The cyclicality of industrial chemicals is forcing change at ICI. Significant acquisitions in the paints division and the wholesale hiring of new blood at senior levels shows the new chief executive is serious about the revolution he is proposing. But can he make it work?
The man in the black cardigan seems an unlikely revolutionary. But a corporate revolution is precisely what Charles Miller-Smith, the chief executive of Imperial Chemical Industries, launched in March 1996 when he addressed ICI's worldwide workforce in the company's first global television link-up. On the theme of The Way Forward, Miller-Smith told his audience ICI was embarking on 'a journey of transformation in a world that is becoming more competitive every day'.
He added later: 'We need to retain the best of the past while grafting on the best of the new. It is a sensitive, delicate thing to do, and it doesn't happen overnight. But I am absolutely clear that we need to change.'
The question his remarks may have prompted in the minds of many ICI staff was, why? When Miller-Smith, who was appointed chief executive in April 1995, took his stand in front of the television cameras, ICI had just reported pre-tax profits of £951 million, its best result since the boom year of 1989 when it just topped the £1 billion mark. And return on net assets (Rona), the key barometer of performance introduced by Sir Ronald Hampel, Miller-Smith's predecessor and now ICI chairman, had climbed to an average 18%, signalling respectable progress towards the group's target of 20% across the chemical cycle.
After the upheavals of ICI's 1993 demerger of Zeneca, its drugs arm, Miller-Smith himself diagnosed that the strong 1995 results had settled people down. 'There was a growing sense of comfort and confidence about the future.
You could feel that leeching into the bloodstream of the business.'
But that confidence has been shaken by subsequent events. Over the ensuing months, the company and its chief executive have received a rough ride from the markets, both chemical and financial. In ICI's industrial (bulk) chemicals business, still by far the largest segment of the group, a price slump triggered by destocking and oversupply reduced the business to bare break-even in the third quarter of the year. City analysts expect group full-year profits, to be announced next month, to emerge at about £630 million, a fall of one-third on 1995. Suddenly, that Rona target looks a long way off. 'It is now clear that ICI will not approach the 20% Rona again for several years,' says Peter Blair, chemicals analyst at Salomon Brothers.
Blair remains confident in the longer term outlook, however, estimating that a 20% Rona would value ICI at about £12 a share. But even he thinks it will take the group until 1998 to surpass the 1995 profit level.
Such reduced prospects caused a slump in the share price. In March, as Miller-Smith wrapped up his television marathon, the shares were touching a post-demerger peak around 950p. On the eve of the third-quarter results, amid prevailing City gloom about the outlook for ICI, they slipped to 775.5p. Only a slightly more upbeat-than-expected statement by Hampel and Miller-Smith pushed the price back above £8. Then it fell again to pre-results levels where it now hovers.
The old criticism about ICI's cyclical dependence on the bulk chemicals rollercoaster reared its head. The Independent remarked: 'It is arguable that the only statistic that really matters about ICI is the following: over the past year its shares have underperformed the market by 12%, by 11% over the past three years, 20% over five, 24% over seven, and a whopping 40% over the past decade. Frankly, it is a mug's game trying to cash in on the flickers of life punctuating this slow decline.' When Miller-Smith read that, and similar comments, he knew one thing for certain: his honeymoon period was over.
At one level, the ICI chief views such carping philosophically. The same old ICI? 'I've got to live through comments like that,' he says. In fact, the profits setback has reinforced, not weakened, Miller-Smith's conviction that ICI must undergo sweeping change, both in its culture and its business portfolio. The need for change is further underlined by managers and scientists who left ICI for Zeneca, and who now seem to present their former employer as something of a dinosaur - slow-moving and outmoded. 'The world is changing even faster than I would have predicted,' comments Miller-Smith. 'The rate of change is speeding up rather than slowing down. And it is an even tougher world than I thought.'
