In the midst of the frenzy of media attention devoted to dot-com start-ups, overvalued IPOs and accounting discrepancies, well-run companies were labeled as boring and often ignored. Who wanted to read about a good company, business editors reasoned, when so many others were falling apart?
At face value, Wickliffe-based Lubrizol Corp. is one of those “boring” companies. A fluid technology company with nearly $2 billion in sales, it delivers consistent sales revenue, steady growth and shareholder dividends. It’s no wonder, then, that in these “the worse news, the better” days of journalism that Lubrizol has flown beneath the media’s radar.
“We are conservative,” says William G. Bares, Lubrizol chairman and CEO. “We are constantly testing the water and deciding what direction to go in.”
When the dust finally clears from this latest business cycle, it will be the time-tested, well-run companies such as Lubrizol that are left standing. After all, they’re the ones that are in the midst of a technological and knowledge revolution that we are just beginning to understand.
And these same so-called boring companies continually strive to find ways to reinvent and retool their core businesses while remaining profitable. Further, they have already recognized and addressed the growing public distrust of corporate America.
Interestingly, there just may be quite a story in running a business responsibly.
Squeaky wheels
In some ways, one of the most impressive aspects of the Lubrizol story is that it has remained competitive in the technology business for three-quarters of a century. In a world in which companies make the Fortune 500 list one year and fall from its ranks soon thereafter, Lubrizol has displayed impressive staying power.
The key, says Bares, “is to constantly balance the long term versus the short term.”
The company was founded in 1928 as Graphite Oil Co., with a lubricant designed to eliminate the squeak caused by the leaf springs in early model cars. Graphite Oil also developed the first of its many motor oils and soon changed its name to Lubri-Zol.
Fast-forward 75 years and drop the hyphen. Lubrizol is now one of the area’s largest and oldest public companies, with more than 4,500 employees in 60 countries. It has successfully weathered this most recent economic downturn through smart and sound management practices. More important, it has continued its tradition of producing a healthy year-end cash flow.
“Lubrizol has 35 percent of the market share and is the leader in the industry,” says Saul Ludwig, an analyst with McDonald Investments who follows the venerable firm. “They only have three other competitors in the transportation sector. They are very disciplined, and therefore generate a lot of cash.”
A long history, however — no matter how successful — does not ensure a company’s future, especially when the industry the company was built upon is rapidly changing.
The transportation lubricant industry continues to be a whopping 80 percent of Lubrizol’s product portfolio, and there’s little doubt it has benefited tremendously from the automobile revolution as each new technological advance in transportation translates into new opportunities for Lubrizol.
But keeping up with the whims of Detroit and edicts of the government requires significant capital investment, patience, and a lot of trial and error.
“Age doesn’t give you an advantage,” says Steve Di Biase, vice president of emulsified products.
He stresses that the company places a high premium on its ever-changing technology.
“We have 800 people in R&D globally … and 90 PhDs,” he says.
Even when the terms “R&D” and “return on investment” were relatively new, Lubrizol was reinvesting and pushing the technology of the day. Historically, it has spent between 8 percent and 10 percent of its sales revenue on R&D.
In 2001, that meant $160 million.
“Products become obsolete,” says Di Biase. “It used to be that it would be obsolete in eight years or so. Now it is less than four. And there are so many different industries — trucks, cars with different parts like gears and transmission — and every one of those products are different.”
But it isn’t just the products that become obsolete. The real question that Lubrizol and the rest of the automotive suppliers face is what will happen to the combustible engine, its petroleum-based fuel and the automobile in five, 10 or even 20 years.
That is the future that stares Bares and his staff in the face every day.
Textbook case
While most of the business world’s attention was myopically focused on high-growth start-ups and record-high initial public offerings, Lubrizol remained true to its roots. Its growth was relatively slow and methodical, not so sexy until you look at what the numbers actually mean.
Revenue for 2001 was the highest in company history, reflecting a 4 percent increase from the previous year’s record shipping volumes. Lubrizol’s market value and stock price jumped 36 percent in 2001, compared with a 13 percent decrease for the S&P 500.
“Lubrizol is a well-run, disciplined organization,” says Ludwig. “The company has a good depth of management … they are successful and have a good track record.”
