Category Archives: Economics

Corporate Freeloaders?

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Our local area is graced with the presence of a biomedical drug production facility.  The company manufactures important, lifesaving products from which mankind benefits and in doing so, the company makes a handsome profit.  They also have a production facility in a Caribbean Island Territory which also manufactures important products.  I understand that they are a very progressive organization. Friends, family, and colleagues from grad school work at the local plant and at the R&D office in Many Trees, in some coastal state. [Note: the name and location have been cleverly disguised or omitted- Th’ Gaussling]

Meanwhile, there is a constant buzz concerning the possibility of moving the entire mfg operation to this Caribbean paradise where the tax and labor costs are significantly lower.  I have no special inside information  here, I just know that this has been considered.

The situation outline is in no way unique to the particular company I’m thinking of. It is a very common situation.  Company decides to move operations off-shore to continue profit growth of a successful product. Shareholders continue to enjoy good returns on their investment, product pricing is competitive and the company continues to hold on to market share. Everybody’s happy, right?

Back at the corporate HQ, assets are safely nestled in the Unites States of America, under the 24/7 protection of the Army, Navy, Air Force, Marines, and Coast Guard.  Corporate human and capital assets (shareholder assets, really) enjoy the benefits of the vast infrastructure of the USA.  Materials and people move safely and efficiently over land and through the skys of the USA.  The FAA assures air safety and orderly movement in the skies.  The DOT assures motor vehicle safety. State and federal monies provide for highways, bridges, and all of the motorway infrastructure to keep the trucks of raw materials and product moving. 

Federal, state, and local governmental agencies provide reservoirs for water and electricity. Plant process water comes from a pipe put in place by the local water district infrastructure.  Sanitary water treatment is provided by the municipality.  The streets are patrolled by city and county police who are charged with crime prevention.

Corporate scientists who invent the technology that the company profits from so handsomely and the executives who guide product to market were educated within the vast academic/research complex that has made the USA the envy of the world.  Graduate student and post-doctoral stipends in science and engineering are largely funded by some government agency or other.

Corporate researchers have access to enormous volumes of public domain technology and knowledge paid for by NSF and NIH grants. Researchers who were educated at public institutions with public subsidies take their talent and generate treasure for the corporations and the shareholders.

Yet, a great many corporate entities are escaping tax liability by moving manufacturing off-shore.  Corporations whose very existance is owed to their fertile, wealthy, and knowledge rich nation have somehow seen fit to evade paying back into the system so as to perpetuate that very system from which they benefit so handsomely.  Instead, others contribute to sustain it.

The advantage of substantial US infrastructure amounts to a kind of subsidy.  The purpose of this subsidy is to stimulate the formation of wealth generating organizations who can then provide jobs and stability for the economy.  Instead, we find that corporations are tapping US knowledge wealth and eventually using it to subsidize foreign economies. 

There are mathematical justifications for this transfer of manufacturing from the local to the foreign.  More profits flow to the shareholders- the big players and those who hold 401(k) plans.  Growth is sustained and a competitive edge is held.  But is it really? Could it be just the result of poor imagination?

Good Customers and Bad Customers

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Even the biggest pollyanna in the sales group will discover one day that it is possible to have a bad customer.  Yes Johnny, it is a fact that not all customers are desirable.  Oh I know, in sales one is always rabid to close the deal. Get the sale and move on to the next prospect with a pulse. But what is the difference between a good customer and a bad customer if their money spends the same?

Ideally, a “Great” customer comes back for repeat business, is flexible on terms and conditions, pays 30 days net, gives long lead times for delivery, accepts FOB terms, accepts delays and price increases without protest, and picks up the dinner tab when out for a visit.  [~~Sound of needle scraping across phonograph album~~]

If only such compliant customers existed (Sigh).  In reality, most chemical customers are in what I would call the “Good” category.  That is, they have reasonable expectations of price and delivery as well as an understanding of what constitutes fair business practice.

But on occasion one runs into what you might call a “bad” customer.  Such customers are found across the entire spectrum of size and business model. 

