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2009 ECONOMIC SURVEY OF AMERICAN CHEMISTRY COUNCIL MEMBERS

CONTENTS Response and Description of Respondent Companies…………………………..

3

Research and Development (R&D)…………..…………………………………...

4

Plant and Equipment (P&E) Investment………………………………….………...

5

Environmental Protection, Health and Safety…………………..…………..……..

6

E-Commerce ………….…………………………………………….………….......

9

Security Spending……………………………………………………..……………..

10

Information Technology Spending…………………………………………………..

11

Innovation…………..………………………………………………………………..

12

INTRODUCTION Every year, the American Chemistry Council (ACC) conducts a survey of its member companies to ascertain their views of their economic performance. The survey solicits information related to their activities in areas including sales, research and development, capital investment, environmental protection, health, and safety, ecommerce, IT spending, and security spending. This report, prepared by ACC’s Economics & Statistics Department, is based on the aggregated results of the survey. ACC member companies based responses to items in the questionnaire solely on their company’s business of chemistry operations in the United States. To aid in benchmarking, the response data are segmented into two main types of production: basic chemicals and specialty chemicals. Both of these segments have distinct characteristics, growth dynamics, markets, new developments, and issues. Response data are also segmented by company size (as determined by 2008 world sales in the business of chemistry). For most survey items, the weighted average, the minimum, lower quartile (or 25th percentile), median (or 50th percentile), upper quartile (or 75th percentile), and the maximum values are presented. These summary statistics are sufficient for describing the central tendency and the spread of the response data distribution. The median, especially, because it is outlier resistant, provides a very good indication of central tendency. The weighted average is calculated using 2008 company global sales data (an estimate is used when the exact data are not provided) as a weight for individual company responses. Every effort has been made in the preparation of this publication to provide the best available information. However, neither the American Chemistry Council, nor any of its employees, agents or other assigns, makes any warranty, expressed or implied, or assumes any liability or responsibility for any use, or the results of such use, of any information or data disclosed in this material. This publication was prepared by ACC’s Economics and Statistics Department. Emily Sanchez Manager, Statistics and Surveys (703) 741-5934 [email protected]

July 2009

1

RESULTS SUMMARY • In 2008, companies spent about 3.4% of their total sales on research and development (R&D). The majority of R&D spending is allocated towards development. • In 2008, companies allocated about 6.9% of their total sales towards plant and equipment (P&E) investment. • Pollution control capital expenditures were equivalent to about 0.7% of total sales and operating costs were equivalent to 1.4% of total sales in 2008. Costs from hazardous waste cleanup and site remediation were equivalent to about 0.4% of total sales in 2008. • Health and safety costs have remained unchanged since the previous year, representing about 0.4% of total sales in 2008. • The trend in sales via e-commerce channels appears to be flattening though in general, companies report higher levels than in previous surveys. Sales via ecommerce channels are expected to represent the equivalent of 18.1% of sales in 2009. • Spending in information technology was about 1.6% of total sales in 2008. • In 2008, spending for security was equivalent to 0.25% of total sales. • A measure of innovation, the portion of company sales from products or services that have been developed within the past 5 years was 15.0% in 2008.

2

RESPONSE AND DESCRIPTION OF RESPONDENT COMPANIES The economic survey questionnaire was distributed to all ACC member companies during February 2009. Out of 123 companies with operations in the U.S., 27 companies returned responses – yielding a response rate of 22%. The combined 2008 total sales of the responding companies were about $168 billion. Segmenting the response data by company size (as determined by ranges of 2008 total or world sales) increases the usefulness (and particularly so for benchmarking purposes) of the aggregated results. Respondents indicated their company’s 2008 world or total sales (solely for their chemical business). Using this information, company responses were sorted into three categories: “small” (sales less than $500 million), “medium” (sales between $500 million and $3 billion), and “large” (sales of $5 billion or more). Note that no respondents reported having total sales within the range of $3 billion to $1 billion. The combined total (world) sales for the small companies were about $1.8 billion. The combined sales for the medium companies were about $11.2 billion and for the large companies, total sales were about $155.0 billion in 2007. The breakdown of the categories follows. Small Companies - (2008 Total Sales less than $500 Million) Medium Companies - (2008 Total Sales between $500 Million to $3 Billion) Large Companies - (2008 Total Sales of $5 Billion or more)

