MIT Chemical Engineering Dept. Centennial 1988 – Ralph Landau, 4/6

MIT Chemical Engineering Dept. Centennial 1988 – Ralph Landau, 4/6


[MUSIC PLAYING] PRESENTER: This morning
and again this afternoon, you heard about some of
the department faculty who actually left to
join industry and had a major impact in industry. Today, we have an example of a
very distinguished alumnus who made his mark in industry,
has finally seen the light, and has become a
scholar, and is enjoying a second career as a professor. And that’s Ralph Landau, who
all of you, I think, know. Ralph is going to talk to us
about the role of chemical engineering in the growth of
the chemical process industries. Ralph– LANDAU: Good afternoon,
ladies and gentlemen. It’s a big honor to
be here with you. I hope I won’t let you
down after the brilliant performances this morning. But I should say,
when Skip Scriven talked about chemical
engineering in the old days, he said that the first
curriculum was in 1888 at MIT and the second
one at Penn in 1892, and that the Institute
was founded in 1908. I should do what President
Reagan sometimes says– I remember those days
well, since I went to Penn, was born in Philadelphia,
and then at MIT. My title had in the printed
text the word “catalyst” for the chemical
process industries. And Clark quite
correctly pointed out that a catalyst is not
supposed to be changed in the course of a reaction. And therefore, it’s
inappropriate for the title. I quite agree with him. He gave me the
title, and I didn’t have the sense to resist it. So the truth is
chemical engineering and its role in the chemical
process industries had a very substantial interaction. And each changed the
other over the years, as I will attempt to present
in the next 35 to 40 minutes. And I have a
special dispensation to run over a half hour, simply
because I said I have to do it. But that’s how it is. Now that I’m an
academic, I’m learning how to fill 50 minutes
very well, but not quite. Anyway, I want to paint the
picture of chemical engineering and the industry with which
it has been associated for so long in its economic context. Because obviously, what made
chemical engineering arise out of chemistry and develop
its own character was its economic context. And I will try to paint
that economic context as we go along in the different
eras that I wish to summarize. This is based on a work that
I’m still doing at Stanford and is therefore a short
summary of a work in progress, which I hope will become a
more extensive work as we get further into the analysis of
our very fascinating industry. Let me just very briefly
touch on chemical engineering in the period from the
1888 initiation until 1920 and describe it in the
following short sentences. The first course in 1988,
as you heard earlier, was descriptive industrial
chemistry, mostly inorganic. Industrial companies
alone in that era possess the know-how to design
and operate large-scale plants. And MIT was still an
undergraduate engineering school. When Arthur Noyes in
1903 saw to convert MIT into a science-based
university including a graduate school oriented
toward basic research, he felt that it would also
better train young people for careers in industry. But William Walker, also
a chemistry professor, had a different
vision and emphasized that it should remain a school
of engineering technology and train the builders
and leaders of industry by focusing on applied sciences. In his view, learning
physical science principles was not enough. Understanding of large-scale
problems drawn from industry was essential. So Walker reorganized
the program in industrial chemistry,
which was languishing when he came, converting
its heterogeneous collection of courses into a
unified program based on [INAUDIBLE] chemistry on a
study of unit operations, which reduced the vast number of
industrial chemical processes to the analysis of a few
basic steps, such as you heard distillation, heat
transfer, filtration, and the like. Walker, who also founded the
AIChE, as you heard, in 1908, established the research
laboratory of applied chemistry in 1908 to obtain research
contracts with industrial firms and to serve as the basis for
graduate students in chemical engineering. In this year, a few firms had
their own research facilities, whereas the rapid growth of
the German chemical industry was due to close cooperation
between university and academics. To further the industrial
linkage, Walker and his younger colleague, Warren
K. Lewis, founded the school of chemical
engineering practice, helped by Arthur D. Little. This gave students access to the
expensive industrial facilities required to relate classroom
instruction and union operations to
industrial practices, but under the supervision
of a faculty member. These two viewpoints
of Noyes and Walker never proved reconcilable. By the end of World War
I, Noyes’s influence in the chemistry
department slipped, while Walker’s program
in chemical engineering grew in popularity
and in students. The rapid expansion of
the undergraduate chemical engineering program at that
time paralleled and derived from the rapid expansion
of the American chemical industry resulting from the war
and the loss of German chemical imports. This linkage of the
industry and the profession has been pervasive ever since. By the end of 1919
therefore, Noyes resigned and, as you
heard earlier, went to California
Institute of Technology and helped create
the modern Institute. It’s interesting to note that
William Walker, who resigned shortly thereafter, left his
mark at MIT in a different path altogether. I happen to be a
privileged person in that I’m a trustee
of both Caltech and MIT. And the different visions
of Noyes and Walker still persist to a considerable
degree to this day. Caltech is more of a
science-based university, and MIT is more of an
engineering-based university, although there are
many exceptions to that general statement. At the time, Walker seemed
