How a classic specialty chemical market works: the synthetic dye industry: How the market was structured

3.1 Many entrants, many failures, a few giants

By 1914 about 116 dye firms had entered the industry in Germany, about 47 in Britain and about 35 in the United States. About 91 of the German firms failed, against 36 British and 25 American. The failure rates were similar everywhere, between 71% and 78%. What differed was the absolute number of trials. Germany won with more births and more deaths. Murmann's evolutionary reading is that in a new industry, where nobody knows the winning formula, more start-ups mean more chances that someone hits it.

The number of firms alive at once stayed small. Germany peaked at 43 in 1897. Britain never had more than about 17, the United States about 15, and the whole world never more than about 85. Entry came in waves when new chemistry opened new ground: aniline dyes before 1863, azo dyes in 1876-1885. Exit waves followed a year or two later, as too many hopefuls chased the same customers.

Concentration rose steadily. On the eve of the war BASF, Bayer and Hoechst each made about 22% of German output, which given Germany's share meant nearly 20% of world output each. Five German firms (with AGFA and Cassella) made more than 90% of German output, or about 76.5% of world output. In Britain, Levinstein and Read Holliday had about 30% of home production each; in the United States, Schoellkopf had about half.

No firm founded after 1870 became a world leader. Barriers to entry kept rising, but they were not big plants. They were international sales networks, expensive research laboratories that could match any new dye quickly, and large patent portfolios. A newcomer with one clever dye now faced rivals who could copy, out-sell and out-patent it.

• Murmann (2003) · pdf pp. 53, 56-57, 66-69, 130, 226, 234-235

3.2 Prices fell year after year, and survival meant cutting costs faster

Price competition was a feature from the second dye onwards. Perkin held a patent on mauve, but fuchsine was made by many firms, and its price fell to about 10% of the 1860 level by 1864. Alizarin fell from 270 marks in 1869-71 to 40 marks in 1877 and 9 marks in 1886, a drop of about 97%.

Murmann traces the falls partly to cheaper raw materials (British benzene fell from 12 shillings in 1883 to 3.5 shillings in 1885) and above all to better large-scale methods and fierce competition. For a firm the rule was simple. Prices would fall; survival meant cutting costs faster than prices fell, so that some margin remained to invest. Bayer's alizarin plant shows how. When prices crashed in 1873, a newly hired chemist judged that the plant would never make money. Carl Rumpf replaced the master craftsman in charge with a chemist and rationalised the process. Three months later the plant made 6,000 pounds of better alizarin a day instead of 600. Five rival alizarin makers around Bayer's home town were out of business by 1874.

The same squeeze hit natural dyes. Indian indigo fell from £400 a tonne in 1877 to £230 in 1903 as synthetic indigo arrived, and exports collapsed. Only the war, which cut off German supply, sent prices back up to £830 in 1917, and the revival was brief.

Price pressure has not gone away. Kent reports that the US textile dye market shrank from 232 million pounds worth $955 million in 1994 to 214 million pounds worth $689 million in 1998. That is about $4.12 a pound falling to $3.22, or 22% in four years, as cheaper imports grew.

• Murmann (2003) · pdf pp. 49, 132, 150-151, 161, 263, 281
• Kent (2012), Ch 13 Dye Application, Manufacture of Dye Intermediates and Dyes · pdf p. 555

3.3 Patents: the same idea, very different national rules

Patents mattered more in dyes than almost anywhere. Of all German patents granted in 1877-1886, only 2.6% were kept paid up for the full fifteen years; for dyes the figure was 15.9%, the highest of any class.

Britain had a patent law from 1852, written for machines. It granted patents on products, with no serious examination of whether the claim was new; the courts sorted that out later, at great cost. A British patent, as one historian put it, gave little more than the right to sue. Early patents on mauve and magenta let a few British firms earn monopoly profits without having to become efficient.

Germany had no unified law until 1877. Most of the 39 states had some patent system, but Prussia rarely granted patents, and the customs union stopped any state from blocking sales of goods made in another. So German firms copied freely and fought each other on cost. The 1877 law then arrived at a good moment, when Germany already had strong firms and chemistry could guide research. It examined every application, allowed rivals to object, recognised whoever filed first, required the invention to be worked in Germany, and granted fifteen years. Crucially, for chemicals it protected only processes, not products. That pushed firms to find and patent every route to a new dye, which in turn needed many chemists. A 1891 revision reversed the burden of proof: an accused copier now had to show it used a different process.

The United States granted product patents to the first inventor, with no working requirement. Foreign firms could patent there and block American entry, as BASF did with alizarin. Britain added a working clause in 1883, but it had no teeth until 1907, and a court blunted it again in 1909.

• Murmann (2003) · pdf pp. 63-65, 109-116, 157-159, 211-215

3.4 Alizarin and indigo: the race for the two great natural dyes

From the start, chemists dreamed of synthesising the two most valuable natural dyes: alizarin, the red colouring matter of madder, and indigo.

In 1869 Carl Graebe and Carl Liebermann, working under Adolf Baeyer in Berlin, made alizarin from anthracene, a different coal-tar crude from the benzene behind the aniline dyes. Their laboratory route (oxidise anthracene to anthraquinone, add bromine, fuse with potash) did not work at scale. With BASF's research director Heinrich Caro they found a process through anthraquinone sulphonic acid fused with caustic soda, which needed new high-temperature, high-pressure boilers. Perkin found a better process independently and filed for a British patent one day after BASF. The two agreed to share Britain rather than fight. In Germany there was no patent to share: by 1873 thirteen German firms made alizarin, prices collapsed, and the survivors emerged with far better processes. It was the last time a British firm led a major dye innovation.

Indigo was harder. Baeyer synthesised it in 1880, but his route was far too costly. BASF and Hoechst worked on it on and off for seventeen years. The breakthrough was Karl Heumann's idea, at Zurich, of closing the molecule's ring a different way, starting from cheap aniline, acetic acid, chlorine and alkali. Even then BASF had to develop the contact process for strong sulphuric acid and license electrolytic chlorine to make it pay. It spent 18 million gold marks, more than its whole share capital, before selling synthetic indigo in 1897. The lone inventor's era was over.

The prize did not last. BASF's own chemist Rene Bohn soon found Indanthrone, a faster blue, and cheap sulphur blues appeared. Indigo survived mainly because dyers were conservative, until denim gave it new life in the 1960s.

• Murmann (2003) · pdf pp. 49, 69-70, 114, 145-147, 161, 273-280
• Kent (2012), Ch 13 Dye Application, Manufacture of Dye Intermediates and Dyes · pdf pp. 485, 548-549

See it in the table

Check your understanding

Germany's dye industry had a failure rate similar to Britain's. Why did it still end up far stronger?

What feature of the 1877 German patent law pushed firms to hire many research chemists?

Alizarin fell from 270 marks to 9 marks between 1869-71 and 1886. By about what percentage?