Friday, December 01, 2006

Book Review: Building Plant *)

Title : Building Plants: Markets for Technology and Internal Capabilities in DSM’s Fertiliser Business, 1925–1970
Author : Arjan Van Rooij
Publisher : Transaction Pub, Aksant, Amsterdam
Year of Publication : 2004
Number of pages : 279

About the author
Dr. J.W. van Rooij or Arjan van Rooij is a researcher in Faculty of Technology Management, Eindhoven University of Technology, Netherland. He studied Arts & Sciences at Maastricht University, and specialized in the Technological Culture Program and graduated in 1998. He did historical research on bicycle tires, engineering contractors; and especially DSM, the Dutch State Mines.

His primary research interests are technology development and innovation from a historical and economic perspective, particularly the history of the chemical industry and chemical technology in the twentieth century. Van Rooij’s disciplinary interests include history of technology, business history and economics of innovation.

“Building Plants” is his dissertation and it was published in the same year. In 2005, Homburg and he wrote another book related to DSM history entitled “DSM Agro 1929-2004”. These two books will be a complete resource for understanding the DSM history. Unfortunately, an English translation is not available yet for the second book.

The reasons for choosing this book

First, this book tells the story of DSM, a corporation (or a company) that recently ranks among the global leaders in many of its fields; a group that it’s net sales grows more then 15% in the last 4 years. Now, DSM has annual sales of over EUR 8 billion and employs some 22,000 people worldwide. On July 2006, DSM NeoResins (one of its product) was awarded the Oliver Wight Class A Standard. Class A is only awarded to companies that achieve a performance standard of between 95 and 98% across all sectors of their business; planning and control, innovation, continuous improvement, people and strategy. Moreover, on September 2006, DSM was elected as leader in the Chemicals market sector of the Dow Jones Sustainability World Index for the third year running. The corporate sustainability performance has been assessed as the best of the world’s chemical companies.

Secondly, this book contributes to a growing body of literature on the history of industrial research and development. It explored the archives to uncover material on the innovative strategies of DSM, a chemical company that started in 1902 as “de Staatsmijnen” (the State Mines). Furthermore, this book is unique, because historians usually describe the growth of the company’s in-house research, but van Rooij has chosen to tell a different story. “Building Plants” shows how the firm DSM developed from a coal mining company to a diversified chemical enterprise from the mid-1920s to 1970. In order to understand the driving forces of that transformation, the author focuses on the plant level (he describes his research method as "plant level analysis") and the specific role played by engineering firms (which he calls "engineering contractors") and internal research and development activities.

The last but not least, in Indonesia, DSM operates in East Kalimantan as the DSM Kaltim Melamine. This huge plant produces melamine powder for industrial applications. I visited this plant in 2002 to inspect the radiation facilities within this plant, so I was likely having a kind of personal relation with this company when I found this book.

Outline of the book
During the twentieth century, DSM grew from a state-owned firm that operated exclusively in coal mining of southern Holland into a multinational chemical company. Around 1920, DSM’s chief executive officer, Frederik van Iterson, decided to diversify the company’s portfolio in order to reduce the company’s dependence on coal. Because its waste products (like nitrogen and phosphate) formed useful raw material for manufacturing fertilizers, they became DSM’s first new product. During the 1920s, DSM became the largest Dutch producer of the fertilizer ammonium sulfate. However, the step toward diversification was not straightforward, as DSM initially did not have the necessary expertise for developing complex products like ammonia.

In this period, DSM decided to hire chemical-engineering contractors who were capable of building a complete chemical plant: “patents were not wanted, only a complete plant”. The company hired engineering contractors, who designed the technology for synthesizing ammonia and made it readily available on the market. The contractors were crucial to the diffusion of technology, and they provided the opportunity for DSM to make use of a large-scale fertilizer plant. It is stated in page 76, “DSM relied on the market for technology to build its ammonia synthesis plant. The company never even contemplated developing its own process. There was no need for this, as several processes were already available and engineering contractors were capable of designing and building industrial scale plants”. Many people believe that engineering contracting was an American invention that was exported to Europe after the Second World War. However, van Rooij proved that even though American engineering contractors became important in Europe after the war, by the 1920s and 1930s there was a market for chemical technology in Europe. This situation had been ignored in the literature so far.

In relation to the economically oriented innovation literature, the author is concerned with the problems of technology transfer and the companies’ strategies on the market. The patent system, for example, would disrupt the ideal technology transfer. Nevertheless, he argues that technology transfer should not be treated as a general category. For example, if the technology is mature, its transfer becomes easier, because many suppliers and buyers operate on a growing market. The DSM case has shown that buying a complete plant is easier than buying patents—what an ammonia plant was supposed to do could easily be specified in a performance contract. For DSM, patents were more important in some cases than in others, but in the end they were not essential for its market strategy. The protection of the technology by means of patents was far more important from the perspective of the patent owner, but it was not crucial for DSM, the company buying the technology.

As a matter of fact, the innovation strategies of “defensive” companies like DSM were a vital factor in technology transfer and acquisition. Although its internal capabilities -- to understand the state-of-the-art technology -- were important for DSM, this did not mean that it exclusively internalized the knowledge it was seeking. The opposite is true: DSM badly needed the outside company knowledge held by engineering contractors.