A bad customer is one that consumes excessive resources during the course of service.

A small bad customer might want you to do free product development for them, or may try to negotiate bulk pricing only to turn around and try to get bulk pricing on small quantities. Bad customers may finagle front-run samples from you and then disappear for months or years without a peep.

Large bad customers like to throw their weight around.  They know they are above you on the food chain and behave accordingly.  They dangle promises of big and long term sales and wangle free services from you. Services like gratis process development, holding inventory for free, tolling or other business agreements that tie your hands and force you to open your books for their auditors.

Bad customers large and small have other maddening habits that consume resources.  Specifications that change over time, always to the side of higher stringency, are a favorite of bad customers.  Bad customers will discover that they can shave costs by elaborate just-in-time delivery schemes with favored shippers, a circumstance that will require full time attention by logistics people and production managers.

Bad customers want the transaction to follow their particular terms and conditions. Bad customers will want 60 days net- a particularly transparent scheme to float their resources in interest bearing accounts while the vendor has to finance manufacture up front.  The fetid odor of MBA finance people lingers here.

Bad customers will want their vendors to provide indemnity to shield them against any conceivable liability related to the product.  Bad customers will want to own any and all inventions pertaining to process improvements relating to the product. They’ll want to be free to take this improvement and hand it to your competitors in order to generate a tidy little bidding war over their business. 

Practices that I have been calling “bad” are generally accepted in the business world.  On the buy-side they are considered good practices.  On the sell-side they are arguably bad practices because they increase risk and expense related to the transaction. A good buyer tries to implement these bad attributes.  A good seller tries to eliminate or minimize these bad attributes. 

In the real world, one rarely has the option of walking away from bad customers.  But it is possible to stand firm and prevent profit erosion.  Very often a customers apparent demand is just a straw man.  If not entirely a bluff, it might be negotiable to some reasonable concession.  The best practice is to be up front with your concerns and communicate with the customer. They are nearly always reasonable.

The 80/20 rule often applies to customer service:  20 % of your customers will take 80 % of your time. This is life in the fabulous world of sales.  Every sales person must eventually come to terms with it.  Sales consultants talk about “qualifying” sales prospects, but that only applies to real estate and vacuum cleaners.  The world of custom business-to-business chemical sales is such that if someone can identify your product and seek your services, they are almost always a legitimate player.

Contrarian Views on Corn-Based Ethanol

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If you travel through the American midwest, you cannot help but notice that corn-based ethanol is in the news. Over at the Oil Drum blog there is a good post on the merits of corn-derived ethanol (EtOH).  One of the important points that was made is that EtOH will be replacing MTBE as an oxygenating additive. This is an important point. For the near term, as MTBE is phased out EtOH is taking its place.  Therefore, the net effect on imported oil volumes may be nil. 

Then there is the matter of the energy balance for EtOH production.  There is no clear consensus on whether or not corn EtOH production is a net gain in BTU’s.  And then there is the matter of unintended consequences in shunting large mass flows of corn into energy production.

Modern agriculture has been characterized as the process of converting diesel fuel into food. High yield crop production also requires large machinery for efficient cultivation, soil amendments, advanced corn breeding, crop rotation, and specialized pesticides.  And this is just the farming part. Modern grain production requires substantial distribution infrastructure as well as financing for the upfront seed and fuel costs.

By unintended consequences the writer of the Oil Drum post means the possibility of ecological insult resulting from intensification of corn production.  Intensified corn production may result in reduced soybean production in the US, resulting in increased production in Brazil. US farmers may simply choose to grow fewer soybean acres. Increased soybean production in Brazil could result in accelerated deforestation to meet the demand uptick. 

What the writer did not mention is that reduced US soybean production could mean reduced crop rotation, placing increased demand on synthetic ammonia (NH3) production to make up the demand for fixed nitrogen.  Ammonia production uses natural gas (CH4) as the source of hydrogen, and the carbon is lost as CO2.  Increased nitrogen fertilizer use may result in greater run-off into the watershed, placing the aquatic ecosystem under increased stress and polluting drinking water supplies. 