Count 9 8 10 27

Percent 33% 30% 37% 100%

Sales Categories based on 2008 World Sales Small: <$500M 44%

Large: >$5B 37%

Medium: $500M$3B 30% Segmenting the company data by primary business focus is also useful. Based on the portion of their company’s 2008 sales, more responding companies, about 56%, indicate that their primary business focus is in specialty chemicals. About 44% of companies indicate that their primary business focus is in basic chemicals. The combined world sales for the basic chemical companies are about $105 billion. The combined world sales for the specialty chemical companies are about $63 billion.

Count 12 15 27

Basic Chemicals Specialty Chemicals

Percent 44% 56% 100%

Primary business focus based on 2008 sales

Specialty Chemicals 56%

Basic Chemicals 44%

3

RESEARCH AND DEVELOPMENT

2008 R&D SPENDING AS A PERCENT OF 2008 SALES 0%

1%

2%

3%

4%

5%

Leading companies in the business of chemistry have consistently been some of the largest US private-sector investors in research and development (R&D) as new products and processes are the driving forces of the continued international competitiveness of the business of chemistry. In 2008, companies spent the equivalent of about 3.4% of their total sales towards R&D (up from 2.5% in 2007).

6%

Aggregate Basic Specialty

R&D budgets vary somewhat depending on company size as determined by total sales in 2008. The survey data indicate that in 2008, the small and large companies spent more towards R&D while the mid-sized companies tended to spend less (measured as a percent of their sales). As found in past surveys, the typical specialty chemical company tends to allocate more of its budget towards R&D (compared to basic chemical companies).

Small Medium Large 2008 R&D Spending as a % of Sales Weighted Averages

Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate

Basic

Specialty

Small

Medium

Large

3.4%

2.7%

4.6%

4.3%

2.0%

3.5%

0.0% 1.2% 2.4% 3.3% 10.0%

0.0% 0.2% 1.4% 3.2% 10.0%

1.0% 1.8% 2.5% 3.3% 9.0%

0.0% 2.0% 2.8% 4.0% 10.0%

0.1% 0.9% 1.8% 2.7% 6.3%

0.2% 1.4% 2.7% 3.0% 7.0%

DISTRIBUTION OF 2008 R&D SPENDING There are two broad categories of research: basic and applied. Basic (or fundamental) research can be defined as any planned search for unknown facts and principles of general validity, without regard to commercial objectives. Applied research can be defined as any investigation planned with the intent of using known phenomena or substances to accomplish a particular objective. In general, today’s basic research is the foundation for tomorrow’s applied research. Chemical companies generally allocate the smallest share of resources toward basic research. The distribution for the aggregate (shown below) is typical. In 2008, survey respondents allocated their R&D spending as follows in the chart. % Basic Aggregate

Specialty

12.3

Small

12.6

Medium 8.9

54.8

32.9

47.5

39.9

47.3

33.1

19.6

Large

51.1

40.8

8.1

% Development 52.5

37.9

9.6

Basic

% Applied

52.9

38.2

0%

50%

4

100%

PLANT AND EQUIPMENT INVESTMENT

2008 P&E SPENDING AS A PERCENT OF 2008 SALES 0%

2%

4%

6%

8%

10%

Companies involved in the business of chemistry in the U.S. have consistently been some of the largest private sector investors in new P&E as new products and processes, often the fruits of R&D, are introduced. Over the years, respondent companies have maintained P&E spending and indicate that P&E investment was equivalent to about 6.9% of total sales in 2008 (up from 6.0% in 2007). In terms of size, the small companies allocated the largest portion of their budget for P&E spending (11.0%) while mid-sized companies allocated the smallest amount (4.9%). As found through previous surveys, the specialty companies allocate more towards P&E spending when compared to the basic chemical companies.

