Growth by Vertical Integration: Chemicals, Paper, and Glass

The leading enterprises in the chemical, paper, and stone-clay-glass groups used large-batch and continuous- process methods of production similar to those of the oil and rubber companies. However, their markets differed. They manufactured primarily producer’s rather than consumer’s goods. Yet in nearly every case their producer’s goods went to a large number and wide variety of users. They were sold to builders and contractors, as well as to manufacturing, mining, and other industrial enterprises. In many cases a small part of their output reached the consumer market through wholesalers. And in the specific industries within the larger industrial groups, where such mass producers had a mass market, the large integrated enterprise flourished.

The pattern is particularly clear in the paper group (26) and the stone-clay-glass group (3 2). Of the 7 paper companies with assets of $20 million or over, 5 produced newsprint and heavy kraft paper. Between 1900 and 1917 all 5 had extensive marketing organizations and owned tracts of timberland in Canada and the American south. The other two, American Writing Paper and Bemis Brothers Bag, had a broader line of products. They had their large buying and selling networks but did not integrate backward to control their raw materials. And although newsprint and kraft paper companies continued to dominate their industry, American Writing Paper and Bemis Bag found they had few advantages over small, nonintegrated competitors.15 Their industries remained competitive at the time when newsprint and kraft paper were becoming oligopolistic.

In the stone-clay-glass group, 4 of the 6 largest firms in 1917 were in plate and window glass and the cement industries. All 4—Pittsburgh Plate Glass, American Window Glass, Lehigh Portland Cement, and Atlas Portland Cement—continued to lead their industry for decades, although the last operated as an autonomous subsidiary of United States Steel after 1930.’° A fifth, Owens Bottle Machine, which became Owens-Illinois in 19Ó5, is still a leader in this industry. The sixth firm, Harbison-Walker Refactories, was a merger of many small firebrick companies producing for local markets, largely in the middle Atlantic states. It was integrated from clay pits to sales to customers. However, given the nature of its production technology, it grew at a much slower rate than the other firms in this group and soon lost its place as one of the nation’s largest industrial manufacturing firms.

The names of the enterprises in chemicals (group 28) are less familiar to present-day readers than those in the food, oil, rubber, paper, glass, and cement groups. The modern chemical industries did not come into their own in the United States until the 1920s. Rapidly changing technologies meant that the processes of some firms listed in Appendix A became obsolete, while other firms would develop a highly diversified product line. Even so, the basic structure of the American chemical industry was becoming clear.

By 1917 all the chemical companies with assets of $20 million or over had integrated production with distribution.17 More had grown by merger than by internal expansion. Three of those that took the latter route— Grasselli Chemical, Sherwin-Williams (paint), and Procter & Gamble— had nineteenth-century roots. A fourth, Semet-Solvay, began in 1895 as a builder and operator of by-product coke ovens and was soon producing ammonium sulphate, benzene, toulene, and other chemicals. In the post- merger movement these older enterprises and the early mergers—National Lead and New Jersey Zinc—continued to thrive. Only American Linseed Oil, still suffering from National Lead’s vigorous competition, returned to its early unhealthy financial condition. The mergers that had been formed between 1899 and 1902 moved, some much more quickly than others, from horizontal combination to vertical integration. These included Du Pont, 2 of the 3 fertilizer companies—Virginia-Carolina and American Agricultural Chemical—United Dyewood, Barrett, General Chemical, Union Carbide, and National Carbon. (The last 2 became part of Union Carbide and Carbon in 191 7 . ) The mergers formed after 1903 (including International Agricultural Chemical, National Aniline, and United States Industrial Alcohol) centralized production and built extensive purchasing and sales networks. United Drug, a retail chain, moved the other way by investing in its own manufacturing facilities.

As in the case of the food and oil companies, the chemical firms integrated further backward to control part of their supplies of raw and semifinished materials.18 Often these moves upstream were defensive. Managers did not want to pay exorbitant prices or shut down operations because of an inability to obtain adequate supplies. These firms, like food, petroleum, rubber, and glass companies, came to own or lease their own ships, rail cars, and other transportation facilities. Here the motive, a more positive one, was to improve the scheduling of flows. In most cases the marketing organization of chemical companies provided specialized serv- ices in addition to coordinating flow. They had storage facilities for volatile and often dangerous chemical products. As in electrical and machinery firms, their salesmen were technically trained engineers who instructed customers on the most efficient use of their industrial products. And like the leading companies in those technologically advanced industries, they pioneered in research and development to improve product and process.

In nearly all cases these firms dominated their particular industry or product market. When, as in the case of American Tobacco and Standard Oil, antitrust action split up Du Pont, the leader in the explosives industry, the response was similar. The spin-offs, Hercules and Atlas, adopted a strategy of vertical integration, building their own marketing and buying organizations.

All these firms continued to prosper, except for the 3 fertilizer com- panies, United Dyewood, whose processes became obsolete, and American Linseed, which never learned to compete successfully with other large integrated firms. All except for American Linseed and Aetna Explosives remain in operation today, either in their own right or as autonomous divisions of major chemical or other industrial companies. For example, Barrett, General Chemical, National Aniline, and Semet-Solvay became divisions of Allied Chemical when that merger was fashioned in 1920. The structure of the American chemical industry took on its modern form in the 192 os, after the formation of Union Carbon and Carbide and Allied Chemical; the shift of Du Pont, Hercules and Atlas from explosives to a large variety of chemical products; and the growth and diversification of smaller and more specialized companies such as Dow and Monsanto. These large, integrated, and increasingly diversified firms dominated their product markets.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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