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CEO Andrew Liveris is focusing Dow Chemical on more innovative, high-margin products - and making them in America.
FORTUNE -- When Mr. McGuire told Dustin Hoffman's Benjamin in The Graduate that "I just want to say one word to you," and that word was "plastics," he could have been recommending a career at Dow Chemical. It was advice that Andrew Liveris, a new chemical-engineering graduate from Darwin, Australia, followed in 1976, when he joined Dow (DOW). The company produced mainly petrochemicals and the plastics created from them, and it was a good business. But by the time Liveris became Dow's CEO in 2004, that commodity chemical strategy no longer made sense. That's why Liveris, 57, has been turning Dow in a new direction, focusing on unique, innovative, high-margin products, such as recently introduced solar shingles. Dow makes them in Michigan, underscoring another of Liveris's major themes, the importance of U.S. manufacturing. Last year he published a book on the subject, Making It in America, and President Obama named him co-chair of a new Advanced Manufacturing Partnership. Liveris talked with Fortune's Geoff Colvin about emulating "Intel inside," optimizing a staggeringly complex business, America's national mission, and much else. Edited excerpts:
Q: Last fall you said you foresaw much slower growth in the U.S., and indeed your fourth-quarter results showed sharply lower demand. What's the outlook now?
A: I think slowly getting better. I won't say the economy has a huge tail wind. It's a slow recovery that's getting a little bit of steam. What's causing that steam? Low energy costs, especially natural gas in this country. There is the beginning of what I would call a job recovery, not because of construction and housing, but because of investment. The oil and gas industry is a good example. People get jobs, they'll spend a little more, so it's the beginning of a consumer recovery.
What about Europe for the rest of the year?
It'll stay exactly where it is now if we're lucky. It might get worse, which is more likely. It's not just one year but several years. The design of Europe is at risk. What it ends up looking like, we don't know, but the scary thing is, neither do the politicians who are doing the design. Business hates uncertainty, so whether it's investment or consumer confidence, you'll start seeing people pulling back, and there will be job cuts, as you're seeing announced. We're in a recession there now -- I'm seeing it from our demand point of view. And, as a consequence, we go where growth is and where the recovery is something that won't reverse itself.
I'm very involved in U.S.-China business relationships, and I'll be there in March running a conference on behalf of the Chinese government with U.S. CEOs. The way I view the China growth story is, it's the growth they have to have. They walk a fine line. Inflation on the one side causes prices to rise to the point where they get social unrest in the streets. On the other side, slow growth means unemployment, meaning social unrest in the streets. So that fine line is 8 1⁄2% or 9%. That's what you'll see.
You mentioned falling energy prices -- that's a big issue for Dow because oil and gas are your main feedstock. How important is the development of shale gas in the U.S.?
It's a game changer, not just for companies like mine but for the U.S. There's enough shale gas being discovered, and enough information on that shale gas is being gathered -- depletion ratios, contamination issues, etc. -- to put in place a pragmatic policy that could reverse our being an energy importer to our being a net energy exporter.
Now between here and there a lot of good partnerships have to be struck between the private sector and government to work out the supply-side policies, including the environmental issues. Then we have to create the demand-side policies; let's not put this gas to a poor use. That's a very important BTU. It's cleaner than coal, so it has an impact on climate change. It's a very good BTU for value-add manufacturing -- advanced manufacturing -- like I would do. Then I create jobs, and for every job I create, I create five to eight jobs around me. So it's a very powerful engine. We have an opportunity for job creation in this sector like we've never seen.
The chemicals industry has been dominated for a long time by a handful of very large global corporations. Don't you have to figure that a big global player will emerge from China?
Absolutely. I call that the emergence of the super-regionals, and we're seeing that beyond chemicals. You see Haier coming out of China in the appliance space. We'll see national champions coming out of state-run economies, China being a classic case, where they have a market of size domestically, and they can scale up through subsidy of capital or of feedstock and make a ton of money. Then they start acquiring internationally and acquiring global footprints.
The top 10 chemical companies in 1990 were all Western companies. Today four are Asian, and three are Middle Eastern or Brazilian. That leaves three that are U.S. or European -- only a few of us: BASF, Bayer, Dow. The remainder of what used to be a very vibrant sector in the U.S. and Europe is very small and niche-oriented.
How you maintain scale and compete internationally is an industry topic in the U.S., but actually it's a Dow topic because DuPont (DD) is mostly in the ag space these days. Dow is the only company left that's of scale, global, and based in the U.S. Therefore I and all my successors are going to be very active ensuring not only that we stay here but also that we can grow here through reinvestment.
What's Dow's strategy now?