to be in the ascendancy. There was, however, opposition
in other faculties at MIT to his aggressiveness and
reliance on industrial ties. And he got into real difficulty
in securing adequate funds for the RLAC,
especially as a result of the post-war recession
that came in about 1919, 1920. And therefore, the selectivity
in choosing problems diminished. Walker then,
frustrated, resigned but left a legacy of
industrial linkage for chemical
engineering education. Now let me trace chemical
engineering and petroleum refining in the era
of 1920 to 1941. Warren Lewis inherited
the research laboratory of applied chemistry, of course,
and its difficulties, finances, and short-term projects. While arising from
industrial problems, chemical engineering
researchers there were often led to the not
immediately practicable, but having a perspective
over a longer term. Lewis thus moved to
quantify and extend the knowledge of the
fundamental unit operations. The chemical
engineering department became an intellectually
powerful center during this period,
and the pioneer text of the Principles of
Chemical Engineering appeared in 1923 simultaneously
with [INAUDIBLE],, as you heard. At the same time, Lewis
developed a new relation with the petroleum
refining industry, which had an enormous impact
on the chemical process industries. The oil companies
of the era foresaw the gasoline demand
for mass-produced cars would boom after the war. They needed to develop and
install large-scale improved continuous processes. Now Amico, then standard
of Indiana, a large refiner had developed the
Burton-Humphreys thermal cracking process, which
was a batch process suffering carbon deposits that require
periodic shutdowns for burnout. Exxon revised this to
the tube and tank process and hired Frank A.
Howard from Indiana as head of its new
development department. Almost the first
thing Howard did was to engage the best
consultant around. And that was Warren K. Lewis. A partnership was
formed that would have a profound influence
on Exxon and on chemical engineering. Lewis’s first efforts were to
provide precision distillation and to make the process
continuous and automatic. Batch processes were clearly
inadequate for the rising market demand for gasoline. By 1924, Lewis helped
increase oil recovery by the use of vacuum stills. His designs became
refinery standards, and coursework at MIT changed
to embody these new design concepts. By 1927, Howard began
a series of agreements with the German IG
Farben, gaining access to their work on hydrogenation
and synthetic substitutes for oil and rubber from coal. Howard needed a whole
new research group to handle this new technology,
particularly knowledgeable about chemical
process technology. Again he consulted Lewis and
who in turn introduced to him Robert Haslam, whose
name you heard earlier from Hoyt Hoddle, who was
then the head of the Chemical Engineering Practice School. Haslam formed a team
of 15 MIT graduates who set up a research
organization at Baton Rouge, headed by Haslam himself. Of those 15, those pioneers,
one is with us today. And that is Bud Fischer. And Bud– as the
audience, I hope you will give him a big hand
because he’s a survivor. 6 of these 15 rose to
high office and members of Exxon’s board. Haslam himself
became vise president in 1927 of the
development department and a senior officer of the
SO Company before he retired. Another staffer of the
RLAC was [? Ari ?] Wilson, who as you heard
earlier today became chairman and CEO of Amico. Exxon during this
period closely linked applied to innovative research,
including the application of chemical catalysis. Much of modern petroleum
refined processing originated in Baton Rouge. And it was basically an
MIT chemical engineering group that got it going. With the continuing
advice of Lewis and later in 1935 of Ed
Gilliland, Baton Rouge produced such outstanding
process developments as hydroforming, fluid cat
cracking, and fluid flex coking. And Hoyt Hoddle had
also started consulting with exon Exxon on
problems in combustion, which became reflected in
Hoddle’s longtime influence in teaching combustion
theory and practice. Thus, Lewis created a very
different approach from Walker’s. Instead of bringing industry
to the campus as in the RLAC, he brought the
campus to industry. Unlike the Practice School,
which also did this, he helped solve the big
problems of industry. And so he established modern
chemical engineering education, proving that industrial
consultation by professors enrich the employers
and the Institute’s educational program. He created the precedent that
able MIT faculty and students should go into industry
and move it along, providing valuable experience
and return potential funding for MIT. Ken Jamieson, the
chairman of Exxon, was the man in
charge of the drive. It got us our new chemical
engineering building. 3– Lewis focused
chemical engineering on the design of continuous
automated processing of a huge variety of products,
first in petroleum refining and then in chemicals. Other chemical engineering
departments as well as MIT’s flourished and attracted
the brightest students from all over the United
States and abroad, who in turn moved
into high positions throughout the petroleum
and chemical industries. Other engineering disciplines,
lacking this history of direct involvement with
a major growing industry, never developed such an
overall systems approach, the design of continuously
operating production plants, with the exception of the
electric power industry. Now, I would like to
deviate a little bit and talk about the
role of the process design firms in the early part
of this century up till 1941. A little known aspect of the
rise of chemical engineering as the design
discipline has long resided in the engineering
design firms, which contained all the skills
necessary to build complete process
plants, particularly in refining and chemicals. The most prominent emerged
early in this century. UOP was more research-oriented
