text: Sticking to the Formula; DuPont Insists Mundane and Exotic Products Mix Well - The New York Times
  Business Day|Sticking to the Formula; DuPont Insists Mundane and Exotic Products Mix Well
  By CLAUDIA H. DEUTSCH MARCH 3, 1998
  Charles O. Holliday Jr. knows that a lot of investors think he should break up DuPont, the $45 billion chemical industry giant where he was put in charge this year. He knows they think that mundane products like polyester and petroleum are a distraction from hot items like genetically altered corn or fancy new drugs.
  He knows -- he just does not agree. When Chad Holliday talks to DuPont's divisional people, he does not hear a cacophony. He hears an orchestra tuning up, one that once it gets its research, marketing and production instruments to augment their solos with ensemble play, will sound just fine.
  ''I am absolutely convinced that all our technologies are better off working with each other,'' Mr. Holliday said.
  But can he convince investors that he is right? That E. I. du Pont de Nemours & Company, based here, is better off pushing products ranging from oil to pesticides to bulletproof vests, instead of homing in on drugs, enhanced crops and other nutrition and health-oriented life sciences businesses?
  Competitors do not seem to think so. ''Chemicals and life sciences are entirely separate businesses, requiring different management and attracting different investors,'' said A. Nicholas Filippello, a vice president of the Monsanto Company, which spun off its chemical operations in September.
  So far, DuPont's investors are hanging in -- the company's stock trades at a respectable 16 times estimated 1998 earnings. [It closed Monday at $62.5625, up $1.25.] That's enough to satisfy most members of the DuPont family, who hold about 15 percent of the stock. ''I like being in a spectrum of promising businesses,'' Edward B. DuPont, a director, said. ''And most of my assets are in this company.''
  But nonfamily investors are getting restless. They have seen the stocks of rival chemical companies soar when they shed older products -- Monsanto's shares trade at more than 40 times the 1998 earnings that analysts project -- and they want some of the same action.
  Specifically, they want DuPont to sell Conoco, the oil company it bought in 1981; to spin off the chemical operations to shareholders, and to concentrate on life sciences.
  ''There aren't any advantages to being so complicated,'' said Roger E. Ford, managing director at Prudential Investments, which sold all its DuPont stock last summer. ''DuPont should be three companies: life sciences, chemicals and oil.''
  This is a dangerous time for DuPont to trust in the status quo. Mr. Holliday, a 28-year DuPont employee who became chief executive in January, has promised that earnings will grow at least 10 percent a year through 2003. But the rich prices DuPont paid for several agricultural and basic chemical acquisitions in 1997 will dilute earnings for at least a year. The strong dollar, Asia's weak economy and dropping oil prices all mitigate against a terrific 1998.
  ''Meeting that 10 percent goal, without life sciences being a bigger part of the mix, is going to be a real challenge,'' said James F. Stanley, a portfolio manager at the Delaware Management Company.
  DuPont is certainly not ignoring life sciences. Last year it spent more than $3 billion to buy Ralston Purina's Protein Technologies International, a soya products company, and 20 percent of Pioneer Hi-Bred International, a seed corn company. It is building a new biotechnology research center in Wilmington now.
  Mr. Holliday has told investors that he wants life sciences to contribute at least 30 percent of earnings soon, up from about 18 percent now. Some of the life sciences executives are even more gung-ho. ''We see plant genetics as tomorrow's Silicon Valley,'' said William F. Kirk, senior vice president of DuPont Agricultural Enterprise, a newly created division that expects about $3.5 billion in sales this year.
  But what rankles some outside investors is that DuPont is spending just as heavily on businesses that they want it to shed. The company spent more than $3 billion to buy Imperial Chemical Industries' industrial whiteners and polyester film operations. About half of its $1.1 billion research budget is devoted to chemicals. And it bought vast oil reserves in Texas and Venezuela to beef up Conoco -- a move that even fans of its chemical conglomerate structure cannot abide.
  ''DuPont has enough money to fund its global chemical business along with life sciences,'' said Leslie C. Ravitz, an analyst with Morgan Stanley. ''But I don't understand why they are holding onto Conoco.''
  Mr. Holliday insists that the question is not one of ''either-or,'' but one of ''and.''
  ''If we'd seen another $6 billion of life sciences acquisitions, we would have made them,'' he said. ''But we aren't missing any opportunities by investing in chemicals or Conoco.''
  In fact, he is out to prove that he is gaining a lot. Mr. Holliday is plumbing every DuPont business and function, seeking ways they can piggyback on one another's efforts.
  Life sciences researchers are trying to ''grow'' chemicals -- say, by incorporating genes from spiders into a plant that could make a fiber with the strength of a spider's web, or substituting fermented plant glucose for petroleum-based chemicals. Chemists, meanwhile, are classifying chemicals for possible use in pharmaceuticals and pesticides.
  ''Why not use molecular biology and genetics to make plastics and fibers?'' asked Joseph A. Miller Jr., DuPont's chief technology officer.