12%

Aggregate Basic Specialty Small Medium Large 2008 P&E Spending as a % of Sales Weighted Averages

Aggregate

Basic

Specialty

Small

Medium

Large

6.9%

5.8%

8.9%

11.0%

4.9%

7.0%

1.0% 3.2% 6.0% 8.0% 50.0%

1.0% 4.0% 5.5% 6.3% 50.0%

2.0% 2.4% 7.0% 9.0% 16.0%

1.0% 2.0% 4.0% 10.0% 50.0%

2.3% 3.6% 4.7% 7.0% 8.0%

1.5% 6.0% 6.0% 9.5% 15.0%

Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

MOTIVATION FOR BUSINESS OF CHEMISTRY CAPITAL SPENDING The data presented in the following table are weighted averages. Note that due to rounding, percentages may not sum exactly to 100%. P&E investment towards expansion of production capacity is broken out into two parts: for existing product range and for new products or for an increase in product range. In 2008 (as in previous years), regardless of company size or primary business focus, the largest proportion of P&E or capital spending is allocated towards expansion of production capacity and replacement of worn out plant/equipment. Furthermore, the majority of the expansion of production capacity continues to be for the existing product range. Increased spending for expanding production capacity for existing products is a driver, particularly for the specialty chemical companies. Aggregate EXPANSION OF PRODUCTION CAPACITY (IS EQUAL TO THE SUM OF 1 AND 2 BELOW) 1)

FOR EXISTING PRODUCT RANGE

2)

FOR NEW PRODUCTS/ INCREASE IN PRODUCT RANGE

REPLACEMENT OF WORN OUT PLANT/ EQUIPMENT INVESTMENT SPECIFICALLY DESIGNED TO IMPROVE OPERATING EFFICIENCY ENERGY SAVING HEALTH, SAFETY ENVIRONMENTAL PROTECTION / POLLUTION ABATEMENT OTHER*

Basic

Specialty

Small

Medium

Large

39.8%

36.9%

44.7%

48.5%

37.7%

39.8%

28.4% 11.4% 24.7%

23.5% 13.4% 22.9%

41.3% 3.4% 27.8%

23.0% 25.5% 16.8%

32.1% 5.6% 29.3%

28.3% 11.6% 24.5%

11.1%

11.7%

10.0%

18.0%

11.1%

11.0%

5.0% 5.0% 7.2% 7.2%

3.0% 6.7% 7.4% 11.4%

8.5% 2.0% 6.9% 0.0%

4.0% 6.3% 3.6% 2.6%

4.9% 7.5% 9.1% 0.4%

5.0% 4.8% 7.1% 7.7%

TOTAL 100% 100% 100% 100% 100% 100% * “Other” details typically include spending related to IT, R&D, security, general plant/office/lab/equipment improvements, increasing or replacing (business) support services, real estate (land and offices), headquarter consolidations, quality improvement, administrative needs, inspections, shutdowns, and other miscellaneous projects.

5

ENVIRONMENTAL PROTECTION, HEALTH, AND SAFETY

POLLUTION CONTROL CAPITAL EXPENDITURES* AS A PERCENT OF 2008 SALES Companies involved in the business of chemistry continue to pursue extensive programs to reduce emissions of the many types of materials that contribute to pollution in the air, land, and water. Since 1988, industry emissions have fallen sharply while industry output volume has continued to increase. Environmental improvements such as this usually necessitate large capital expenditures. Respondents indicate that pollution control capital expenditures are equivalent to 0.7% of their total company sales. In 2008, basic chemical companies had relatively lower pollution control capital expenditures (compared to specialty chemical companies).