in its approach to petroleum refining and
became the major source of process technologies for
the smaller oil companies. M. W. Kellogg grew as
a partner with some of the majors in the development
of the fluid catalytic cracking process, hydroforming,
and so on. Few oil companies had
the complete organization necessary in those days to
perform all the phases of plant design and construction. Because of the obvious
need for design of continuous automatically
controlled units, these and other
similar companies soon came to be dominated
by chemical engineers, many trained by MIT. I’ll briefly track the history
of the chemical industry before 1941, although this
is a very skeleton approach. A few key features–
firstly, the First World War proved to the United
States that it must become more self-sufficient
in all important chemicals. And the number of companies
and products grew. Secondly, in the
depression, a world cartel in the major chemicals arose. Entry costs for new
companies were prohibitive. The industry survived. Three– the industry was largely
based on branch operations, and the chemical engineer
was not yet perceived as a critical resource. And forth–
nevertheless, companies like Exxon, Union
Carbide, Shell, and Dow, ventured into what were the
first small-scale stages of the rise of the
petrochemical industry, detailed in the excellent
book on petrochemicals by my former colleague
Peter H. Spitz, who I think is also here today. Here the need for chemical
engineering skills rose sharply as the
scale of operations forced resorting to
continuous processing, as previously in the
petroleum refining industry. And chemical raw materials
began their epochal shift from coal-based to
petroleum-based. The war years,
again, can only be summarized in a few paragraphs. The United States had
entered into a crash program to build many new facilities
for synthetic rubber, petroleum refining, chemicals, munitions,
light metals, et cetera. Much sharing of know-how and
processes between competitors took place. Many new companies undertook
chemical manufacturing, and personnel were
widely interchanged. Engineering design firms
were swamped with orders, becoming an important
reservoir of widely experienced chemical engineers. And as the war
ended, the government insisted on selling
the new plants to many newcomers
and competitors of the traditional
chemical industry. The European chemical
industry lay in ruins, and the prewar cartel
had ceased to exist. That was the picture at 1946. Now I’ll trace the
two decades from ’46 to ’66, which I call
the stable decades. And I will first talk about
the broader economic climate in which our industry developed. And then I’ll narrow the
focus to the chemical industry itself. And I should say at this point,
when I talk about the chemical industry, I’m talking about
what the Department of Commerce used to call Standard Industrial
Classification number 28. That’s a very broad
industry with a lot of different segments. And while I’m speaking
in the overall industry, the separate parts of it
had very different histories and different characteristics. And there’s no time
to, in this talk, to give you a better picture
of how widely divergent some of these parts were. Anyway, during that
period of ’46 to ’66, the United States had a
unique world situation. There was a large
pent-up domestic demand and need for
reconstruction abroad. The United States was
the only center undamaged in new industrial
facilities and finances and had little competition. The United States government
maintained a low inflation, low interest economy
with low cost of capital. Federal budgets were
close to balance, and there was a positive
trade balance overall. Despite the Korean War,
the economic climate was favorable for growth. The postwar real growth
rate and GNP, real terms, reached historic highs averaging
around 3 and 1/2 percent per year. Productivity growth was
also good in this period, averaging 2 and 1/2 percent
per capita in real terms until 1973. This favorable world
scene obviously greatly influenced the progress
of the chemical industry. Firstly, it became
international very quickly. Secondly, the entry
costs were low. Competitive scale of
plants was still small. Capital costs were low,
building times rapid, and markets almost
continually expanding. Thirdly, technology spread
rapidly around the world. Licensing by domestic producers
and process design firms accelerated, while
important foreign inventions such as Ziegler’s polyethylene,
Natta’s polypropylene, and ICI’s polyester fiber and
high pressure polyethylene crossed the ocean to here. Licensing became an apparently
profitable technique for companies unable
to invest everywhere to earn additional revenue. Fourthly, American chemical
engineering, developing rapidly in our universities,
proved to have an overwhelming competitive
advantage abroad, where there were smaller and
less diversified refineries, and chemical plants that
had been largely designed by chemists unused
to large scale-ups. Fifthly, chemical engineers
rose to top management positions in oil and chemical companies. Thus, by this
process, innovation was coupled to the marketplace
and process design integrated with the product. Sixthly, the growth in petroleum
feedstocks for the chemical industry attracted the attention
of the oil companies, who sought forward integration,
while chemical companies looked for ways to integrate backwards. Seventh, there was a
flow of new products, such as synthetic fibers,
plastics, and detergents into the marketplace. Many of these were superior
substitutes or novel applications of synthetic
products for such fibers as cotton, wool, and
silk, as well as plastics for paper, glass, and wood. Eighth, there was a lack
of pervasive intrusion by government in a
variety of areas. Ninth, the chemical
trade balance remained positive, a combination
of strong innovation, favorable raw materials,