Few analysts stood back long enough to appreciate the fact, but the buffeting suffered by ICI actually strengthens, rather than undermines, Miller-Smith's case for fundamental reformation. Throughout its recent history, the company's stock-market rating has been dogged by two underlying concerns: that its preponderance of bulk chemicals operations tied it inextricably to the industry's cyclical peaks and troughs, and that its deeply-entrenched culture meant that it lacked the cutting-edge of the best of its American competitors.
Under Hampel's direction during and immediately after the demerger, ICI worked to reduce those twin concerns. It has shed thousands of jobs across the company, both through redundancy and through divestments of industrial chemicals operations. At demerger, ICI had 82,000 employees; today it has 64,000, a fall of more than one-fifth. In the traditional British bulk business of chemicals and plastics, numbers have fallen by 40% to 9,000.
Hampel also executed some deft and innovative deals that furthered ICI's aim of moving up the value chain into higher quality businesses in which it could be a world leader. One particularly neat move was the swap of its nylon activities with the acrylics business of DuPont, making ICI acrylics the global number one.
Miller-Smith intends to go even further and faster, despite his insistence that the kind of culture change on which ICI has embarked is a 20-year haul to fulfilment. He immediately established a programme to close what ICI called the value gap between itself and the best of its rivals, notably Dow and DuPont. Miller-Smith reckons that they make returns on capital which are 6%-7% higher than ICI's; his company is aiming for savings of £400 million by the end of 1997 to help close that gap.
The main difference from past efficiency drives is that this one is not being dominated by job cuts. 'We are moving beyond the phase of making productivity improvements by simple headcount reduction,' says Miller-Smith. 'You can't run businesses with zero people. McKinsey (the management consultants who have been instrumental in developing the value gap concept) say that the low-hanging fruits of simple productivity gains have gone. Job reduction is a line that is going to flatten out: efficiency and productivity have to come essentially from being smarter sellers and producers, better supply chain managers and innovators. We are in a world of searching out value.' After 1997, there will be more years of value gap savings, Miller-Smith says. Only this time, ICI will be measuring itself not against the chemical industry efficiency leaders, but the most productive companies in every industry. 'The value gap is infinite,' he adds.
Miller-Smith is closer to reaching a different target. He is confident that, by the end of this year, he will have recruited about a quarter of ICI's top 150 executives from outside the company. This new blood initiative continues to give rise to comment inside, as well as outside the company.
'New blood is welcome, but it must have some limits,' one incumbent ICI executive was heard to joke recently. Miller-Smith, who prefers to call the initiative 'widening the gene pool', sees it as a vital instrument in his change programme, and a cornerstone of the future ICI. It could almost equally well be called young blood. 'We've got to put a whole group of 40-year-olds in relatively senior positions so that six or seven years down the road, they will have had a set of international experiences that will make them the natural leaders of ICI going forward.'
One of the key new recruits from outside is Ashok Ganguly, an old hand and former colleague from Miller-Smith's days at Unilever (where he was finance director, competing with Niall FitzGerald in the battle to step into Sir Michael Perry's shoes). Ganguly, brought in to chair ICI India, one of the group's main vehicles for growth in the rapidly expanding Asian markets, was formerly Unilever's research and engineering director. The younger generation includes Rona (sic) Fairhead, 35, former head of corporate strategy at Short Brothers, the Belfast aerospace company, as planning and acquisitions general manager; and Ian McMahon, 44, formerly European head of Grand Metropolitan's Pillsbury foods subsidiary, as chief executive of ICI's European decorative paint business, including the renowned Dulux brand.
Of all ICI's businesses, paints, where ICI is world number one, has seen by far the most action during Miller-Smith's first 18 months. Indeed, its performance, its expansion and the internal changes it is undergoing have made it the spearhead of his reformation drive. Charles Lambert, head of equities at Merrill Lynch Europe and an ICI expert, says, 'They are moving towards making paints the banker to underpin the group'.
Peter Kirby, ICI's paints supremo, does not ostensibly meet the specification for a new ICI executive, being a company veteran with 24 years' service.
