October 19, 2016 / 9:21 PM / a year ago

Dow executive vows new materials group will pack research punch

DUESSELDORF (Reuters) - Dow Chemical will keep up research and development efforts even as it is set to lose some of its most research-intensive activities as part of a transformational deal with DuPont, the U.S. chemical maker’s head of operations said.

Dow will use current R&D budgets as a percentage of revenues as a future benchmark even after it is stripped of complex electronic materials and crop protection businesses after the planned merger with DuPont, Chief Operating Officer James Fitterling told Reuters.

The two U.S. companies have said that one of the three spin-offs to emerge from the tie-up will be a maker of plastics and materials for high-volume industries such as packaging, automotive and construction, to be named Dow and consisting of the largest part of current Dow businesses.

“Even on today’s percentage of sales to R&D, (we will be)focusing that R&D money into fewer markets than we were as Dow,” Fitterling said at a plastics industry show in Duesseldorf, Germany.

The new company will be “focusing that R&D on four big market growth segments. So you’re going to see a lot more products coming out of the pipeline as the new materials company spins out,” he added, referring to packaging, transportation, consumer goods and infrastructure markets.

The pledge comes after Dow lowered R&D expenses 3 percent to $1.6 billion in 2015, mainly due to cost cuts at its agriculture business, on top of a 5.7 percent reduction the year earlier.

Dow’s R&D spending in 2015 was equal to 3.3 percent of sales, its annual report shows.

Among its innovation efforts, the company is looking into better catalysts that speed up production processes, packaging that keeps food fresh for longer, and the reuse and recycling of disposable products, Fitterling said.

In other markets, the planned merger has sparked concerns that smaller farming seed players could be blocked from participating in agricultural innovation.

The U.S. Justice Department is looking into consolidation among major seed and agricultural chemical companies such as Dow and DuPont because it may squeeze the trade in a type of know-how that is needed for genetically modified seeds.

Fitterling sought to allay fears of independent seed sellers that the merger parties could decide to hike licensing fees for favorable plant characteristics, so-called traits, or that they could keep the best traits for themselves.

“Cross-licensing ... has allowed a lot of trait technology to be used across various platforms and various competitors. We view the trait licensing as a pro-competitive activity and our view is it’s going to continue,” he said.

Elsewhere, another mega merger is in the making with Reuters reporting last week that Chinese state-owned chemical companies Sinochem Group and ChemChina are in talks to combine.

Fitterling, who will take the chief operating officer role at the new Dow company, said that such a merger could be a chance to reduce excessive output capacity in China, which has been a key growth market for Western chemical groups.

“With all the capacity that’s been built, it’s been ultra competitive in that space and it’s difficult to try to make money. ... So I can understand the rationale to maybe get some synergies out of a combination,” he said, adding that it still was “too early to speculate.”

Reporting by Ludwig Burger; Editing by Leslie Adler

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