some tariff protection, and the need to maintain
a competitive edge against the rapidly
reviving European chemical giants, which sharpened
management skills. 10th, although profits
of US chemical producers grew rapidly in the
mid ’50s, so did those of other basic industries. By the end of the 1950s,
the exuberant expansion of the industry led to
overbuilding and overcapacity. Nevertheless, the
earnings of the industry grew about as fast as all
manufacturing up until 1966, but the balance sheets
were deteriorating. The signs of
competitive pressure, both domestic and international,
were unmistakable. Unlike electronics
and computers, where many small companies
did much innovating, chemical did not have this. Entry costs were
already too high. As I attempted briefly
to say earlier, with this kind of
favorable, stable climate, many product lines and
processes appeared. Among the many innovators were
the process design-oriented engineering firms,
described previously, which were basically responsible for
developing and commercializing the key processes
for petrochemical raw materials’ manufacture. These were ethylene cracking
and distillation processes primarily by Lummus, Kellogg,
Foster Wheeler, Stone & Webster, and aromatics
extraction and production by UOP in the platforming
process, Udex, and the like. The modern
petrochemical industry would be inconceivable without
these fundamental American chemical engineering
developments. And they spread rapidly
around the world to make petroleum and other
hydrocarbon feedstocks the primary raw material source
for the chemical industry. But this also opened the
door to many new and vigorous competitors to American firms. I’ve left out a lot of detail
about other engineering firms like my own. And I think there’s a
paper in your booklet you got that describe some
more detail about what we were doing. And therefore, I can only
say at this point that, in following Doc Lewis’s
concept of chemical engineering, apply the creative
process design, I started our company in ’46
with that basic model in mind. I wrote about this in
the paper I describe. And we have always searched,
even though we licensed widely, for manufacture position,
rather than in licensing, first in ethylene oxide
in the late ’40s, then in terephthalic
acid in the mid ’50s, which we sold to Amico,
and finally successfully in the mid ’60s, with our
propylene oxide process, which formed the basis for our
oxirane joint venture with ARCO. During this period,
we saw for ourselves how powerful were the tools of
American chemical engineering by bringing this
discipline to West Germany. Their design
methods were clearly unsuited to the larger scale
of the modern petrochemical industry. When we built our first ethylene
oxide plant during the middle ’50s for a major German
chemical company, it was sized at 4,000
tons per year, a number that I find inconceivable today. Soon after completion
they wanted to quadruple the capacity
to 16,000 tons per year. We offered them a design
for a single 12,000 ton per year plant operating in
parallel with the earlier one. But instead, concerned about a
short continuity of operations, they insisted on three
more 4,000 [INAUDIBLE] ton units in parallel. I’ll never forget seeing
four 4,000-ton units, one side by side, inside a
very large brick building, operating in the later part of
the ’50s using our technology. But the Germans soon
learned from us and others and soon adopted many of
the American practices and deployed
American engineering, chemical engineering design,
just like everybody else. Our conclusions
from this period, the first 20 years
that I’ve described, were something
along these lines. The world was now
the marketplace for industrial companies. The risks of moving abroad
in that era were low. Secondly, patented exclusive
technical advantages are critical. And in our industry,
they most certainly are in our form of capital. But the diffusion
of technologies excrete increasingly
rapid, and competition restricts profitability. Third, chemical engineers
participating directly in the laboratory with chemists,
and frequent interchange between laboratory, the
design room, plant startup, and the like, provide
an integrating force– and I use this word in a
somewhat different context from what was used before lunch– that spurs commercially
valuable innovation in the shortest possible time. By applying the latest
fundamental principles aided by computers, we designed
large-scale plants directly from a micro pilot plant. We could thus speed
commercialization of new technology and
gain an important position in the marketplace. Fourthly, a CEO who is
technically sophisticated is the key to successful
integration of technology with company strategy. Other technologically-based
industries have also been learning this
lesson, some more slowly than others. Fifthly, the commercial
applicability of an invention often precedes the
underlying science. And I wanted to comment briefly
on an earlier discussion that showed a model of science,
invention, innovation, and so on, down to the marketplace. We published an
article in our book that I wrote with Nate Rosenberg
of Stanford several years ago on the way innovation
really takes place in industry, which we call the
chain-linked model. And if you have a chance to
read the chapter by Steve Klein and Nate Rosenberg, he’ll
show you how much more complex the real industrial
process of innovation is. Sixthly, process improvement
is a major opportunity to gain profitability. Many of our developments are
by no means breakthroughs. But they contributed continuous
productivity improvements and cost advantages. Because in this era many
companies focus their research efforts on new products,
we and other design firms were able to demonstrate the
great benefits of continuing process innovation. Seventh, research efforts were
almost entirely market-driven. And the federal government
had no significant share in the industry’s work. This era ended about