This is the third great transformation of the company. It started out as an inorganic chemistry company 115 years ago. It became a petrochemical and plastics company. The transformation of the past seven or eight years is to a science-based company that takes feedstocks and adds value to them. So less commodities. We're bringing in biological science, physics, chemistry, material science.
You're going after four large trends: clean energy, health and nutrition, consumerism in the emerging world, and infrastructure. Operationally, what has that led you to change?
Technology R&D -- in the past five years we've spent $9 billion on research and development in those four trends. We have become innovation-centric on the R&D side. That's a big change. We can now get the best and the brightest of the U.S. and the world to come join us. Our recruiting strategies have changed with our advertising strategy, rebranding the company around the human element and sustainability, presenting a company that is innovation-centric vs. the notion that it was a legacy company in commodity chemicals.
Also marketing. I'm not in the consumer domain, but from a consumer psyche point of view, if they know "Intel inside," if they know that I've got the special ingredient that makes the shampoo better or the special material that makes the chip faster or that insulates the home better and leads to a net-zero-energy-use home -- if they're to understand all that, I need marketing of the consumer variety.
On that we're still maybe a third of the way there. On the other changes I think we've really elevated our position, representing ourselves not as Dow Chemical but as Dow, a company based on sustainable business.
That's back to end-use brand marketing. You don't have to be at the interface directly. As long as the end-user knows it's you that's created the enabler, that is very important for many reasons. We're judged by the court of public opinion on everything we do. "Sustainable" is no longer an option, it's an adjective -- sustainable business, sustainable science, sustainable solutions. Presenting ourselves as solution providers to the John and Jill on the street will lead us to more, if not consumer products, then consumer-oriented businesses that are in a consumer domain, like the shingle.
You're passionate about manufacturing in America, and you've said government should offer more incentives for it. But the counterargument is that if a business can't make it without a government incentive, then is it a good business?
I think we're off-center with the question and the answer embedded in that point. Most of the big inventions of our time have come through government-funded labs -- Bell Labs, Argonne Labs, Lawrence Livermore. Through these laboratories the taxpayer actually did create incentives that spilled out to industry. Putting a man on the moon, the Internet -- all those came from front-loaded, thoughtful responses to some national mission.
What is our national mission today? Do we want to just be a service provider to the world, or do we want to be a provider of intellectual property because we're smarter, we can make it more efficiently, and we're going to export to the world?
An incentive is not a subsidy. I have subsidized competition all over the place -- subsidized feedstock, subsidized capital, subsidized labor. There's no such thing as a level playing field -- let's not get starry-eyed about that notion. Agriculture and defense are must-do's for the country, and the government takes a very big role in them. So in manufacturing, have we given thought to the country's needs? I would argue there are two very vital needs. One is energy and our being an importer vs. an exporter. The second is infrastructure. We have to rebuild this country. Those two things are worthy of -- not a subsidy, but a holistic government plan that incentivizes the private sector to participate in the solution.
Do you think your view of our national mission is widely agreed upon?
I think this current administration has grabbed it. Just by being co-chair of the Advanced Manufacturing Partnership, I am delighted -- three or four years ago, we weren't even talking about manufacturing. We now are.
I'm an Australian-born citizen of Australia, privileged to be in this great country, so I think I have some objectivity when I say this. We still have the best system in the world, with its resilience, entrepreneurial focus, and innovation. All we have to do is stop warring with each other and start partnering in public-private partnerships. I think this administration has worked hard to get that going with the Advanced Manufacturing Partnership. I'm very confident that after this political cycle, we'll see something adopted.
You've spent your entire career with one company. A lot of young people today could not imagine doing that. Is it still the way for young people to go?
People may well think that I've had 36 years at this company as a deliberate thing, but I did not. I had a career one or two years at a time, and every one or two years, Dow recruited me again. So I've got to re-recruit our young employees every one or two years, or for their generation maybe it's less than a year. The younger generation are not as mobile. They love their fun. They want their environments a bit different. So I've got to recustomize my corporation to be appealing quicker based on their attention span. I'm not criticizing. That's just an "is."
So I haven't had a 36-year career. I've had many opportunities to not be part of Dow Chemical. I joined the company, but I stayed because of the people. It's the people around you that make a difference to what is hopefully a happy, energetic work and life. Because if you don't do that, then what the hell are you doing every day?
The Leadership Series
Formerly called "C-Suite Strategies," this is the latest interview with a top executive by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/leadership -- plus find Colvin interviews with Chicago mayor Rahm Emanuel, DirecTV CEO Michael White, Xerox CEO Ursula Burns, Humana CEO Michael McCallister, and many more.
This interview is from the March 19, 2012 issue of Fortune.