The manufacture of synthetic resins is the fastest growing sector of the chemicals industry in Australia and overseas. In the U.S., for example, chemicals output as a whole increased by 6.6 percent per annum between 1960 and 1968, while the real output of synthetic resins increased by 14.3 percent per annum over the same period. The dependence of the
chemicals industry on the plastics processing industry as its fastest grow- ing market is heightened by the significance of economies of scale and
^ This point holds for Australian patents statistics in general since 80 percent of all patents originate overseas.
J •n. l O .
capacity u t i l i z a t i o n in cliGiaical plants p r o d u c i n g synthetic rssin.
Hunter and Webb (1963) provide a detailed description of the Aust- ralian chemicals industry. This section is confined to some general observations on the nature of the chemicals industry, and to those fac- tors which bear directly upon the development of the plastics processing industry in Australia.
A salient feature of the chemicals industry is its technological base. The ability of the industry to develop sophisticated technology to obtain valuable products from relatively cheap and abundant raw materials is prob- ably the most important factor behind the growth of the industry since the second half of the nineteenth century. In the long run the viability of the modern chemicals company as an independent entity is determined by its
2
efficiency in producing two products: chemicals and technology. The production of the former is subject to economies of scale at the plant level while the production of technology that is, research, is subject
to significant economies at the firm level. The industry's oligopolistic 1 For evidence on economies of scale and capacity utilization in
the Australian context, see ACIC Public Evidence to Tariff Inquiry on Industrial Chemicals and synthetic Resins, pp 31-41.
For evidence of economies of scale in chemicals plant size in the U.S., U.K. and Japan, see Haldi and Whitcomb (1967), Pratten (1971, pp37-59) and Lau and Tamura (1972), respectively.
^ This thesis is skilfully developed by Hohenberg (1967) in his analysis of the development of the German, French and Swiss chemicals industries in the nineteenth century. Current observation and the evidence provided by Freeman (1963) and Hufbauer (1966) suggest that the thesis is no less relevant to the t^ventieth century chemicals industry.
^ On economies of scale in research and innovation in chemicals see Mansfield (1968a,b) and Archilladelis (1971).
For the U.S. chemical industry Mansfield finds that "increases in research and development expenditures in the relevant range (and holding firm size constant) result in more than proportional increases in inven- tive output" (1968b, p67).
Similar results from a study of 36 chemicals innovations are reported by Archilladelis using market penetration as the yardstick of a successful outcome to a research project he concludes that "The results provide little support for the hypothesis that size of firm is of great importance in inn- ovation but fairly strong support for the hypothesis that size of project
team, and to a lesser degree, project expenditure is often of considerable importance." p269.
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market structure follows as a direct consequence of these economies of scale.
For practical purposes, the chemicals industry exhausts its economies of plant scale. There is, however, no evidence to suggest that economies of firm size are similarly exhausted. In other words, the minimum economic scale of output (m.e.s.) at which unit costs of production for the plant cease to fall significantly is considerably less than the minimum economic scale of output where unit costs cease to fall significantly for the firm. For this reason alone, chemicals companies tend to be multiplant operations. Moreover, given the relatively small size of many domestic markets compared
to the m.e.s. of a chemicals firm, the operations of these companies are typically multinational with ownership and control centred in the largest domestic markets. In Australia, the small size of the domestic market and the late date of industrialization have contributed to the high degree of foreign ownership of the chemicals industry. The effect of these factors has been accentuated by official government policy, which in marked con-
trast to the Japanese example, has accepted foreign investment uncondition- ally and which in emphasising import replacement and tariff protection has distracted industrialists attention from export prospects thus further em- phasising the constraints of a small domestic market.
Table 3.1 shows the equity holdings in major chemicals companies producing synthetic resins in Australia and demonstrates that these com- panies are predominantly foreign owned.
For the plastics processing industry one direct consequence of the equity links between the Australian chemicals industry and its U.K., U.S. and German parents is that the flow of new technology into Australia is facilitated. The ready and cheap access to new technology from overseas sources has largely precluded independent research by the Australian sub- sidiaries thus increasing the reliance on overseas technology.
