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MAY 1, 2003 SPECIAL REPORT: ENVIROTECH Dow Reaches for a Greener Future Skeptics abound, but the chemical giant is putting "sustainable-development" on a front burner. Profits, however, won't benefit soon DOW ) reported a surprise first-quarter profit of $76 million, or 8 cents a share, despite surging energy prices, driven up 70% during the quarter by the war in Iraq. The news shocked the Street, which had been expecting a loss of $95 million, equal to 10 cents a share, on revenues of $7.14 billion. It was a proud moment for Dow management, which, after two years of disappointing earnings had said goodbye to CEO Michael Parker last December. On Apr. 29, Dow shares closed at $32.31, not far off their 52-week high of $34.73. -- even though company executives said they couldn't predict whether the upward trend would continue: "Economic conditions are fragile. We're taking this one quarter at a time," said J. Pedro Reinhard, Dow's executive vice-president and chief financial officer. Times are so tough for U.S. chemical makers right now that analysts say even the best-run outfits face danger from volatile raw-material costs and competition from rivals overseas, particularly in the energy-rich Middle East, where doing business is cheaper. From 1995 to 2002, the combination of higher raw-material costs and lower selling prices reduced Dow profits by $8.8 billion. Thus, even in light of its good first-quarter numbers, Banc of America analyst Kevin McCarthy estimates that Dow shares will end the year at $28, representing a 12-month loss of 8.3%. THREE BOTTOM LINES. "Chemical companies like Dow need to come up with innovations that let them grow again," says Graham Copley, a chemical-industry analyst with Bernstein Investment Research, which doesn't offer investment-banking services. "They need to reinvent themselves with products that improve everyday quality of life and by developing biotech replacements for expensive hydrocarbons." That thinking helps explain why Dow is leading a charge toward "sustainable development," a set of principles that stresses using scarce resources as wisely as possible by increasing efficiency, eliminating waste, and improving quality -- all of which are good for business. As a result, Dow says it has a "triple bottom line," because it measures its success by the contributions it makes toward improving the environment and society, as well as by the size of its profits. "It's very clear, from our perspective, that to create a successful business we have to embrace sustainable development," says Carlos Guimaraes, vice-president for Dow's 700-employee environmental-operations unit and chairman of the U.S. Business Council for Sustainable Development. INDIAN NIGHTMARE. Detractors say Dow's commitment to sustainable development is nothing more than a public-relations campaign. After all, this is the corporation that's being sued over human health problems caused by Agent Orange, a Vietnam-era defoliant and over the deadly effects of asbestos on both its employees and customers. In 2001, long after it began its sustainable-development campaign, Dow paid $7.3 billion to purchase Union Carbide, the outfit responsible for the 1984 poisonous-fumes disaster in Bhopal, India, which killed nearly 4,000 people and left tens of thousands sickened. Spoof Web site www.dowethics.com, which at first glance looks like Dow's corporate site, has this to say about the company's environmental commitment: "Did you know that Dow is responsible for the birth of the modern environmental movement? Rachel Carson's 1962 book, Silent Spring, about the side effects of a Dow product, DDT, led to a groundswell of concern and the birth of many of today's environmental-action groups. Another example of Dow's commitment to living." Still, Dow's decade-long emphasis on sustainable development can't be denied. It was the first chemical company to establish a corporate environmental-advisory group, back in 1991. That council comprises 6 to 10 academics, engineers, and policymakers from outside Dow who meet quarterly to critique its progress and set corporate goals for sustainable development. AHEAD OF PLAN. Although these projects account for only a small portion of Dow's $27 billion in annual revenues, its financial commitment to them dwarfs that of most other "green" organizations. In 1994 Dow said it would spend about $1 billion over 10 years to reduce harmful emissions and cut back on energy and water consumption, all of which it projected would save $3 billion in operating expenses. In 2001, at the half-way mark, Dow said it had spent $900 million on sustainable-development projects that it calculates reaped $2.7 billion in total savings. Since the effort began, Dow claims to have reduced its total chemical-plant emissions by 42%, even as it has increased its production of chemicals by 20%. Executives are hopeful that the actual savings will far outstrip their projections. To achieve such results, Dow has initiated dozens of sustainable-development efforts. Guimaraes' environmental-business unit has been given the job of reducing waste and, where possible, recycling by-products across the entire outfit. At Dow's Freeport (Tex.) operations, Guimaraes has implemented a plan that's reducing water usage per pound of chemical produced by as much as 50% simply by combining operations and applying classic Six Sigma management principles. So far, the program is saving $1 million annually.
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