the middle ’60s with the arrival of Vietnam
War, a Great Society, and the full-fledged recovery
of the major competitors abroad. For our own company,
it became very clear. A reliance on worldwide
licensing and building could not be sustained,
and self-manufacture became more urgent. Now we enter what I call
the turbulent period of 1966 to 1981. I’m sure many of you
remember that very well. From about 1966, Americans’
annual productivity improvements started to slow
down and collapse by 1973. The merchandise trade balance
also started to deteriorate. By 1972, the real trade
balance became negative, although the nominal
trade balance did not sink into the red until 1981. Some industries were
affected more than others. The first slide will
show that only three of the research
intensive industries, or high-tech
industries if you will, have had consistent
positive trade balances– aerospace, chemicals,
and scientific apparatus. And the green line with a little
symbol of a chemical plant is, of course, our
chemical industry. Other industries started down
early, especially petroleum after the 1973 oil shock,
which I show in slide 2. Petroleum in this case is shown
with a derrick, as you can see. American competitiveness
in world markets had begun a long-term erosion. Vietnomics had begun to appear
in macroeconomic policy, and it had powerful lasting
effects on the world economy. Firstly– you can have
the slide off now– a great demand
overstimulation took place. Inflation and rising
interest rates appeared. There was a structural
budget deficit. There was a sharply declining
dollar in the early ’70s. And the United States abandoned
the Bretton Woods regime of fixed monetary
exchange rates in 1971. A significant flow of the
savings pool of the United States into less productive
residential and commercial construction took
place as investors fled from financial
to real assets in order to protect
their capital. And of course, the
cost of capital rose. There was a decline in
capital investment per worker as the baby boom peaked. And hence, there was the
decline of productivity gains. In the 1980s, there has been
some improvement, particularly in manufacturing. Japan, with two to three
times as much annual capital investment per worker, had
a high productivity gain. But the United States created
a large number of jobs, mostly in small
companies, unlike Europe, where unemployment arose. In the face of
many new entrants, jobs became an important part of
United States economic policies in that era. There were two massive oil
price increases in ’73 and ’79, which siphoned enormous wealth
out of the industrial world. There was a rise of the
environmental movement, resulting in much greater
regulation and litigation. Businesses were required
to invest large sums to clean up the excesses
of many years in the past, and to do it pretty quickly. Volatility of
economic conditions appeared as a regular feature,
and myopic planning horizons for business accompany them. And the intolerance of
the ravaging effects of the inflation of
the 1970s resulted in Jimmy Carter’s
appointing Paul Volcker as chairman of the
Federal Reserve Board to subdue it in 1979. And that, of course, resulted
in the recession of ’81 to ’82, which marked
the end of what I call the turbulent period. The chemical industry,
needless to say, was very strongly affected
by these immensely climactic changes. Firstly, in the shorter
run, inflation and the war provided a large
demand stimulus, which was misread
by many companies as indicating a larger potential
market than actually existed. This led to much
overbuilding, especially of large world-scale plants,
which each company thought would give it the
advantages of scale, only to be dismayed as
other companies rushed in with equally
large facilities. The notion of optimum
scale expanded over time, aided by the very skills
of the chemical engineers involved, who learned how to
design and build ever large– got larger single train plants. It was not until market
conditions prevented operation at capacity that
it became evident that smaller plants
operating at full capacity could be more profitable
than big plants operating at half capacity. Economists have
recently pointed out, in fact, that American
managements invested more than financial considerations
alone would have justified in the last 15 to 20 years. And that was part of
what lay behind that. Secondly, profitability
dropped significantly, as is shown in the
next two slides. Slide 3 shows the
profit margin in terms of percent of sales for the
chemical industry, which is marked in green, and
the operating rate, which is marked in orange. And while the scale is
relatively compressed, I think you can see that when
an operating margin in 1985, for example, dropped
down to just over 4%, the industry is not doing well. And it pretty much tracks
the capacity factor as well, although not by any
means one-on-one. The next slide shows a
slightly different measure of profitability of the
industry as a whole. It’s the return on
assets in percent, also with operating
rate in orange, and the return in green. As you can see, the
return on assets also has gone from a
high of over 10% in 1973 to a low of just
over 4% in 1985, though we’ve had a very
violently fluctuating history during this period. Now– you can turn
the slide off, please. Managements found
financial conditions in an era of rising inflation
to be critical to survival. While technologists were still
prevalent in this industry, MBAs and financial offices
also became indispensable. Four, although
foreign competition aided by extensive licensing– I described before; it’s now
very large– the United States chemical industry still
enjoyed scale factor, cheaper resources, the best chemical
engineering in the world, substantial technological
edges in many areas, and international presence. And our trade balance remained
positive as it has to this day. Fifthly, entry costs were