1 n ^ J- v.- fj
TABLE 3.1
OMERSHIP OF MAJOR AUSTRALIAN CH£NICi^J.S COMPMIES as at June 1973
Australian Corapany Percentage of Paid-up Capital O^med by -
C.S.R. Chemicals Ltd. The Colonial Sugar Refining Co. Ltd. 50.3%
I.C.I. Australia Ltd. 49.7% Dow Chemical (Aust.) Ltd.
B.F. Goodrich Chemicals Ltd,
DOV7 Chemical Company of
Michigan, U.S.A.
B.F. Goodrich Chemical Co. of Cleveland Ohio, U.S.A.
James Hardie Asbestos, Australia
100 %
80 % 20 % Hoechst Australia Ltd. Fabwerke Hoechst AG,
F.R. Germany
Australian shareholders
53 % 47 % I.C.I. Australia Ltd, I.C.I. Ltd., U.K.
Australian shareholders Miscellaneous overseas 56 41 3
%
%
%
Monsanto Chemicals (Australia) Ltd.Monsanto Co., U.S.A.
Monsanto Chemicals Ltd., U.K. Australian shareholders 38 50 12
%
%
%
Shell Chemical (Australia) Pty. Ltd.
Union Carbide (Australia) Ltd.
Shell Petroleum Co. Ltd., U.K. Union Carbide Corp., U.S.A. Australian shareholders
100 %
57 % 43 %
ill)
The nature of the research and development undertaken by Australian chemicals companies is discussed in detail in section 3.2 below.
The protective tariff is a major determinant of the structure and per- formance of Australian industry. Until the late 1960s the level of the tariff was "tailor made" for each specific commodity, that is, the tariff was set at a level which would offset the cost disability of the Australian
commodity compared with the import.^ This policy has led to excessive fragmentation of the local industry in terms of both firms and plants and has discouraged any international specialization. The Australian chemicals
industry, therefore, appears as a smaller version of the oligopolistic
2
international market.
The small domestic market, and the duplication of production facil- ities encouraged by high tariff levels, have resulted in plant sizes which are typically 25-42 percent of minimum economic scale (m.e.s.) that is, the
3
scale at which unit costs cease to fall significantly. Table 3.2 shows the size of Australian plants manufacturing the major feedstock, ethylene, and three thermoplastic materials as a proportion of m.e.s.
^ The first public rejection by the Tariff Board of traditional tariff making principles and practice may be found in the Board's Annual Report for Year 1966/6 7. In this major report, the Board
announced its proposal for a progressive and systematic review of the Tariff in areas of high protection and developed the concept of effec- tive protection.
^ The oligopolistic structure of the Australian chemicals industry has been reinforced by the competitive industrialization policies of the state governments. In particular, the inducements offered by the Vic- torian and New South Wales state governments to persuade large companies to locate their plants within their borders have probably contributed to the duplication of chemical plants in Sydney and Altona.
^ The extent of the duplication of plant is shown in the table Material Producers
PVC ICI Australia & Goodrich Chemicals LDPE ICI Australia & UCAL
HDPE UCAL & Hoechst pp Shell & Hoechst
TABLE 3.2
SIZE OF AUSTRALIM SYNTHETIC RESIN PLANTS AS A PROPORTION OF MINI14UM ECONOMIC SCALE
Product Ethylene LDPE PVC PP Source: Minimum economic size 200,000 tons p.a. 100,000 tons p.a. 150,000 tons p.a. 60,000 tons p.a. Size as % of m.e.s. 1st Plant 2nd Plant 33 40 30 48 50 40 30 61 Parry (1972) and correspondence from Chemicals Companies.
TABLE 3.3
PRICE OF SELECTED SYNTHETIC RESINS IN AUSTRALIA AND OTHER COUNTRIES,1957
(Base : Australia = 100) LDPE PVC PS Producer Countries U.K. 90.4 65.7 91.7 U.S. 80.9 87.6 66.3 Japan 107.5 69.4 84.0 Importing Countries Hong Kong 81.4 101.5 75.2 Nev; Zealand 89.4 93.4 75.7 Australia 100 100 100 Australian Price 47 54k 423^ (pence/lb)
Source: The Plastics Industry of Australia, Department of Trade, 1957 •
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As a result of the sub-optimal scale of plants and the high costs of feedstock, electricity and other inputs, Australian production of syn-
thetic resins is uneconomic by world standards and the industry has tradi- tionally depended heavily upon tariff protection against imports. Table 3.3 shows the relative prices of the three major thermoplastics in Japan,
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U.K. and other countries in 1957 relative to the Australian prices. ' Since 1950, there have been more than 30 reports by the Tariff Board and the Special Advisory Authority on the level and form of protection given the industry. A summary of Tariff Board and S.A.A. Reports on Synthetic Resins and Plastic Goods is given in Appendix III.2.