While many manufacturers struggle to meet changing consumer whims, Lubrizol’s products are somewhat resistant.
“The company is somewhat countercyclical,” says Di Biase. “Our products continued to be consumed, and when times are bad, our commercial customers tend to maintain their equipment rather than buy new.”
Over the years, Lubrizol’s transportation and industry segments have grown organically through new products offerings. Recently, however, Bares has added a new twist — a relatively aggressive acquisition strategy.
Since 2000, in an effort to expand into markets as diversified as personal care products, defoamers and polyester resins used in printing inks and adhesives, Bares has engineered the purchase of six companies with combined annual revenue of more than $118 million.
Ludwig says that when you take into account that Lubrizol’s core business generates revenue in the hundreds of millions of dollars, its acquisition strategy is not only integral to its future, it is also a form of cash management.
“Managing and utilizing cash flow is a big issue for the company,” he says. “The challenge for the company is to deploy its cash efficiently.”
“It’s not easy to grow in our industry,” admits Di Biase. “It’s hard to generate new growth, and you have to make sure the growth is real.”
A variety of market forces — and conditions like improved engine design, longer drain intervals and frequent product modifications — have produced a global growth rate for transportation lubricants estimated at a mere 1 percent a year. And since the passage of the Clean Air Act, government regulations and standards have dictated much of the new product research.
“The government defines the rules of the game,” says Di Biase. “Oftentimes, it creates the need.”
Accordingly, with its heavy reliance on fluid technology for transportation, Bares and his team have spent heavily on new technology development.
But Lubrizol’s research and development efforts have resulted in both triumph and failure. The tricky part has been balancing the two well enough to realize a return on the company’s investment.
Bares says he learned this lesson after the company scrapped plans for developing the world’s first industrial plant-based lubricants through genetic mutation.
“You can’t fall in love with a technology,” he warns.
A notable positive result of one such doomed love affair was Lubrizol’s gift of $22 million worth of patents last year to CAMP Inc. The patents cover technology based on a fluid that can carry an electrical current. Bares hopes some day to see the process commercialized.
Knowing when to let go and move on has been a crucial part of the company’s success, he says.
“We have processes,” Bares says. “We try the idea. If it doesn’t pass the muster, pass the milestone, we don’t pursue it. With technology and R&D, you are not going to bat 1.000. You have to be a .300 or .400 hitter.”
As conservative as that approach may sound, it is not risk-free. But for Lubrizol, the real risk is in not taking any risk at all.
Sustainability
In order to take the right calculated risks, and balance the long and short term, Bares challenged his management team to rethink the company’s overall vision. After a few years of planning, “Creating fluid technologies to make the world a better place” emerged as the formal mission statement.
“It’s relevant to what we are doing today,” says Di Biase. “We have a strong position on the environment.”
Thirty years ago, any company, let alone a business-to-business industrial chemical company, would have been hard-pressed to tout environmental consciousness in its mission statement. But times have changed. Wall Street, investors and consumers expect more from large corporations.
The discussion has also changed. Now there’s a real issue about sustainability, on a business, social and environmental level.
“Consumers are becoming more educated,” says Nick Zingale, president of Affinity Consultants, a Canal Fulton-based firm that helps manufacturers maximize their environmental, health and safety systems. “There is a fallacy that you have to be rich to be concerned, but surveys show they have a concern no matter what walk of life they come from.”
What was once a tenuous relationship between manufacturers of chemicals and environmentalists has become cooperation as companies make decisions that are socially and environmentally responsible.
“For many people, chemistry is synonymous with pollution,” says Di Biase, who stresses that he doesn’t want to overstate the issue. “We tend to think about being environmentally responsible rather than environmentally friendly.”
For the most part, though, environmental issues wax and wane in the public consciousness. Issues like dolphin-safe tuna and oil-soaked wildlife grab our attention, then fade. But ironically, it is the issues that are very often invisible that pose the greatest risk.
As part of its mission, Lubrizol effected a 60 percent reduction in annual hazardous waste generated between 1990 and 2000, and a 50 percent reduction in annual air emissions at its Wickliffe facility.
Another part of the sustainability issue resides in the company’s new brand strategy aligned to its strategic vision: Improving the world we live in by providing technologies that result in products that work better, last longer and benefit the environment.