But as a South African who has spent a large part of his career running paints for ICI in Australia, he brings an outsider's perspective to the Slough-based business. Kirby is the man charged with realising Miller-Smith's aspiration that ICI become 'the Procter & Gamble of paints'. By this, Miller-Smith says he means that the business should combine P&G's marketing sense with its 'institutionalised aggression' in the ferociously competitive fast-moving consumer goods sector.
Kirby is setting about doing just that. One objective is to expand the scale of the business by raising annual sales from last year's £2 billion to around £6 billion within the next decade. Kirby should achieve that goal, since after three significant acquisitions this year - Grow Chemical and Fuller O'Brien in the US, and Bunge in Latin America - annualised sales are already up to £3 billion.
Bunge in particular, Kirby and Miller-Smith agree, was a dream deal.
ICI traditionalists had long neglected Latin America, because of their unhappy experiences there in the bulk chemicals business. As a result, despite its world leadership, ICI paints was a lightweight in the region.
Bunge, bought in March for £255 million, transformed the company's position overnight. Thanks to the acquisition, ICI now holds 24% of the market in Brazil, 36% of Argentina's and 60% in Uruguay. Moreover, says Kirby, 'the signs are very encouraging that we got it at a good price'. ICI believes some of its rivals now regret their reluctance to bid more in the auction for Bunge, which was put up for sale as a non-core part of a huge foods company.
Internally, the Bunge purchase was also something of a milestone. 'It was a good example of some really good teamwork between the centre at Millbank and paints in Slough,' says Kirby. 'They used to love to fight, but there has been a determined effort from both points to try and understand each other better.' But size is only a precondition of Kirby's supreme target; a return on net assets averaging 30% through the cycle. Kirby believes this is attainable, because paints is a working capital-intensive activity which is relatively light on fixed assets. 'Working capital is almost as high as the fixed capital, so provided you manage the fixed capital and get the working capital down, you can achieve pretty good Ronas.'
International expansion will be the precondition for enhancing performance in paints, he says. 'Profitability in the industry is closely correlated to national market strength.' But at the same time, 'globalisation imposes a cost on you. Unless you go out to harvest the benefits of globalisation, you are going to be a net loser relative to a good local or regional player.'
Kirby is therefore pushing to sharpen ICI's leading edge. More than 1,800 jobs - just under 10% of the enlarged workforce in paints - have gone in the past two years, many of them because of Kirby's determination to focus resources at the sharp end. 'We want a better relation between the front line infantry and the back line,' he says. 'I want more people at the front, preferably with some of the people at the back reallocated to the front, outsourced, moved or whatever.' He is refining operations in other ways, too. A new position of full-time international marketing director has been created. 'One of his first jobs will be to improve marketing in America, which is very good in operations and sales' but not so hot on marketing. ICI has a powerful competitor in Sherwin Williams, which has 93% of sales in the US and is twice the size of ICI in the American decorative paints market.
Miller-Smith waxes lyrical about paints, a tendency that could be viewed cynically in the light of the problems evident throughout the rest of the group. But the chief executive sees paints as an exemplar for the future ICI which, he says, will grow through a combination of acquisition and organic evolution. The paints division 'is a genuinely market-driven business where the skills are in branding, distribution, technology, and where we can bring technical innovation out of ICI's heritage into the marketplace. Put that together with exploiting growth in Asia and Latin America, and the fact that it generates an awful lot of cash, and you have a classic case of a business opportunity to change the perception of what we are.'
The traditional perception of ICI is so deep-rooted that it takes an effort of foresight to grasp the extent of the change Miller-Smith envisages.
ICI's continuing significance as an industrial icon was highlighted at November's CBI conference, when the group's new mission statement was denounced by John Kay, stakeholding's high priest, as reflecting a 'deformed style of capitalism'. Ironically for an aspiring business guru of the late 1990s, Kay's attack was fundamentally, if inadvertently, reactionary. The persistence of such nostalgia for the old ICI, a sentiment which still lingers in parts of the company, highlights the size of the task ahead of Miller-Smith. If he succeeds, Imperial Chemical Industries will effectively become International Chemical Industries. Within a decade, annual sales will be grown by 50% to £15 billion. Asia, which accounted for 14% of last year's £10.3 billion turnover, will represent one quarter of the business.