As shown in Table 3.4, the price of synthetic resins in Australia has declined at slower rates than those observed for the same materials in maj-
3
or industrial countries, including the U.K., U.S. and Japan. Accordingly, the materials cost disability faced by Australian plastics processors
against imported plastics goods has widened rather than narrowed over time,
One result of the traditional approach to tariff principles and making was to disturb the price relativities between synthetic resins made in Australia and those imported at non protective rates of duty under By-law. In many cases the admission of a substitute product at non-protective rates of duty enabled it to be landed in Australia at price equal to, or below, that of the competitive locally-made product despite the fact that in overseas countries the substitute product was more expensive than the product for which it was substituted in Austra- lia. This situation ended when following the release of the Tariff Board's Report on Industrial Chemicals and Synthetic Resins, ]3 April, 1966, when the imported substitute product became dutiable at the pro- tective rate applicable to the locally-made product.
^ The effect of the tariff on synthetic resins prices is discussed in section 3.1 of Chapter VI.
In percentage terms, the price of synthetic resins in Australia fell steadily at approximately 4 percent per annum during the period 1953/54 to 1967/68. Overseas synthetic resins prices fell at approx- imately the same rate until 1960 when major additions to capacity and a significant increase in the size of plants caused a rapid decline in prices between 1960 and 1966. After 1966 the rate of fall in prices overseas reverted to the 4 percent level until the early 1970s when the price of the major thermoplastics ceased to decline.
TABLE 3.4
MOVEMENT IN PRICES OF MAJOR PLASTICS MATERIALS
C Jot^fi*. : = 1 o o )
PVC (G.P.) LDPE (moulding grade) PS (G.P., Crystal)
Aust U . K . U.S.A. Japan Aust U . K . U.S.A. Japan Aust U . K . U . S . A . Japan
1955 ICQ 100 100 n/a n/a 100 100 n/a 100 100 100 100
1956 100 93 71 100 n / a . 100 90 n/a 100 100 100 n/a 1957 87 93 71 93 n/a 94 85 n/a 100 100 93 100 1958 87 93 71 59 100 94 85 100 100 100 81 86 1959 87 88 62 62 100 86 85 99 92 84 73 94 1960 71 76 62 61 89 79 79 95 78 84 73 70 1961 71 71 49 53 72 63 63 78 73 61 61 68 1962 68 62 42 46 76 51 60 64 72 61 61 66 1963 71 62 40 45 76 54 52 49 70 61 57 53 1964 63 60 42 45 76 54 43 45 66 61 49 51 1965 60 60 42 45 67 45 43 44 64 48 49 43 1966 59 59 42 43 66 51 43 43 64 47 49 37 1967 61 53 39 46 66 48 46 36 64 42 48 39 1968 61 50 39 40 66 48 46 29 59 42 52 50 1969 60 48 37 40 58 48 35 27 56 40 50 34
3.2 The Contribution of The Australian Chemicals Industry to Plastics Technology
The very substantial economies of firm scale in research and develop- ment, which to a large extent explain the international character of the
chemicals industry, lead to a concentration of research and development effort in central laboratories in the home market.
The ability of Australian cheaiicals companies to purchase new tech- nology cheaply from their overseas associates obviates the need for expen- sive research and development in Australia. Accordingly, research and development undertaken by Australian chemical companies into plastics and other materials is negligible compared with the expenditures of their overseas counterparts and differs qualitatively in its nature.