  DuPont's product chiefs are collaborating more these days, too. The group that makes Lycra -- DuPont's brand name for spandex -- has found a way, for example, to use it in women's dress shoes. Now they are working with the Kevlar group to see if Kevlar, known best for bulletproof fabrics, would work for shoe heels. ''We're looking for economy of scope, not just economy of scale,'' said Steven R. McCracken, vice president of DuPont Lycra.
  In a sense, it is easy to understand Mr. Holliday's continued affection for chemicals and oil. Both businesses earn more than the cost of capital. Joint ventures with Asahi, Dow Chemical and others have given DuPont relatively inexpensive access to new markets and technologies. The Imperial Chemical businesses, meanwhile, have given DuPont a formidable presence in Europe.
  ''Chad said loud and clear, 'See how you can grow this business,' '' said Ellen J. Kullman, the vice president responsible for industrial whiteners. ''He did not say, 'Turn your business into a cash cow.' ''
  Ms. Kullman and other executives in basic chemicals have been wringing costs from or adding attributes to products widely viewed as generics. DuPont has squeezed 40 percent out of the cost of polyester resins for bottles. It has a catalyst in the works that can give inexpensive chemicals like polyethylene, used to make plastic wrap and other basic goods, some of the strength and flexibility of chemicals that sell for much more. It has fine-tuned its Dacron fibers so that they make more pliable pillows and more flexible clothing.
  Such tinkering does not pack the punch of earlier DuPont innovations like Teflon, Dacron and nylon. But it can add years of life to aging products. ''We may not have home runs anymore,'' William Ghitis, Dacron's managing director, said, ''but we sure can score singles.''
  Score them, yes -- but selling them is another matter. Just ask Kurt M. Landgraf, Mr. Holliday's second in command. At Mr. Holliday's behest, Mr. Landgraf recently assessed DuPont's marketing practices; he was horrified at the vacuum that pervaded not just industrial chemicals, but consumer brands.
  DuPont's fluoroproducts division, which makes nonstick coatings like Teflon and Silverstone, had a finance man running marketing because ''it was a good development tool for him,'' Mr. Landgraf recalled, his voice still registering disbelief. ''When it comes to marketing, DuPont has missed the boat big time.''
  Now, the businesses are swimming fast to catch up. Mr. Landgraf is showing them how to market directly to end users -- to farmers, say, for pesticides; to athletes for Lycra-based clothing -- with the idea that if consumers request DuPont brands, dealers will stock them. And he is trying to persuade the businesses to stress service.
  ''Offer just-in-time delivery or global support or input into new product research, and you could set a piece of wood apart from the pack,'' Mr. Landgraf insisted.
  That kind of thinking is a sea change for DuPont, which has never put much marketing muscle behind industrial products. But then, Mr. Landgraf and Mr. Holliday represent a sea change themselves.
  Mr. Landgraf, 51, is the former chief executive of DuPont Merck, and is the first DuPonter to rise to the No. 2 spot through the pharmaceutical and marketing ranks. Mr. Holliday, at 49, is the company's youngest leader in 50 years. An industrial engineer who spent many years running various DuPont fibers businesses, he is the first chief to have done a stint in Asia.
  He faces different problems from his predecessors. Edgar S. Woolard Jr., DuPont's chief executive from 1989 through 1995, spent much of his tenure cutting bloated costs and increasing sluggish productivity. He also arranged the company's 82 product lines into 16 profit centers, each responsible for its own technology, marketing and bottom line.
  John A. Krol, who took over in 1995, reshaped the product portfolio. He shed ancillary businesses like printing and medical products, and he negotiated last year's acquisitions. Thus, when Mr. Krol, who is 61, opted for early retirement -- a decision that the board insists, and analysts believe, was his own -- Mr. Holliday inherited a company with solid earnings and cash flow, manageable debt and low costs. Mr. Holliday has promised to cut costs even more, but most DuPont watchers expect him to focus on proving that the company can move as nimbly as specialized competitors.
  ''He's not just reducing costs, he's eliminating structural empires and bureaucracy,'' said J. Jeffrey Cianci, an analyst with Bear, Stearns.
  Now Mr. Holliday must give DuPont's business units the skills to handle autonomy. Mr. Landgraf's marketing push is part of that. So is an in-house financial college that Gary M. Pfeiffer, the chief financial officer, has spearheaded to teach the businesses how to manage cash.
  ''I want the businesses to have their own lawyers, their own finance people, everything that will speed up their decisions,'' Mr. Holliday said. ''I want to see charts tracking customer satisfaction in every office.''
  Sounds nice -- but investors would prefer charts of a soaring stock price. Thus, DuPont's biggest marketing job may yet be convincing investors that its life sciences baby needs its older chemical siblings.
  ''We're like this school of little fish,'' Mr. Pfeiffer said. ''If they swim together, they can cast an enormous shark-like shadow.''