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Herbert Dow’s Chemical Stand

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Herbert Dow was an inventor who refused to let naysayers and unfair competition keep him from building a chemical giant.

Soon after graduating from college in 1888, Dow founded Midland Chemical Co. and earned a patent for developing a cost-effective process for extracting bromine from brine, an underground liquid left over from prehistoric oceans.

The find was crucial. Bromine was a main ingredient in sedatives. The photo industry also used it.

But when Dow’s financial backers fired him after rejecting his plan to experiment with other chemicals, the inventor struck out on his own.

He developed a process to make sodium hydroxide and chlorine in order to produce bleaching powder and secured the backing of family, friends and former classmates.

In 1896, Dow founded the Dow Chemical Co. (DOW) and within three years had bought Midland Chemical. “He had a pioneering, risk-taking determination that saw him through hard times,” Lawrence Reed, president of the Foundation for Economic Education in Irvington, N.Y., told IBD.

Dow used electrolysis to extract bromine from a huge pool of underground brine in Midland, Mich.

His method became known as the Dow Process and let the entrepreneur produce bromine more cheaply than a German cartel that had a near monopoly on the chemical.

Bring It On

The cartel, Deutsche Bromkonvention, had threatened to flood the American market with cheap bromine and bankrupt competitors that encroached upon its markets outside the U.S.

Until then, U.S. firms heeded that warning. Dow ignored it.

“He saw Europe and Germany, where a lot of his competition was, as a region that had lost its edge,” said Burton Folsom, a history professor at Hillsdale (Mich.) College. “He thought the Germans had good abilities as inventors, but he was not at all impressed with their ability to sell what they were making.”

In 1904, Dow began shipping bromine to England and later Japan, undercutting Bromkonvention’s price of 49 cents per pound. When a Bromkonvention official confronted Dow with evidence of his transgression, Dow replied: “What of it?”

“Dow was stubborn and hated being bluffed by a bully,” Folsom wrote in an article for the Mackinac Center for Public Policy titled “Herbert Dow: The Monopoly Breaker.”

So Dow kept selling and displaying the bravado that earned him the nickname Crazy Dow.

Folsom explained the nickname by saying “that’s how an entrepreneur seems to the outside world. He sees possibilities where everybody else sees dangers. There’s an optimism with most entrepreneurs, and Dow is among them.”

Bromkonvention retaliated by dumping bromine in the American market at 15 cents a pound, well below Dow’s price of 36 cents.

The cartel expected that its price war would drive Dow out of business, but the intrepid American turned the tables on the Germans. He had an agent secretly buy up hundreds of thousands of pounds of the cut-rate imported bromine, repackage it and export it back to Europe, including Germany, at 27 cents a pound. That gave Dow a profit of 12 cents per pound.

“Instead of meeting it (the 15-cent price), we pulled out of the American market altogether and used all our production to supply the foreign demand,” Dow said, according to Folsom. “This, as we afterward learned, was not what they anticipated we would do.”

Bromkonvention couldn’t figure out why U.S. demand for bromine was skyrocketing. And the cartel was flummoxed by the cheap imported bromine flooding its market.

The cartel suspected its members of violating the price-fixing agreement, but it couldn’t find evidence to back up that claim. Confounded, Bromkonvention continued to slash bromine prices in the U.S. all the way to 10.5 cents. That let Dow buy bromine at ever lower prices for resale in Europe.

Finally, the cartel discovered Dow’s scheme and negotiated a pact. Bromkonvention and Dow would stop selling bromine in each other’s domestic markets and compete for business in the rest of the world. The cartel had been broken.

“Dow’s triumph has been used as an argument that predatory pricing is an irrational practice that would never work in the real world,” Folsom wrote.

Dow went on to extract more chemicals from brine, including chlorine, sodium, calcium and magnesium. He also expanded into organic chemicals such as phenol and indigo dye, a deep blue derived from a plant, and broke up the German dye cartel and magnesium trust.

That forced prices down and eroded the Germans’ hold over the chemical industry. “He was a consummate cost cutter who knew that success in business depended on finding ways to get more out of every dollar of investment,” Reed said.

By contrast, German firms were comfortable in their price-fixing arrangements and had little incentive to innovate and cut costs. “The Germans were at a loss as to how to compete with him because he could always produce better products more cheaply,” Folsom said.

He added that Dow “just believed that Americans had an attitude that Germans and Europeans didn’t have if we’d just be persistent. We were much more willing to compete, whereas they were satisfied to make a little bit and settle for less.”

Dow Chemical expanded rapidly during World War I when Britain blockaded German ports, cutting off shipments from most of the world’s largest chemical suppliers.

Dow’s firm produced magnesium for incendiary flares, monochlorobenzene and phenol for explosives, and bromine for medicines and tear gas, all helping the Allies.

While Herbert Dow is best known for producing bromine and chlorine, he also earned patents for applications ranging from steam and internal combustion engines, automatic furnace controls and water seals.

After the war ended in 1918, Dow discovered that magnesium could be used to make car pistons. The new pistons provided increased speed and better fuel efficiency.

His pistons were used heavily in race cars, even sparking the 1921 winner of the Indianapolis 500.

Today, Dow Chemical employs 46,000 people worldwide and produces products ranging from food to pharmaceuticals, paints and personal care products. Sales in 2008 totaled $57.4 billion.

Up In Canada

Herbert Henry Dow was born in 1866 in Belleville, Ontario, and his family soon moved to Connecticut. He was a precocious kid, conducting scientific experiments and helping his father with mechanical problems.

Upon his high school graduation, he had already invented an incubator for chicken eggs and helped his dad make a steam turbine that the Navy used to propel torpedoes.

By the time Dow died in 1930, he had amassed over 90 patents and turned Dow Chemical into one of the world’s leading chemical firms.

“Herbert Henry Dow was the quintessential American entrepreneurial model: honest, courageous, visionary, tireless, optimistic,” Reed said. “Perhaps most important, Dow believed that hard work and strong character were indispensable pillars of personal accomplishment.”

Dow’s Keys

•Built a company from scratch while developing• compounds that led to bleach, explosives, water seals, car pistons and sedatives.

•”If we can’t do it better than the others, why do it?”

Investor’s Business Daily Inc.

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