becoming even greater. Only the large companies
could now play. However, the oil
companies moved forcefully into the already crowded
and overbuilt arena. Sixthly, many of the new
technologies of the ’40s and ’50s were now
being fully exploited to reduce costs, raise quality,
and diversify product lines. So to step back just a moment,
it was only after the war that the immense new markets
and large-scale demand produced the great surge in
petrochemical development and also in the demand
for chemical engineers. Some scholars have
incorrectly contended that the innovative
urge of the industry declined decade by decade. It hasn’t. But it has changed
in its character. Until the middle ’60s or
so, major commercialization was accomplished for
important young plastics and for the new fibers. Each required low
cost feedstocks from the large new olefin
and aromatics plants. Also, a large segment
of the innovations made during this period
included significant process improvements for
precursors of plastics developed in earlier years. After 1966, the tonnage
plastics already in place became ever more differentiated. More sophisticated
fibers and plastics such as Kevlar and
composites were begun. And additional precursor
process developments for previously commercialized
polymers were introduced. Several involved switches and
raw materials, as the energy price shocks were
seen to be permanent. In the more recent years,
innovative developments continue to focus on further
product differentiation and adaptation of lower cost
processes for precursors. The oil and process engineering
firms also did much innovating, as did foreign companies. Because of vigorous
international technological competition among chemical
and oil companies, companies everywhere
could commercialize innovation made elsewhere. Virtually all products
were very large tonnage, which provided an economic
basis for innovation and hence for the talents of
chemical engineers grounded in design. But there was much
new chemistry also and close cooperation
between chemists and chemical engineers. By the end of the 1960s,
the depressed earnings of the industry were
reflected in the discount to market of chemical equities. In the early 1970s,
returns on capital had dropped to a level where
differentiated producers could support new investments,
while most others could not. Optimism dropped after ’76,
when many companies finally realized that growth
in the industry, which had been at least twice that
of the GNP to this point, had slowed. Gross margins in the
commodities had disappeared, and the increases in
hydrocarbon prices would have a negative
effect on future earnings. Unfortunately, much
new capital had been committed to the
commodity sectors, partially because of the large
plant syndrome, and partially because of the ease of adoption
of the existing technology with a “me too” attitude,
which was rather a cocky expression of hitherto
successful operations. Many judgments
about future markets turned out to be
mostly in error. Hence, in the absence of
large new capital investment possibilities,
chemical companies turned to increasing R&D. The chemical industry
proved particularly vulnerable in the public’s eyes
to environmental and toxicity hazards. Some companies were
spending up to one quarter of their capital on
such investments, inhibiting other
kinds of innovation. For our company, our
agreement with ARCO permitted us to move rapidly
abroad to Rotterdam, to Japan, and to Spain. From a zero share of the market,
we rose to not far from half and introduced some
new products also. By not copying other
companies and technology, but striking out boldly with
new and riskier technology, we established a
dominant enough position to benefit most fully
from future exploitation and descend down a
rapid learning curve. By 1980, however,
the traumatic events in the general economy
that I had been describing could no longer be overcome,
even by all the advantages we had that I have cited above. The prime interest rate in
the winter of 1979 and 1980 rose to 21%. At that point, our share
and our venture’s cash flow was going solely to the banks. The time horizon of management
was very short indeed. It was the next quarterly
payment of interest. We were forced to
sell out to ARCO. And after the recession
of 1981 and ’82, I sold the rest of my company. And I became an
academic economists so that I could find out why all
this had been happening to us at the height of our success. Now I’ll sketch in
the present era, which I think you all know just as
well as I do, if not better, ’81 onward. The Vietnomics period that I
described earlier was succeeded by what might best be called
Carteromics, Reaganomics, because it started with Volcker
in ’79 and has continued to this day– inflation followed by deflation. A sharp recession
occurred in ’81, ’82, followed by about six
years of uninterrupted growth, some revival of
gains in productivity, which had about 3 and
1/2% in manufacturing, some marginal tax rate cuts,
and growing budget deficits. But the still high
real interest rates combined with the need to
finance the budget deficits, created by a strong
international demand for dollars. And the dollar
appreciated to where many exports became
uncompetitive and imports cheap. The current account deficit grew
to the present minus 3 and 1/2% of GNP, reflecting the
inflow of $160 billion for investment in the
United States in 1987. American savings and
investment declined relative to the Japanese. Investment faltered
because industry was suffering from the
overcapacity of the ’70s. Rapid technological change
and the trade imbalance induced heavy competition
for American companies, not only in international
markets, but also domestically. The huge debt created
by the government and the private
sector moved first into the financial
markets, rather than into the real world
of goods and services. This and the tax
code, which permits deductibility of
interest on debt but not dividends on equities,