Increased ammonia demand will stress the natural gas market to some extent and result in increased greenhouse gas emissions. 

In addition to ecological insult, there will be a shift of wealth associated with increased diversion of corn to fuels.  If corn yields and acreage cannot be increased to make up for increased fuels demand on corn supplies, the food product chain could be subject to greater scarcity with an increase cost to consumers for everything associated with corn- corn oil, high fructose corn syrup, starch, beer production (!!) with corn starch, cereal products, animal feeds and the associated price uptick that would cause for meat products. 

It is worth remembering that corn is one of the major inputs to our food manufacturing complex. It enters directly as whole corn or as separated corn germ and corn starch, and indirectly as food for hogs, cattle, and poultry.

Many of the choices we have in the supermarket are largely based on what you can do cheaply and on a continuous process basis with grain products.  Stress on this supply will be passed along to the consumer.

One fresh approach is from a start-up company called Zeachem who aims to produce cellulosic ethanol from biomass other than just the corn kernel.  In this process, all fermentable sugars as well as cellulosic hydrolyzates can be converted to acetic acid by fermentation and the lignin sidestream can be processed to yield hydrogen.  Esterification with process ethanol to afford ethyl acetate followed by hydrogenation yields EtOH.  This process is currently in scaleup and may prove to be a major improvement in the otherwise anemic economics of EtOH. 

Purchasing Chemicals from China

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I’m having to search far-off China for raw materials much more frequently these days. The availability of many US manufactured chemicals is slowly falling off.  Especially for really basic materials.  I’m not referring to those mundane elements like iron or soda ash or copper. No no. materials from the folds and deep recesses of the periodic table. Elements with relativistic electrons.  There are short term economic pluses and minuses to this migration of manufacturing.

On the plus side, Chinese prices are often, well,  quite low. Even with multimodal freight charges from across the Pacific. When you pay peasants fresh off the farm $40/month (or whatever insane wage it is), you can undercut nearly everyone in pricing. 

But there is a down side to spot buying from China.  This is to be distinguished from contract purchasing.  In contract purchasing, you work out an agreement with a manufacturer and you lock in quality, price, and delivery in exchange for long term business.  Spot buying, however, is much more risky. What do I mean by that?

Spot buying is where you find a merchant supplier who can furnish material without the fuss and obligations of a contract.  Either they have it in inventory, they can source it quickly, or they themselves will make it pronto.  A supply contract has to be managed or enforced.  For raw materials that are less than critical, finding a spot supplier makes sense. 

Locating a spot supplier in China that you can trust is problematic. I’m not suggesting that Chinese suppliers are dishonest.  I am saying, however, that culling out a supplier from a list of unfamiliar names from the other side of the world without the benefit of a site visit or a Dunn and Bradstreet report can be risky. Spot buying anywhere is risky, but when it is complicated by international transactions, the risk multiplies a bit.

It is relatively easy to find contacts on the web that will reply to an RFQ (request for quotation) by email (often “hotmail” accounts) and make an offer.  But what you find is that you may be in contact with an agent of some description in an office suite in Shanghai, far from the factory.  Indeed, it is hard to tell just what the relationship is between the factory and your contact.  To salve over some of the uncertainty westerners may have, it is common now for these web contacts take on western names. 

Brokering goods is common in some parts of the world and scarce in others.  In the USA, brokering chemicals is fairly uncommon.  Most US companies prefer to do bulk business with the manufacturer or a catalog house.   Sigma Aldrich, for instance, is both a catalog company and a manfacturer of bulk and semi-bulk materials.  Purchasing from a broker (as opposed to a distributor) rather than the manufacturer will add costs to the transaction.  A broker is someone who connects the purchaser with the supplier.  Usually they perform drop shipments to the purchaser directly from the manufacturer.  A broker is a sort of “free agent” sales group.

I have found that there is a greater reliance on brokering in Asia and to a lesser extent, the EU.  The internet has made life a bit trickier for brokers in that a search for manufacturers is a lot less painful than it used to be.

