Young & Partners 33rd Annual Senior Chemical Executive Conference

Fitterling:
Certainly, this has been a difficult and uncertain year for the entire industry and we have done a good job of adjusting very dynamically as the economy has gyrated through the quarters of this year. I think the industry is becoming leaner and more focused. The pandemic has forced a really fast retrenchment. We hit some really low operating rates and that fleshed out a number of competitive positions. A number of capital projects have been canceled or delayed. At Dow, our growth capital is going to be spent further downstream and on more discrete projects. I think the industry is going to be more committed to digitalization and Environmental, Social, and Corporate Governance (“ESG”). At Dow, we created digital platforms to make it easier for customers to get access to us and our products. We have been moving more materials through ecommerce channels. We did 150+ innovation webinars with customers some of which included placing digital cameras inside pilot plants so customers could see the new products that we were manufacturing for them. Our ecommerce platform is one of the largest in any industry and we are trying to apply that digital interface to more of our businesses. We’ve created virtual 3D trade show booths which are immersive experiences for our customers. Customer demands for innovations that are sustainable are higher now than they have ever been. There is a clear demand for products that help customers reduce their carbon footprint. At Dow, we’ve reduced our annual carbon emissions by 15% over the past decade. We are looking at new process technologies that will help us to achieve our future emission reduction goals. We joined a number of coalitions aimed at reducing plastic waste. Customers are shifting their purchases towards recycled materials. This is driving innovation and investment in recycling infrastructure. Embracing these trends will extend the growth of the chemicals industry for decades to come. As a country, we really underinvested in our youth. The demand for Science, Technology, Engineering and Math graduates is increasing exponentially. If we really want to bring manufacturing back to the USA and be more selfsufficient as a nation, we will need the human resources to do so.

Gupta:
This pandemic was a Black Swan event. The number one priority across all the industries that I am exposed to as a board member is employee safety. The second highest priority is ensuring liquidity and the third was achieving breakeven profitability through cost reduction. In the second quarter, automotive production was down 60-70% and the aerospace industry was at a standstill. Meanwhile, the technology and healthcare industries experienced tailwinds. Chemicals serve all of those industries and the impact on company portfolios has been uneven as a result. Communication between stakeholders to respond to these uneven impacts necessarily has increased significantly. Prompted by the social unrest this year, business leaders were pressured to examine their commitment to all
components of ESG. For example, in direct response to climate change, the automotive industry has realized that the transition to electric vehicles is happening far more rapidly than previously thought. Additionally, executive compensation and talent retention is being increasingly scrutinized, particularly against the backdrop of the pandemic business environment. Governments around the world responded very well by stimulating their economies. In the post-pandemic world demand is going to change, supply chains will need to adjust, workplaces need to be re-designed and technology will have to leveraged more effectively

Young:
How did you prioritize where tofocus your time with regard to issues associated with the onset of the pandemic?

Fitterling:
Dow had a pandemic plan in place. I personally was living in Asia during SARS. We effectively executed that plan within a matter of days. The tougher part was
keeping up with customers and suppliers. There was a period of time when no orders were coming in. We were trying to get visibility on how long we could run at reduced operating rates. We had to put protocols in place around managing employee safety like contact tracing, etc. Our incidence rates have been much lower than in the general population. We learned a lot about what our organization was capable of. For example, our finance and accounting team was able to close the first quarter books on time without any major hiccups while working remotely.

Young:
How did the pandemic effect the various industries you are exposed to as a board member?

Gupta:
There were certain things that cut across every industry i.e. employee safety, work practices, communication etc. In healthcare, we were still growing 5-7%, expanding margins and generating cash. We had to explore how we might participate in the changes that were taking place i.e. testing, vaccines, supply chains, etc. In automotive, we had to supply our customers with millions of parts per day, from 350 facilities around the world, on time. As demand was down, we had concerns about our liquidity and raised $2 billion in debt and equity. Young: How are you managing the increased pace of change that is occuring?

Fitterling:
In a capital-intensive industry like chemicals, the ability to pivot and adapt is more difficult than in other industries. There are two big changes that I see on the horizon. There is a pull-back from a 30 year run of globalization and relaxed trade policies. We are seeing that all around the world. Climate change and regulatory policy is the other major change and it is not going to be cheap to make the required transitions. The electrical grid in the United States cannot handle the mass transfer to electric from fossil fuels fast enough. If the United States and EU sign the Paris agreement without China and India, it puts the West in danger of becoming uncompetitive without really solving the climate issue.

Young:
Whats the impact of the current political climate on the chemical industry?

Gupta:
In some ways, the outcome of the elections is good because there will be limited sweeping change. Certain policy changes, such withdrawal from the Paris accords, spearheaded are likely to be undone by the new administration. The industry has already been moving towards stricter regulatory compliance as it has been the
norm in Western Europe for some time.

Young:
Do you think the change in administration will temper the desire for national self-sufficiency?

Fitterling:
I think you will see vaccine production move to the United States. We are trying to reverse 30 years of globalization and that is not going to happen over night. The simplistic view that manufacturing moved to China so jobs moved to China does not account for the automation that has actually replaced many of those  industries. If you actually tour a Chinese factory, they have very advanced robotic technology involved in production. There are actually sustainability pressures to shorten supply chains as the carbon footprint associated with shipping dwarfs the footprint associated with manufacturing.