Dow Chemicals Bid Case Analysis

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Dow Chemical’s Bid - Case Analysis 1. What are the critical success factors in the polyethylene business? Polyethylene is produced from ethylene or alpha olefins. Both are the product of a cracking process using either naphtha molecules derived from crude oil or ethane molecules derived from natural gas. The production of ethylene and derivatives such as polyethylene is highly integrated, requires large capital investments and goes along with a high operating leverage. Polyethylene is a commodity product, which trades globally and within a narrow price band. Critical success factors in the polyethylene business are: • Large plant sizes as large plants offer significant economies of scale • Vertical integration as a result of the highly integrated production process • Stable supplies of ethane of naphtha to support the highly integrated process and to allow for operating rates near 100% • Ethane as input o Plant cost for ethane cracking are about half of plant for cracking naphtha. o Operating cost are lower as dracking ethane requires less energy, manufacturing intensity and equipment than cracking naphtha • Low transportation cost including duties and levies as a result of the commodity product nature and the narrow price brand of polyethylene. • High global capacity utilization, as prices and profit margins are closely linked to the global operating rate i.e. industry overcapacity. • Technology leadership and operational excellence to keep and enhance the cost leader position required to compete with government-subsidized chemical complexes having different targets (“loss leader”, “zero return”) -1- Dow Chemical’s Bid - Case Analysis 2. How would you convince Dow headquarters to invest in the PBB project? Dow Chemical has no foothold in polyethylene in Argentina or the rest of the Mercosur region and Dow Chemical cannot afford to risk its globally leading
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