A company will work through a broker for several reasons. Brokers are usually specialists, so a company can tap into considerable expertise in supply chain management.  And, the broker only gets paid if they find a qualifying supplier, so a manufacturer could conceivably keep the head count down. Brokers might be better at the intricacies of negotiation as well.  There are a lot of tough guys running companies out there who are actually poor negotiators.

These agents seem to work in organizations that carry on the sales and marketing activity for a factory or a series of factories.  In addition to unfamiliar business practices, there is the matter of payment.  Many Chinese companies want prepayment- they do not automatically offer 30 days net.  This makes company controllers and project managers nervous.  Since this is an international transaction, customary business laws covering remedies are not applicable. In other words, you can get royally screwed. But from their perspective, it is the same issue.  So settling into a supply relationship can take time.

Deutsche Bank’s Sankey: Simple Scarcity Driving up Fuel Prices

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As everyone knows, the price of gasoline in the USA has been steadily marching up into the low US$3.00 per gallon range to achieve all-time high pricing.  Reliable sources state that the price run-up is due to simple shortage of supply. According to testimony from energy analyst Paul Sankey of Deutsche Bank, the US refines 17 million barrels of petroleum per day against a demand of 22 million barrels per day.  An interesting analysis can be found at the Oil Drum. 

We are in a very precarious position here. An oil shock caused by a catastrophic loss of refining capacity will result in a wild price spike (some estimate US$100/bbl) while gasoline is in the mid $3.00 range already and a major perturbation to the economy- or worse.  Unfortunately, we are bogged down in the ill-conceived GW-II, the second of the energy wars. 

Bush Administration’s Soldiers of Fortune

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Lordy.  The very notion that our federal executive branch is managing a contractor army to promulgate its policies, apparently outside of the oversight of the legislative branch, is the kind of revelation that takes your breath away.  

The presence and extent of mercenaries, or commercial warriers, has been popping up in the news lately.  This video is given by Jeremy Scahill, an investigative reporter at The Nation.  The Bush II administration has placed soldiers of fortune in Iraq (and elsewhere?) whose fundamental operating sensibilities may be rooted in their company Articles of Incorporation rather than the ideals of a nation state.  On a recent edition of Fresh Air, Terry Gross interviewed Scahill and he recounted some chilling observations related to the emergence of the private army business.

No doubt, the DoD has a thousand page contract and hard drives full of MIL-Spec terms and conditions that a contractor must abide by.  But the contractors are well paid for their trouble. 

What the people of the United States lose, apparently, is accountability.  One of the reasons a nation state has a military is to promulgate foreign policy.  The checks and balances and the separation of powers provided for in the US Constitution assure that power is shared and that there is accountability by each of the branches. However, what we have here is a circumstance whereby one branch of government has war-zone contractors obligated to the DoD, which is under control of the Executive Branch.  Exactly what is their status in regard to congressional oversight?

Let me clarify my point. It isn’t clear that there is anything inherently wrong with the US government hiring militarized contractors.  However, everything is wrong when we hire military contractors who are hidden from, or are not subject to our system of checks and balances.  It is doubly true when we ask these people to expend ammunition on our behalf.

What US law covers the conduct of US military contractors in a foreign conflict? What is their status if they are captured?  Would they be non-military combatants and be disqualified from international law covering the humane treatment of prisoners of war? Would other nations treat them like we treat the detainees at Gitmo- i.e., criminals with no rights or due process? 

What rights here at home do these folks have in comparison to US military veterans?  Do not the people of the US owe some debt of gratitude for their sacrifice? I think so.  Will Haliburton or Blackwater see to their medical needs in 20 years? Good questions.  The federal government, for all of its flaws, does have resources that function over multi-decade timeframes. 

Chemical Logistics

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Any chemical company manager will have to admit that order fulfillment isn’t over until the product is in the hands of the customer.  Chemical manufacturing isn’t just about running reactions in big pots.  It’s about attracting a skilled, reliable, and safe work force. It is about building a supply chain for the timely delivery of raw materials. It is about executing the manufacture of products in spec the first time through. It is about warehousing raw mats and products and keeping the stream of wastes moving through the system.