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% Aggregate Basic Specialty Small Medium Large Weighted Averages

Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate

Basic

Specialties

Small

Medium

Large

0.7%

0.7%

0.8%

0.1%

1.0%

0.7%

0.0% 0.1% 0.3% 0.5% 5.0%

0.0% 0.1% 0.2% 0.5% 1.0%

0.0% 0.2% 0.3% 1.0% 5.0%

0.0% 0.1% 0.1% 0.3% 0.3%

0.0% 0.1% 0.7% 1.7% 5.0%

0.1% 0.2% 0.3% 0.5% 1.0%

*Environmental protection/ pollution abatement capital spending is the cost of additions or modifications/ performed on existing facilities for environmental reasons plus the estimated additions to the cost of new plant and equipment which result from environmental protection; i.e., your actual spending less what you would have spent without the environmental protection/pollution abatement, structures, features and equipment.

POLLUTION CONTROL OPERATING COSTS** AS A PERCENT OF 2008 SALES 0.0%

0.5%

1.0%

1.5%

Aggregate Basic Specialty Small Medium Large 2008 Pollution Control Operating Costs

Operating costs (labor, material and supplies, services, etc.) for environmental protection (pollution abatement and control) at manufacturing facilities were slightly higher than they were in 2007. Survey respondents indicate that in 2008, the equivalent of about 1.4% of their total sales were allocated towards these operating costs. Overall, costs ranged from 0% to as much as 8% of sales. The smaller companies tend to have much relatively lower pollution control operating costs.

as a % of Sales Weighted Averages Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate

Basic

Specialties

Small

Medium

Large

1.4%

1.4%

1.4%

0.3%

1.4%

1.4%

0.0% 0.3% 0.4% 1.0% 8.0%

0.2% 0.3% 0.4% 0.9% 2.9%

0.0% 0.2% 0.5% 1.1% 8.0%

0.1% 0.2% 0.3% 0.4% 0.5%

0.0% 0.4% 1.0% 1.3% 8.0%

0.2% 0.4% 0.5% 1.7% 2.9%

** Operating costs include: depreciation, labor, materials and supplies, utilities, engineering, R&D, other services, etc. for air, water, and solid waste pollution abatement but for this purpose do not include costs for hazardous waste site cleanup and remediation.

6

ENVIRONMENTAL PROTECTION, HEALTH, AND SAFETY

RECOVERY OF POLLUTION ABATEMENT AND CONTROL OPERATING COSTS % Recovered Aggregate 11.1

88.9

Basic 8.5

91.5

Specialties

19.0

81.0

Small

19.4

80.6

15.7

Medium

Respondents report that 11.1% of their total U.S. pollution abatement and control operating costs are recovered as a result of increased efficiency (e.g., recouped through waste reduction, lower energy costs, and/or other kinds of savings) related to pollution abatement and control measures. This figure is down from 23.1% in 2007. Smaller and mid-sized companies tend to recover a smaller proportion of their costs. Specialty chemical companies tend to recover more of their costs compared to the basic chemical companies (19.0% recovered versus 8.5% recovered). The weighted averages for all of the categories are displayed in the chart at left.

% Not Recovered

84.3

Large 10.5

89.5

0%

50%

100%

HEALTH AND SAFETY COSTS 0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

Aggregate

Respondents indicate that their companies spent the equivalent of about 0.4% (unchanged from 2007) of their total sales towards meeting OSHA and other health and safety regulations. Their costs include training, services, other operating costs, etc. Health and safety costs are about the same for the basic and specialty chemical companies.