are among the primary factors that lay behind the junk
bonds, corporate takeovers, leveraged buyouts, and
other creative financial manipulations. The high interest rates
and cost of capital contributed to
short-term horizons. While it’s true that some mad
managements were driven out by this process, the
general atmosphere of fear in many companies
also reduced propensity for risk taking. As the dollar weakened,
by the middle ’80s, exports to the United States
improved but also encouraged foreign companies to buy
assets in this country. Beginning in some cases
as early as ’76 to ’77, chemical companies did respond
to their external pressures. Successful survivors
needed a rapid improvement in their processes. High yields were essential
for expensive raw materials. And high energy costs
necessitated efficient heat conservation. The chemical engineers’ talents
were indispensable in this year as well. The new ARCO
propylene oxide plant in France, for example,
using our technology operates without any
external heat energy source at all under normal
operating conditions. Because many lacked these
advantages, by late 1982, several major chemical
company stocks sold at the same absolute
stock level as 1959. Investors saw these companies as
mature commodity manufacturers threatened by new sources of
low-cost production in Canada, the Middle East, and so on. This underestimated the degree
of change or renewed innovation already taken place and
the future potential. Even in the year of 1982,
although many major areas were unprofitable, the specialty
businesses of some companies contributed a large
share of the profits, although accounting for only a
small fraction of their sales and assets. The productivity declines. And here I refer to
multi-factor productivity shown in the next slide
for the chemicals. The productivity index
is shown in yellow, and the operating rate
again is shown in orange– suggests the extent of
restructuring going on. And therefore, it
very clearly points to a decline in
capital productivity during this period,
capacity utilization being obviously very critical. When a better demand
environment appeared– you can turn this light off– in 1983, the net result of
such constructive changes was a rapid buildup of cash. From 1986 on, the
industry is benefiting from lower oil prices, a
weaker dollar, and growth in the world economies. Its restructuring has
resulted in emphasizing its lack of labor intensivity. Its total employment of
slightly over 1 million has hardly changed in over 10
years, during which total sales nearly doubled, so that in
real terms, labor productivity, after being essentially
flat from 1973 to ’81, has been improving rapidly by
almost 50% since that time. This cash flow has been used
to buy back stock and raise stock prices. We expanded into new areas,
promising future growth and increased related
R&D expenditures, capital investment and
modernization rationalization of major commodity
of manufacture, and finally, some new
capacity in certain sectors such as plastics. People still remember being
burned by overcapacity, as you can imagine. And an export-led drive
for a new capacity is a tenuous thing these days. The chemical industry
today combines a large commodity-based
capital intensive substructure with a proprietary
research-based overlay. These businesses require
different skills, but this combination defines
the competitive companies of the future. In many ways, we are now in a
golden age of American chemical manufacture. Few industries are so
thoroughly pervaded by strategic and tactical issues
involving product, geographic, and customer diversification,
forward and backward integration,
technology advances, economic and
non-economic competitors, international financial
structure, environment and safety questions,
capital, marketing, and research intensity. It supports probably the world’s
largest privately financed research and development budget. And it also is the strongest
individual industry in Europe. And the Europeans have a trade
balance of $27 billion surplus in chemicals alone. The next slide shows
the expenditures for R&D as a percent of sales for the
research-intensive industries. Of course, this isn’t
terribly meaningful, since in some cases like
instruments or aerospace, it’s a very large component
of their sales dollar. Our industry is, nevertheless,
quite a high performer in this area. And the next slide shows the
current R&D expenditure table with an indication of where
the funding is coming from. And as you can see, the funding
of the chemical industry is essentially 97%
privately funded, as contrasted with aerospace,
which is 80% government funded. This is not the place to discuss
the very different histories and characteristics of these
two very successful companies and industries. But you can see
that already there are some very profound
differences in explaining them. Certainly R&D alone is
not enough to account for positive trade balances. Industries that are
successful in trade have a number of the favorable
factors I’ve been describing. The rapidly changing
quality indices product is not reflected in these
productivity figures. Certainly, many fibers,
plastics, consumer products, and so on, are much better
or more diversified. Thus, I have to look
at profitability in the international
competitive position as indicators of the
health of the industry. At present, our industry
is operating close to 100% of realistic capacity. Nevertheless, the rapid
pace of global technology will necessitate replacement
of obsolete facilities. And yet in spite of its
technical accomplishments, which are immense, the industry
over the past 30 years has not been able– as you’ve seen– to establish sustained
high profitability. Foreign large
buyers may yet raise their ownership of
America’s industry to a much higher level. In the past three years,
approximately one third of foreign investment in
manufacturing in the United States has come into
