2005. We’ll see it again. We are very dedicated to seeing this through.
Audience Question:
Given the fact the utilities are one of the greatest emitters, how can this country possibly achieve energy efficiency when we reward utilities companies for selling more electricity and punish them for using less?
AL:
I believe that the next panelist is Jim Rogers, and I hope he can answer that question for you. If you look at energy usage, I’m about (inaudible) industry as a whole is about 18%, chemicals is about 10%, so you can see how we’re tapering ours a little bit. But you raise a very important point, which is the utility point and the transports, and I answered the renewable CAFE point that was made by saying the need to be at the table, same with utilities. They have a very complex equation because the multiple inputs they already have are better than their current footprint. And the installed capital based to move from a better footprint varies by utility, and the whole industry therefore can’t be easily united. All I would plead is that they don’t keep dashing to gas and saying ‘Well, we aren’t opening up the gaskets.’ Because that is suicide. And while I’m on that, ethanol happens to be suicide, not because corn but because of natural gas. We’re burning as much natural gas as the ethanol we use to produce the gas that goes in cars. So left pocket, right pocket, here we go again and we don’t have the gas. E-85 is wonderful, but we don’t have the natural gas to produce it, so what are you going to do? Burn coal?
WSJ:
So, how do you fix that problem? What do you do about ethanol right now?
AL:
Well, we’re building the world’s largest renewable plastics plants in Brazil, based on sugarcane. Photosynthesis is a terrible process, .1% yield. We do things in the chemical industry at 99.99%. So making a profit on .1%, running a plantation for anything other than food, is a pretty tough thing. But, if you’re going to do it, do it with a crop you can plant year-round that doesn’t need much water, that doesn’t chew up our needed land. Sugarcane is our best answer right now. The fact that we don’t have a way of organizing it in the U.S. and we don’t have a way of importing if from Brazil is a political problem.
WSJ:
Should we get rid of the ethanol subsidy?
AL:
I think the word subsidy I would replace. Let’s put the signals in the right place.
WSJ:
So it should go to something else?
AL:
Sure. Cellulosic ethanol will arrive. The scientists of America will put the enzymes and the breakdown of a very tough, tough component cellulose to put into usable energy. But, we’re all working on it. We have the signals in place. We’ll break the breakthrough. Makes a lot better sense than corn.
Audience Question:
You have emphasized stability in price signal as the purpose of supporting USCAP. But in trying to reduce emissions, you can either pick the target, which is what a cap-and-trade does, or you can pick the price. If you pick the target, you have no idea what the price is going to be. If you pick the price, you have no idea what the emissions reduced is going to be. And, in fact, cap-and-trade does not cause stability, it provides the opposite. It causes a huge fluctuation in the price, which is why energy investments are fleeing Europe all across the board in the energy sector, because no one knows what the price is going to be. So, it seems to me you have contradicted yourself.
AL:
If we want reductions, then we have to go to something that’s market-based, not source based, like a carbon tax, because a carbon tax does nothing for the signal. Basically, it means I could pass it on to you and I wouldn’t reduce anything, because I’m clever enough to do that.
WSJ:
You don’t think cap-and-trade does that, too?
AL:
Cap-and-trade does it under the basis of the question, which is how much is going to be free allowances and how much are we going to allow the financial services industry to profit from this? Because if we make this a money thing, as we tend to do in this country, instead of a widget thing – in other words, we open up too much on the auction process and too much free – then you’re going to get exactly what you just said: a lot of volatility. The devil’s in the details and that’s why this is a complex topic. Unlike acid rain, CO2 is (inaudible). If this was easy, humankind would have already figured out some answers. The European experience is terrible. But let’s bring that to the table and figure out what we’re going to do. And while I’m on that topic, you’ve got to bulk this up globally somehow, which of course relates to the herding cats topic. But I will tell you that at this point, as close to stable as you can get on the market will come from cap-and-trade on market price versus carbon tax. There are people who disagree on that opinion, which is why the debate is appearing.