Chemical manufacturing requires the careful management of cash flow by minimizing costs and maximizing profits. The business office must attend to receivables and collect payments in the most expeditious way that customers will tolerate. This is no different that any other manufacturing arena- sprockets, fur caps, or rocket motors.

One of the key jobs required of any chemical company is the matter of managing logistics.  That is, managing the timely transport of raw materials onto the site and the transport of products off the site. So how does this affect the chemist??

The tender shoot studying chemistry in their junior year of college may not know it yet, but if their path is in the fabulous world of business, then some aspect of logistics may be in their future.  What kind of chemist would need some knowledge of shipping? Well, project managers, sales managers, business development managers, plant managers, procurement managers, etc.  All these positions are often filled with chemists and all have to have some knowledge of this topic.  And how does one get this knowledge? Why, on-the-job training, of course.

If you have read many of my posts, you know that I tend to prattle on about this. There is a reason. It is not uncommon for a sales person or a business development manager to spend no small amount of time with a customer trying to work out how the product will be delivered.  The transport of materials is complicated in proportion to the hazard and the chemical sensitivity to decomposition. 

Let’s say that you are in the chemical business and you are just starting the custom mfg of a trialkylphosphine.  The customer will state that they want say, 100 kg, of their R3P with a list of specifications (e.g., 99% in R3P, oxides < 0.1 %, etc, Karl Fisher water 200 ppm) for their new product. The customer has accepted the quoted price and the delivery date. Hmmm. Price, delivery, and specs. Sounds like everything is in place.

So, the question then arises: How are you going to ship it? Glass bottles? Drums? Polyethylene totes? Whoops, the material is excruciatingly air sensitive, so charging and discharging the product will have to be done airlessly. Sounds like a cylinder is just the thing. But what are the materials of construction? I seem to recall that phosphines are ligands, so can we really use a steel cylinder? Soft steel? Stainless steel?

But there is yet another question.  Do we offer the phosphine neat or as a solution? If the neat R3P is a liquid, we can move it around airlessly and charge a cylinder with it. If it is a solid, then it could be a serious problem to transfer it from a filter to a shipping container. How will you or the customer actually handle it? This is the kind of detail that chemists might find themselves groping with. If it is a solid, the customer might have to consider receiving it as a solution in a non-interfering solvent.

Then the matter of transporting it arises. In the present epoch of security theatre, air transport of any quantity might be banned. So, surface shipment will be needed. The matter of heated shipment may arise if freezing or precipitation is an issue. The last thing anybody needs is a cylinder full of precipitated solids in it.  Remember, if you are shipping product in a heated trailer in the winter, you may have stiff competition from other customers who need to ship their lettuce or strawberrys. In some locations, reefer trucks as they are sometimes called may be in short supply.

OK. So you’ve specified a reefer trailer for heated transport of the goods. Let’s say that the product solution will crash out precipitate at 15 C. In the trailer everything is just fine. Fine that is until the shipper reaches a transfer point and moves the product out onto the loading dock where it sits in the freezing weather for a few hours waiting to be put into another trailer. Or it sits in unheated warehouse space for a while.

Eventually, the cylinder of R3P solution arrives and, sadly, has precipitated and won’t come out of the cylinder. So there you are. The customer is unhappy and you now face having to haul it back and recover the product. These are the kinds of problems that chemists on the business side (the plow horses) can find themselves dealing with. Of course, the R&D chemists (the show horses) are rarely bothered with such things.

On Extracting Abstractions from the Abstracts

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One of the chores that must be done when developing a new technology is “Due Diligence” as applied to intellectual property.  In the fabulous world of industrial chemistry, there is an overlapping of the three great magisteria- Business, Chemical Science, and Law.  In order to get a new product or process on stream, we must find a line of sight through the many hoops and past the many gatekeepers of those magisteria that can obstruct our path the fame and fortune. 