the chemical industry. And it probably is about
25% foreign-owned today. It may well be that
there should be some mergers in this
industry to fend off such takeovers by foreigners. Some of our chemical
companies are too small to stay in the race. One should take as
a cautionary note that the American dyestuff
service industry is not 100% foreign-owned. Now let me dwell very briefly
in my concluding remarks about the future. Nearly everyone thinks that
domestic and world recession will come sooner or later. Our deficits may diminish. Oil prices are uncertain,
but domestic oil production is clearly shrinking. There is talk of
yet more tax bills. A new administration may take
office with few commitments. And no one knows
exactly how to increase the savings and investment
rate of American society. And companies need to catch
up with the many more modern installations abroad. When hurdle rates for new
investments are 15% to 20% in the United States
and perhaps 5% to 8% in Japan, where
capital costs only 1%, it can be seen how big our
capital problem really is. And this is especially true
in financing, research, and development, which is
at all equity financing. The chemical
industry has suffered in profitability for
misallocation of capital to over large commodity type
plants for quite a while. Given a reasonable
macroeconomic climate, the American chemical
industry will survive and grow and will certainly
participate in the newer fields of materials,
electronics manufacture, biotechnology, complete systems,
including fabricated equipment and instruments, and
so on, as well as in extending and deepening
its own traditional products. Take the last slide off, please. It may well become the world’s
leading industry in the 1990s. And what of chemical
engineering? There are some disturbing signs. College enrollments are down. Many more fields attract the
best students as well as ours, spreading them more thinly. Chemical and oil company
expansions are fewer. Companies feel they need
talents different from those of the typical
undergraduate-trained chemical engineer. And you heard about that
from Jimmy Wei earlier. The public sees
chemicals as dangerous. There is an increasing lack of
strong industrial orientation in many chemical
engineering departments. A trend that began
in the late ’50s is government funding
of university research became dominant, and
engineering science moved the discipline closer to
a more academic orientation. Perhaps a partial return
to a greater proportion of industrial funding
would be a better balance. And here, I think
we have it at MIT. The National Research
Council’s Frontiers in Chemical Engineering
report, which Jimmy describes, has discussed
many aspects of this question, including a forecast that even
closer integration of process design, product
development, and market needs in the newer areas,
will represent the product opportunities of the future. And let there be no mistake– the new specialty of
differentiated chemicals require continuously operating
plans in many, many instances. And they need to be
designed properly. Chemical engineers
should therefore stress their scale-up
ability but in relation to both flexibility and
economic considerations. If we cannot convey this ability
to serve as leaders of a team having this focus, we risk
the loss of identification and the employment contest
to chemists, biochemists, material scientists, et cetera. It was process
design, tightly linked the market demands in
research and development that fueled the rise
of chemical engineering and the industries with
which it has been associated. This model should serve not
only as our paradigm, but also as one for other engineering
disciplines, which as I said earlier, have
not had this tradition. And I’ve seen the Japanese
adopt such a model for the manufacture of many
complex machines and objects. Chemical engineering
at MIT today is even now serving as
a source of inspiration to other disciplines. Recently in connection with
his bold new leadership for manufacturing
initiatives– led, of course, by Dean Lester Thurow, who
will speak in a few moments– MIT is adopting the
model of our Practice School and some
essential features by proposing to establish
other such centers in a variety of
manufacturing plants, so that students and faculty can
study the process as a whole. At the same time, we must be
aware of the macro environment which shapes us. We are entering a new world
of intense international competition, global markets,
rapid diffusion of technology, and in many respects, obsolete
national domestic policies, which are increasingly
disciplined by the world financial markets. We don’t want to build
facilities and conduct research for unprofitable plants
because of infatuation with the technology, while
overlooking the large role that financial
considerations will play in the next decade in
an era of high-cost capital. I have written some articles
and books on this subject, but that’s not a
proper theme for today. I end, as I think most other
speakers have, in a salute to my greatest teacher,
my greatest inspiration, the man who probably
had more to do with the industry
and the profession I’ve been describing than
any other single individual, the real father of our
profession, Warren K. Lewis. But I would be
remiss if I didn’t say that I think the present
day chemical engineering department at MIT is once
again in the same magnificent leadership position
that it was in the days when I was there in
the ’40s and ’50s. A great deal of
the success of this is due to the inspirational
leadership of Jimmy Wei and the tremendous stars of the
faculty that he has assembled. And I feel very comfortable
about the future of chemical engineering
at MIT as a consequence. And I’m extremely grateful to
it for having made it possible for me to do all these things
that I’ve been describing. Thank you very much, indeed.

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