Details of research expenditures on plastics are not available for Australia nor for overseas countries. Hence information on polymer patents
filings and information on research expenditures on all chemicals must serve as rough guides to the intensity of research effort into plastics. According to Freeman (1963), the leading German companies, BASF, Bayer and Hoechst, I.C.I, in the U.K., and Du Pont, Union Carbide, Dow and Eastman Kodak in the U.S., spent 4 percent or more of sales on research
1 2
and development in the 1950s and early 1960s. ' For the same period Zeidler (1961) estimates that Australian research and development expendi- tures on chemicals represents only 0.6 - 0.8 percent of sales.
^ Since the 4 percent figure refers to the leading companies it may represent the upper bound, but in Germany, at least, all chemical companies spent near this proportion on research.
2
A decade later, the picture is almost unchanged. For the ten
largest chemical companies in 19 72, the simple average of research and development expenditures as a percentage of sales was 4 percent. There is, however, a wide range of research intensity between these companies, for example, the figures gor Du Pont and Union Carbide Corporation were 6.4 and 2.6 percent respectively. Research expenditures by German and U.S. firms were 4.2 and 3.4 percent of sales, respectively. Source: Chemical & Engineering News, April 16, 1973.
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Research and development expenditures vary considerably between companies, however. There is some suggestion that the research/sales ratio is positively related to the period of manufacture of the company in Australia, the magnitude of Australian sales, and the vintage of the products it manufactures. The evidence suggests that I.C.I. Australia and Monsanto Australia, both of which commenced Australian manufacture in the
1940s, conduct larger amounts of research and development relative to their sales than do companies such as Hoechst Australia, which commenced Austra- lian manufacture of a relatively new product in 1966. This relationship arises from three factors. First, the longer the Australian subsidiary has been manufacturing, the greater its independence and the confidence vjith which the parent can allocate research monies to the subsidiary. Secondly, the larger the size of its operation the more likely it is an Australian company can afford the minimum expenditures to establish and run an research and development laboratory. Thirdly, the older the pro- duct the smaller is the likelihood of major breakthroughs in research and relatively the more important is development, which the Australian com- panies are better placed to handle.^ Economies of scale in development and adaptation are probably less significant than they are in basic re- search.
Research and development by the Australian chemical industry as a whole also differs qualitatively from research and development undertaken
overseas, with the major emphasis directed to the adaptation and development
^ Those chemicals companies undertaking research of a more
fundamental nature, such as I.C.I, and Monsanto, have concentrated their attention on pesticides, agricultural chemicals and veterinary products, so that taking the local industry as a whole it seems likely that there is greater emphasis on the adaption and development of
existing technology in the case of plastics than there is in the case of chemicals products in general.
1
of existing technology for the Australian market. Referring to research and development into all chemical products, I.C.I. Australia, for example, stated in 1966:
"The Company's research is aimed mainly at solving those problems unique to Australia and supplying special needs which have been determined in discussions with our sales personnel."
ICIANZ, 37th Annual Report, p8.
The emphasis on the adaption and development of existing technology for the Australian market is repeated in the pattern of local research and development into plastics. Union Carbide Australia provides an example:
"As a licensee of Union Carbide Corporation for both poly- ethylene resin manufacture and polyethylene film technology. Union Carbide Australia Ltd. is primarily dependent on the Corporation for generation of new resin and film products. Development work in Australia accordingly is confined largely to minor modifications to tailor-made products to suit specific local requirements. Two such examples may be given.
1) The high sunlight intensity compels use of ultra-violet inhibitors in polyethylene film used in outdoor applications. Such UV protected film is limited in use for the northern markets. The UY inhibitors used, however, have all been
developed in Europe or the U.S.A.
2) Heat sealing of bags containing powdered materials such as skim milk powder, in which Australia enjoys a large export trade, require the use of antistatic additives to the film to minimise difficulties in heat sealing, which would otherwise occur." ^
Table 3.5 indicates the size of the research and development effort into all chemicals made by Australian chemical companies in 1969. Although
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TABLE 3.5
TECHNICAL RESEARCH CENTRES OPERATED BY A U S T R A L I M CHEMICALS COMPANIES IN 1969 UNDERTAKING RESEARCH INTO PLASTICS AND POLYMERS
Number of Research Staff
ICI ANZ 115 Monsanto Australia 40
UCAL 12