First, allow me to pay homage to two great and wondrous database services- the United States Patent and Trademark Office (USPTO) and Chemical Abstracts Service (CAS).  They are the custodians of data generated by some of the most cantankerous and unruly people on earth- lawyers and chemists.  Their task is complex and effectively endless. 

In actually trying to do a reliable due diligence analysis, a searcher must ascertain that a proposed bit of IP does not conflict with claims in valid patents owned by others.  In a chemical IP search, one can divide the claim universe into 2 domains- composition of matter claims and process claims.  In the patent, the first sentence will state whether a composition is being claimed or that a process is being claimed. Some patents have both composition claims and process claims.

So here is the problem.  Let’s say that you are trying to determine whether or not you have the right to manufacture a particular molecule. This apparently simple question actually deconvolutes to two fundamental questions: 1) Is the composition of matter in the public domain? And, 2) are there claimed processes for it’s manufacture? 

There is a third domain and that relates to the use of the composition.  However, this does not impinge on the right to manufacture the material, just it’s use.

If the material is claimed as a 1) composition of matter in a valid patent, then you cannot lawfully make it or possess it (for commercial use, though precendence is being set for a bar on R&D use as well) without the permission of the assignee of the patent. Note that the owner of the patent is the assignee, not the inventor(s). If the composition of matter is not claimed, then it is in the public domain, assuming that you did not learn of it under trade secrecy. 

So, let’s say then that your target material is in the public domain. Now the question is 2); does your proposed method for its manufacture infringe on claimed methods? This may be a hard or expensive question to answer, and the reason is plain.  When you execute a search for IP issues related to a substance, you search path is limited to fields, key words, structures, CASRN’s, etc. that are flagged in the major databases. 

A CAS search on a given compound will lead to patent families that mention the compound, its preparation, or its use. But you have no way of knowing whether the patent reference claims the composition, its preparation, or its use.  It could very well be that there are no claims pertaining to the compound of interest- it was just cited as an example of some sort.

A CAS search is highly accurate in terms of the focus on a particular compound.  However, a USPTO search is not. A chemical search of the USPTO public database (USPTO.gov) is pretty much limited to a search for specific character strings.  It is possible to narrow down the scope of a search by concentrating on classification numbers, but I have never been convinced of its thoroughness.

After all of this set up, here is my point.  The problem we all face in doing our IP due diligence is that there is no direct means for determining from an indication in a database search report whether or not a composition is in the public domain. A CAS search will not yield a clear yes or no, and the USPTO database search only retrieves hits that have the requested strings.  Despite the advances in database technology, the user still has to collect all of the patent citations pertaining to the material and sift through them and interpret the claim language. 

Wouldn’t it be useful to the public if an applicant for a US patent were required to collate the claimed compositions for uplink into a database?  With such a “field” in a CAS or Beilstein search, you could tell in an instant if the composition was claimed. The same argument holds true for processes.  At present, the “retrievability” of claimed art is poor.

Patent attorneys are likely to object along the following arguments: not all patents that you retrieve from a search on CAS or USPTO will be valid.  Some patents will have expired naturally, others will have expired for non-payment of fees, and still others will have serious weaknesses that will only be apparent from an examination of the prosecution history as revealed in the file wrapper.  Abandonment may be difficult to detect for abstracting services, as would flaws in the prosecution as documented by the wrapper.

Another objection that is unlikely to be openly identified is the matter of clarity.  There is may be advantage conferred to assignees when a claim is a bit fuzzy.  This may afford some manuevering room during an infringement action, though it might be hard to say who the beneficiary would really be. I would estimate that whomever had the most persuasive attorneys would prevail.

It would be interesting to hear from others about this matter.

Importing Chemicals From Asia

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When you are involved with sales, you have to wake up with three words on your mind every morning- Sell, Sell, Sell. In the fabulous world of chemical business you can either make stuff or re-sell stuff. Sometimes you do both. After all, you can’t make everything.

A well run mature chemical business will have more opportunities than capacity. By contrast, an immature company may have more capacity than opportunities.  Many companies get to the point where they have to start choosing which customers they want to make the happiest because they are low on capacity. During the ups and downs of the business cycle, plant capacity goes from abundant to slim and back. It is the job of the sales person to keep the plant booked solid.