“It guides our people,” says Bares. “When they think of a new idea, it has to fit.”
Di Biase calls the result an indirect benefit.
“It’s part of our corporate DNA,” he says. “We always had emphasis on the environment. It’s been an underlying philosophy to do the right thing.”
And consider this. The life span of automobiles has increased from an average of five years to 10 years. It is an especially salient issue during a recession, when capital equipment expenditures are fewer and maintenance is extended for older vehicles.
“We translate it three ways,” says Bares. “We make things that last longer, run better and benefit the environment.”
Zingale describes it another way. “It’s a three-legged stool,” he says. “Companies have to balance their economical, social and environmental responsibility. Companies are publishing more than what they did economically. They are saying, ‘Here’s what we did socially, and here’s what we did environmentally.'”
Motoring ahead
In 1997, the EPA proposed a cap of 15 parts per million (ppm) of sulfur in diesel fuel beginning in 2006, a significant reduction from the current U.S. standard of 500 ppm.
The regulations, recently upheld by the U.S. Supreme Court, are designed to reduce heavy-duty emissions by between 90 percent and 95 percent from 2007 to 2010, and lower diesel fuel sulfur content by 97 percent from 2006 to 2009.
Close on the heels of that decision, the EPA released a 651-page diesel health assessment report that cited occupational health studies and the results of tests on animals, which revealed that diesel emissions are, in fact, carcinogenic.
As part of its commitment to a better environment, Lubrizol developed and commercialized a new product called PuriNOx, a fuel additive designed for use in diesel engines. Using water to combine with the fuel, the product has shown to reduce dangerous pollutants by up to 20 percent.
But this may simply be a stopgap measure. In his most recent State of the Union address, President Bush laid the groundwork for his administration’s Clear Skies initiative. One of his most memorable statements referred to a hydrogen-powered automobile, upping the ante on the diesel emissions standards his father set in 1990.
“The automotive companies are scrambling to come up with alternative fuel technology or moving away from fossil fuels altogether,” says Zingale.
But don’t expect it to happen overnight. Change takes time, although the winds of change are beginning to blow louder and harder.
Bares is well aware of this. The overall demand for lubricant and fuel additives is slowing in mature markets such as North America and Europe.
“It will have a negative effect on some of our business but we support it … we have known it for years,” says Bares. “That’s why we are moving into other areas, like coatings.”
Lubrizol, he says, is poised to reposition itself by entering the business-to-consumer world of paints and personal care products as well as by applying its vast knowledge to entire fluid-based systems beyond automotives.
“It’s about creating value,” says Di Biase. “We are really selling our knowledge. It’s different than our traditional business, but it’s aligned with our vision. We don’t want to be constrained by the past.”
Because of these changes, the next five years will be crucial to Lubrizol’s success.
“You have to have a vision,” says Di Biase. “You can plan out five to 10 years at the most, but beyond that, any plan would be a fallacy. There is a shifting of power. With the change comes some choices.”
The industrial revolution, which shaped the last few generations, is giving way to an information revolution, which could create as much change in just one generation.
“Business is not on its own little island anymore,” says Zingale. “The role that the Tycos and Enrons and Worldcoms played, and what those companies brought to light, is that at a much higher level in organization, there needs to be more accountability and responsibility.”
That’s where companies such as Lubrizol come in.
To corporate leaders such as Bares, there’s a hope that it does matter that Lubrizol has made a conscious effort to decrease emissions from its laboratories, that it has remained loyal to its headquarters, invested in mentoring projects and donated patents to local organizations.
And it should make a difference that a significant portion of the company’s research and development dollars are spent trying to develop clean air projects and plant-based, nonpetroleum lubricants that are environmentally friendly.
Perhaps Bares summed it up perfectly in his letter to shareholders in Lubrizol’s most recent annual report: “Reflecting on the events of the past year only strengthens our determination that our vision — to make products work better, last longer and benefit the environment — is the path to improved shareholder value.” How to reach: Lubrizol Corporation: (440) 943-4200 or www.lubrizol.com;” Affinity Consultants: (330) 854-9066 or www.affinityconsultants.com; McDonald Investments, (216) 443-2300