Together with the Americas, whose contribution will rise from 27% to 35% of sales, it will dominate the group. If all goes to plan, the UK share will halve to 11%.
The impact on ICI's historic base will be even greater than that figure suggests. Today, Britain still originates 37% of ICI's total production, largely because it exports so heavily into continental Europe. By 2005, that figure will decline sharply as Europe, including the UK, diminishes in importance for ICI. Yet, Miller-Smith maintains, the UK knowledge base will still play a disproportionately influential role as a source of innovation and technology.
The geographical axis-shift will be interwoven with Miller-Smith's planned transformation of ICI's business portfolio. ICI will move progressively into intermediate chemicals, such as acrylics, polyurethanes and polyester film - grouped under the materials banner - and light products, notably explosives and paints. 'These will be the businesses that you will see us developing in Asia,' Miller-Smith says. 'We have always said that the destiny of ICI is middles and lights. Our view with the heavy part has to be that the businesses must have a robust strategic future, inside or outside ICI, and produce a good financial return. If they have both of those attributes, then we are pragmatists, but generally, if it looks as though a change would be sensible, then we should face up to the change.
The long-term future for ICI is in skills rather than capital.'
ICI followers construe this text as meaning that ICI will progressively shed all its bulk chemicals operations, or at least reduce its involvement in them through joint ventures and other alliances. Such a metamorphosis would genuinely amount to a paradigm shift, unlike most corporate makeovers now adorned with that fashionable label. In the comparative boom year of 1995, industrial chemicals accounted for more than 40% of sales and half the £994-million group trading profit. The division's influence was emphasised by the profits slump in 1996, for which it was almost entirely responsible.
The 1996 experience also highlighted the problems Miller-Smith will encounter in reconstructing ICI. The profits slump was caused not so much by the bulk chemicals old guard, but by the newer businesses of titanium dioxide and, more particularly, by the polyester-based twins, PTA and PET, all three singled out by Miller-Smith shortly after his arrival as occupying 'attractive, international markets'. At the time, both PTA and PET were looking like industrial chemicals that were being transmuted by internationalisation and innovation into intermediates. The ferocious profits squeeze, caused by surging oil prices and product price falls forced by a capacity glut, particularly from new Asian producers, was a rude awakening. It showed how quickly value can be subtracted by commoditisation of a previously upmarket product.
Miller-Smith says the PET glut hammered home three lessons, namely, 'the unpredictability of markets in a world of global economics; the impact on the industry of Asia, and the impact on Asia of China; and how, even if you take a technology lead, you have to sustain your commitment to technology'. ICI now produces Laser+ PET, which the company says enables bottlers to process 10%-20% faster than lower grade PET. 'What we should be doing now is to produce Laser and Laser +,' Miller-Smith says. 'There will come a turning-point for PTA and PET, and I bet we won't call the turn on that, just as we didn't see the dip. I don't believe you can call things right or wrong; the chances of being in error on either side are greater today than they have ever been.'
For the ICI chief executive, that uncertainty reinforces the necessity of corporate reconstruction: 'There's a strange ambivalent reaction to ICI: people want us to be successful, but are always fearful that we won't be. We go from these two extremities. One of my rules - and it's an odd rule for me, a simple Scottish bookkeeper - is to keep saying to people outside, "We know what we want to do. We can't do it by snapping our fingers, but that doesn't mean it won't be done".' He and his colleagues will have to show persistence in driving home that message, and even greater determination in ensuring that the company lives up to their change theme. For the moment, there is an imbalance in the ambivalent biochemistry of ICI analysis: hope that Miller-Smith's great experiment will succeed is outweighed by concern that it may fail.
Andrew Lorenz is business editor of the Sunday Times
ICI: GROUP FINANCIAL HIGHLIGHTS
First nine months Third quarter
1996 £m 1995 £m 1996 £m 1995 £m
Turnover 7,965 7,708 2,668 2,622
Profit before tax 498 758 131 248
Eps after 29.1p 61.6p 9.7p 16.2p