Although van Rooij does not describe the history of DSM’s central laboratory in detail, the reader quickly can surmise that this department, inaugurated in 1938, stands at the heart of this account. Why? Because it exemplified DSM’s capabilities to carry out internal research, as well as to acquire outside knowledge and equipment. It was ultimately at the laboratory where the firm decided whether to buy or to develop its own technology. DSM’s central laboratory kept on growing to become one of the largest industrial research facilities in the Netherlands in the 1960s. By then, the Dutch state-owned company had established its own engineering and licensing departments. One of the book’s key chapters is in fact devoted to DSM’s urea process, developed at the central laboratory after World War II.

By that time, the firm had substituted oil for coal as feedstock. Urea, used as both a fertilizer and a raw material for the petrochemical industry, was a commercial success that explains, according to the author, the dramatic transformation that DSM underwent in its golden age. On the one hand, the firm came to rely more and more on licensing, while on the other hand, it was able to afford its growing in-house research activities. The urea case therefore represents the culmination of the story told in this book, a story that goes beyond the (not necessarily popular) history of the chemical industry to approach the history of the international markets for technology.

The correlation with the subject of this course

Van Rooij’s main point is that, by offering the possibility of acquiring outside technology complementary to internal research capabilities, engineering contractors can play an essential role in the development of industrial firms. This thought is more or less in accordance with Japanese companies’ way of thinking, especially in the beginning of “The Industrial Miracle”. According to the course, it can be proved that most of new technologies brought to Japan simply imported from Europe and US. Of course Japanese employees within those companies then should made many efforts to grow those adopted technologies in to mature commercial ones. Similarly, the DSM’s executive decision of “Go or No Go” in any cases have important contributions of their success story. I will discuss it more detail later.

Lessons learn

There are few companies, and even fewer successful chemical companies with a history to match that of DSM; a company that has changed so much over time, reinvented itself, repeatedly adjusted to changing circumstances and that are still fulfilling the promise of those modest beginnings in 1902.

What the author is therefore looking at is the ultimate sources of industrial innovation. There are indeed three relevant concepts he relates to technology and discusses throughout the book: sources, markets, and capabilities. More than that, this is a remarkable example of how the history of technology (his proper field) and the history of business can be brought together wisely and usefully, and how empirical research can be undertaken with new approaches and concepts. At the same time, the author claims that there was a market for technology around several European processes, such as high-pressure ammonia. Whereas large chemical firms sold expertise (through licenses), engineering contractors actually built and made operational industrial plants. Historians of technology and business who traditionally have focused on the former (the makers of the industrial diplomacy that shaped the European industry of the 1920s and 1930s) need to understand that the transfer of innovations would have been much slower and more difficult without the mediation of industrial contractors.

In spite of its intellectual excellence and literary quality, van Rooij’s book is not going to attract many readers among academic people. The author should not be blamed for that, since the chemical industry, as already pointed out, is not exactly an attractive topic. Besides that, the publishers, who overall have done a very good job, have not hidden the fact that the book is a doctoral dissertation. Still, those interested in the history of business and innovation in the past century should ignore both obstacles and read this book.

After 1970s

As requested, I add some information regarding DSM’s post activities after 1970s.

In the 1970s and 80s DSM underwent major reorganizations to ensure itself of sufficient scale, greater guarantees for market consumption, and diversification into high-quality plastics and fine chemicals. After 1985, DSM developed a series of ambitious innovation projects resulting in specialties such as the polyethylene fiber Dyneema, the strongest fiber on earth. Four years after that, DSM was privatized and listed publicly. During the 1990s, the company paid greater attention to creating a balance between commerce and research and developing value-adding processes and products, particularly products for the pharmaceutical and the food industries and performance materials for the automotive and transport industry and the electrics and electronics sector.

In 2002, DSM completed the sale of its petrochemicals operation in anticipation of future market movements. This was followed by the acquisition of Roche's Vitamins & Fine Chemicals Division in October 2003, which was subsequently, renamed DSM Nutritional Products. In February 2005 NeoResins, the coating resins business of Avecia was purchased. Now known as DSM NeoResins, this acquisition forms part of DSM Resins, a business group in the performance materials cluster. Within three years, this acquisition was followed by the sale of DSM Bakery Ingredients to the Dutch investment company Gilde Investment Management. Inally, in October 2005 DSM acquired the Chinese resins company Syntech.

With regards to “Go or No Go Cases”, at least there are two interesting points in the success story of DSM. First, their decision to diversify the company’s portfolio in order to reduce the company’s dependence on coal in the 1920s was a truly brave intuitive decision since they actually did not have the necessary expertise for developing complex fertilizers products like ammonia. Second one, their ambitious innovation projects such as the polyethylene fiber Dyneema have been leading to more profit. Its wide and various applications are the most basic foundation for stable market worldwide.

To sum up, DSM has grown and developed with new strategies and approaches. Based on their vision and strategy, the company is currently focusing on the four key elements: (1) market-driven growth and innovation, (2) increased presence in emerging economies, (3) operational excellent and (4) value creation.

Additional reading resources

*) International Technology and Management 4E (ITM) – 70677
Professor NAKAMURA Shuzo

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