Basic Specialty Small Medium Large

2008 Health and Safety Costs as a % of Sales Weighted Averages

Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate

Basic

Specialties

Small

Medium

Large

0.4%

0.4%

0.4%

0.8%

0.7%

0.4%

0.1% 0.3% 0.5% 0.7% 5.0%

0.1% 0.2% 0.5% 0.5% 5.0%

0.1% 0.4% 0.5% 0.8% 2.0%

0.1% 0.1% 0.5% 0.7% 5.0%

0.2% 0.5% 0.7% 1.1% 2.0%

0.1% 0.2% 0.4% 0.5% 0.6%

7

ENVIRONMENTAL PROTECTION, HEALTH, AND SAFETY

HAZARDOUS WASTE SITE CLEANUP AND SITE REMEDIATION COSTS 0.0%

0.5%

1.0%

Aggregate

In addition to the costs related to reducing pollution, many companies also have hazardous waste cleanup and site remediation costs (these are not included in pollution abatement and control costs). These include expenditures for cleanups under both the Superfund and Resource Conservation and Recovery Act (RCRA) programs as well as voluntary cleanups. Respondents estimate that in 2008, their costs were equal to about 0.4% of their totals sales (just below the 2007 figure, 0.5%). Further details are displayed in the following table.

Basic Specialty Small Medium Large 2008 Hazardous Waste Site Cleanup and Site Remediation Costs as a % of Sales - Weighted Averages

Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate

Basic

Specialties

Small

Medium

Large

0.4%

0.4%

0.4%

0.4%

0.4%

0.4%

0.0% 0.0% 0.1% 0.5% 2.0%

0.0% 0.0% 0.1% 0.4% 1.0%

0.0% 0.1% 0.1% 0.6% 2.0%

0.0% 0.0% 0.1% 0.3% 1.5%

0.0% 0.2% 0.3% 0.7% 2.0%

0.0% 0.0% 0.1% 0.5% 0.7%

8

E-COMMERCE

E-COMMERCE Respondents expect that their sales through e-commerce channels will rise this year. The weighted average for the aggregated responses indicates that actual sales placed via e-commerce were 17.4% in 2007 and 17.2% in 2008. Respondents expect to reach 18.1% of total sales through e-commerce by the end of 2009. E-commerce includes Electronic Data Interchange (EDI) and other integrated direct systems, company Internet sites, and thirdparty market places.)

% of Total Sales placed via E-Commerce Weighted Averages 25% 2007

2008

2009

20%

15%

10%

5%

0% Aggregate

Basic

2007 Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate 2008 2009

Small

Medium

2007

Basic 2008

2009

2007

Large

Specialties 2008 2009

17.4%

17.2%

18.1%

22.3%

21.9%

22.5%

8.3%

8.7%

9.9%

0.0% 0.0% 5.0% 11.5% 60.0%

0.0% 0.0% 4.9% 11.8% 62.0%

0.0% 0.0% 4.9% 11.8% 67.0%

0.0% 0.0% 3.9% 14.3% 60.0%

0.0% 0.0% 3.7% 14.0% 62.0%

0.0% 0.0% 3.7% 14.0% 67.0%

0.0% 0.7% 5.1% 9.5% 50.0%

0.0% 0.9% 5.4% 10.5% 53.0%

0.0% 1.0% 5.9% 10.8% 54.0%

Small 2008

2009

2007

2007

Large 2008

2009

9.3%

9.9%

10.2%

5.4%

5.9%

5.4%

18.4%

18.2%

19.1%

0.0% 0.0% 0.0% 5.0% 50.0%

0.0% 0.0% 0.0% 6.0% 53.0%

0.0% 0.0% 0.0% 7.0% 54.0%

0.0% 0.0% 1.4% 5.8% 25.8%

0.0% 0.0% 1.9% 6.4% 26.9%

0.0% 0.0% 2.0% 5.7% 24.0%

2.7% 8.0% 12.0% 21.0% 60.0%

2.4% 8.0% 12.0% 20.0% 62.0%

2.4% 9.7% 12.0% 20.0% 67.0%

2007 Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Specialty

9

Medium 2008 2009

SECURITY SPENDING

SECURITY SPENDING

0.00%

0.25%

0.50%

0.75%

1.00%

Aggregate Basic Specialty Small Medium Large 2008 Security Spending as a % of Sales Weighted Averages