When your plant is at capacity, a funny thing happens.  It occurs to people that not all products are equally desirable. That is, some products are more profitable than others. When this is the case, management will start to wonder why they are spending scarce reactor time with products that are the least profitable.  Suddenly, products that have been steady money makers over the years begin to look a little anemic.  Pretty soon, these products are seen to be liabilities of a sort.  There is loose talk about pushing them back on the timeline; of offering 12 week lead times rather than 4-6 weeks. Then one day, they are off the production schedule. It has been decided that we can no longer afford to “neglect” other products because of these lower dollar products.

So what do you do? There is still a market out there for these orphaned products. Here is one option.  You outsource the product and resell it.  The trick is to find a supplier whose price is low enough to allow for a decent profit when you resell it.  In fact, this is a way to increase plant capacity without having to buy any real estate or pots & pans. If you can pull it off, you might even come out looking like a flippin’ genius.

The trick is to find a low cost source- preferably one whose selling price is less than or equal to your old manufacturing cost. This allows for the profits that are the same or better than before. So where do you go?  Commodity feedstock costs tend to be similar around the world. But in some countries, labor costs and overhead may be dramatically lower.  At the present time, Asia- China and India- are attractive locations for low cost manufacturing.

But, buying from Asia may be trickier than you think and for reasons that you have not considered.  Neglecting import duties which may add 0 % to 10 % (or much higher) to the cost, and neglecting tranportation costs and delays, you have to think about how the actual business transaction is going to work. 

Here is the problem:  You want to start buying from a new manufacturer or trading company in Asia.  Now, I’m not talking about the the pharma business- I’m talking about fine chemicals. There is a good chance that whomever you contact on the web is not going to be a factory person. It is likely that your contact will be a trader of some kind. This is very common in Asia. My experience has been that these traders will represent a “stable” of manufacturers who have some kind of agreement with the trading firm.  In fact, making a direct manufacturer could prove to be difficult if you are limited to internet searches.  The best way to meet manufacturers is at a trade show.

The contact is likely to want prepayment at least initially, unless your name is Pfizer or DuPont. So, you will have to send a purchase order and do a wire transfer of some funds. That’s easy enough.

The question is, do you really want to do a prepayment? What if there is a SNAFU and your payment is taken, but the product isn’t shipped? In the US, you’d have some recourse in the civil courts.  Or, what if the quality is inferior?  You might find that getting a replacement or a refund is … difficult.

I have not yet had a really terrible experience with importing. At least not involving anything underhanded. Most of the problems that I have seen involve logistics. Yes Mr or Ms chemist, if you are to be involved with outsourcing in a non-trivial way, you will have to learn about the transport of hazardous goods. International transport of chemicals, hazardous or not, is a multimodal affair involving ground transport on both sides and air or ocean in between- trucks, planes, container ships, FedEx, UPS, DHL, etc.  Some things you can ship internationally by air and others have to go by boat. Remember, there is no overnight to Asia or Europe. At least without hiring a private jet.

Outsourcing involves way more than just finding a vendor and a good price.  Before you commit funds to the purchase, you MUST ascertain that the stuff will arrive in a timely fashion.  It has been my experience that Asian chemical suppliers I am familiar with  have gotten really good in the manufacturing part, but they are often lacking in the logistics part. 

When you contact a new Asian supplier from the USA, it is critical to drill in to find out just how they intend to ship the materials and what the Incoterms are. And here is a really important part, so put down your yogurt and pay attention. You have to get familiar with Incoterms. It is critical that you understand who is responsible for arranging for what and where you take ownership of the goods.  The sellers price will vary depending on the Incoterms. 

A common term might be “Ex-Works”, meaning that the seller makes the goods available on the sellers premises, and it is the buyers responsibility and risk to arrange for transport from there.  EXW strongly favors the seller.  Other terms include CFR, “Cost and Freight”; CIF, “Cost, Insurance, and Freight”; FOB, “Free on Board”; DDU, “Delivered, Duties Unpaid”; and DDP, “Delivered, Duties Paid”.  All of these terms have specific meanings with the responsibilities and liabilities defined. These terms may be negotiable.