Responsible Care® is the chemical industry’s health, safety, security, and environmental performance improvement initiative. Through the Responsible Care® Security Code, chemical companies are making serious commitments to enhance security including security against a potential terrorist attack at plant sites, with customers and suppliers throughout the supply chain and through cyber systems. Implementation of this Security Code is mandatory for all members of the American Chemistry Council. Companies continue to attribute about 0.3% of total sales towards security spending. After September 11, 2001, security became a very important issue to the public. However, long before that day, the chemical industry was working on facility security guidelines and now may not be dealing with large implementation costs. Chemical companies report spending about 0.25% of sales towards security every year. Spending levels are higher for basic chemical companies. They are also higher for smaller chemical companies. The detailed breakdown on spending is given in the following table. Compared to larger companies, the smaller companies tend to allocate a larger proportion of their budget towards security. 2008 SECURITY Spending* as a % of 2008 Sales: Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate

Basic

Specialties

Small

Medium

Large

0.25%

0.27%

0.20%

0.59%

0.38%

0.24%

0.01% 0.10% 0.20% 0.30% 5.00%

0.02% 0.09% 0.25% 0.33% 5.00%

0.01% 0.10% 0.15% 0.20% 2.00%

0.05% 0.10% 0.20% 0.40% 5.00%

0.03% 0.09% 0.15% 0.43% 2.00%

0.01% 0.10% 0.10% 0.30% 0.75%

* Security Spending includes: cash-based spending for vulnerability assessments, development of security plans and procedures, and investment in physical improvements and cyber security improvements (including process control equipment) for facility, corporate sites and value chain, including spending to meet customer security requirements.

10

IT SPENDING

IT SPENDING 0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Aggregate Basic Specialty Small Medium Large 2008 IT Spending as a % of Sales Weighted Averages

For the purposes of the survey, IT spending was defined to include all cash-based spending for hardware, software, consultants, other purchased services, payroll and other related functions excluding overhead. Respondents calculated IT spending as a percent of their company’s total sales in 2008. In aggregate, IT spending was about 1.6% of total sales in 2008 (up slightly from 1.5% in 2007). Responses ranged from 0.1% to 3.0% in 2008.

Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate

Basic

Specialties

Small

Medium

Large

1.6%

1.1%

2.3%

0.7%

1.3%

1.6%

0.1% 0.4% 1.0% 1.8% 3.0%

0.1% 0.2% 0.8% 1.1% 3.0%

0.4% 0.7% 1.1% 2.4% 3.0%

0.1% 0.4% 0.4% 1.0% 1.5%

0.2% 0.7% 1.3% 2.3% 2.5%

0.2% 1.0% 1.2% 2.6% 3.0%

11

INNOVATION

INNOVATION 0%

5%

10%

15%

20%

25%

Aggregate Basic Specialty Small Medium Large % of 2008 Sales from products/services developed during the previous 5 years Weighted Averages

Innovation – putting ideas into action through knowledge to create new products and services to meet the needs of current and future customers – is a long-term driver of future financial performance and value creation. It provides business opportunities as well as the sustainable foundation for continued growth. Innovation can lead to shifts in relative cost relationships, as well as provide sustained competitive advantages. Indeed, it is at the heart of the business of chemistry and is crucial to economic growth and improvement in the quality of life. In 2008, for the typical company involved in the business of chemistry, 15.0% of their company’s sales were from products or services that have been developed within the past 5 years. For some companies, this portion could be as high as 35% of total sales. There is a notable difference between basic and specialty chemical companies when it comes to sales from new products or services. The amount is 10.2% for basics and 23.0% for specialties. As in the past, specialties tend to spend a relatively higher amount towards developing new products/services.

Weighted Average Minimum 25th Percentile Median 75th Percentile Maximum

Aggregate

Basic

Specialties

Small

Medium

Large

15.0%

10.2%

23.0%

14.1%

8.7%

15.4%

0.0% 3.0% 10.0% 20.0% 35.0%

0.0% 1.7% 9.0% 10.8% 25.0%

0.0% 5.5% 15.0% 24.1% 35.0%

0.0% 11.5% 16.0% 20.0% 28.2%

0.0% 2.3% 7.5% 15.0% 28.6%

1.5% 3.1% 10.0% 21.5% 35.0%

12