For an R&D sample, these transportation details are not a big deal.  But for bulk materials, you can experience failure modes you never dreamed existed. There are companies that specialize in the international movement of materials. It is always best to engage a logistics firm to help with the coordination. For example, if you were going to send a cylinder of butyllithium to Argentina, how would you do it?  See what I mean?

Chemical Advertising

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For the past eight years I have been involved in advertising the goods and services of my company.  I have designed a series of ads you’ve seen in C&EN and I’ve just recently gotten a trade name through the trademark process at the USPTO.  I have been deeply involved in the design several iterations of chemical catalogs and web-sites. 

What has been interesting about this experience is the chance to witness up close how the advertising business works.  I have been an industrial chemical sales manager, so I can spot salesmanship a kilometer away.  In some respects, my chronic exposure to it has built up a resistance to the enchanting ways of the art.  But I have nothing over advertising account managers (a.k.a, advertising sales people).  These people are smooth.

It has been said that 50 % of all advertising is wasted effort and money. The trick is to figure out which 50 %. Advertising is something you know you should do, but the question is, how much should you spend and what should the message be?  Ah, that is the trick.  An advertising rep will encourage you to spend as much as possible.  They understand your uncertainty and trepidations, but they are in the job of selling ink & space.

The uncertainty over what and how to advertise is always there, but it is possible to put some boundaries around it. You do this by having an advertising budget. At minimum, this limits the cash bleed out in advertising costs.  Pretty elementary so far.  Next you have to decide on a message and an image.  Sometimes the image is the message. Other times, you will want to trot out specific goods and services. 

Within your company, just as everyone believes that they are an expert in pricing, everyone will have the same certainty that they are an expert in how to design ads.  I bring this up because rarely will someone have complete and solitary control over the design of an ad campaign.  There will be input from all levels- from the janitor to the CEO- however, some opinions are more important than others. If the CEO or other officers of the company don’t like the ad campign, then no matter how brilliant or clever it is, the thing is dead.  Like death and taxes, it is an elementary fact of life.

Selling chemicals is not quite like selling fragrances, apparel, or cars.  In advertising chemical goods and services, you can’t overtly appeal to the vanities controlled by the gonads.  People do not buy chemicals to fulfill some notion about their identity.  They buy chemicals for the same reason people buy cordless drills, 2×4’s, and bolts.  They are going to make something else or use the chemical to achieve some purpose other than simply being in possession of the material.  Owning a pile of KOtBu or a drum of DMF does not confer any upper eschalon status that I am aware of. It might alarm the local authorities, though.

But there is one vanity that a chemical sales campaign can appeal to: that is the need to have achieved a good “buy”.  Being a smart buyer feels good. Having a track record of being a smart buyer will help your company and will give bouyancy to your career.  People are always looking for a good deal and the advertiser needs to focus on this need.

But a smart buy isn’t simply about low unit price.  Availability and quality are important as well.  Nothing sours people quicker than the realization that they have been duped with an inexpensive purchase of low quality chemicals or late delivery. So there is always the need to balance price with quality and delivery.

Some companies are very smart about this.  Take SAFC (“Aldrich”) for instance.  Aldrich tends to be a premium supplier of chemical products.  While their catalog prices tend towards the higher side of average, at least by my observation, you can depend on high quality and fast delivery. They have built a successful institution on high quality and excellent service.  When you pay $80 for a gram of something, you are paying for good quality stuff and the price of near instant availability.  The fact is, most people are willing to pay the price for availability.

So, while you can’t take the “Give Her Diamonds” approach of DeBeers, your chemical advertising campaign can appeal to the need to be smart and to look smart.  The way to make a buyer look smart is to offer a service that gives competitive pricing and timely delivery of quality goods.  Buyers always have a list of difficult-to-find materials as well, so advertising unique reagents and intermediates is often worthwhile.