How a classic specialty chemical market works: the synthetic dye industry: Why Germany won, and what any specialty market can learn

5.1 Not coal or customers: Britain had more of both

The usual suspects have alibis. In 1859 Britain mined about six times as much coal as Germany, and German dye makers bought much of their coal tar from Britain. In 1852 Britain had 23 times Germany's cotton spindles, and still five times as many in 1913. If raw materials or home demand decided the matter, Britain would have won.

Murmann's first answer is the training of organic chemists. Germany had built research universities since 1810, and Justus von Liebig's laboratory at Giessen taught students from all over Europe, including 83 Britons. Hofmann, Liebig's pupil, ran the Royal College of Chemistry in London from 1845, and most early British dye entrepreneurs came from his laboratory. In 1865 he returned to Berlin, where Prussia built him an institute for about 100 students. There he supervised 150 doctoral students. Baeyer's Munich group produced 395 doctorates between 1875 and 1915. By 1877 Germany and Switzerland wrote 74% of the world's organic chemistry papers; Britain wrote 6%.

Money followed. Around 1900 the British government gave universities £26,000 a year for all purposes; Prussia alone gave £476,000. German technical universities grew from 2,759 full-time students to 10,591 by 1910. Oxford and Cambridge awarded only 56 science honours degrees between 1880 and 1900, and in 1902 only 59 of 502 chemists in British industry had a higher-education degree. American universities grew fast but trained analytical chemists for farms, steel and oil; only about 5% of US chemistry doctorates before 1914 were in organic chemistry.

Trained chemists also ran German shop floors. Around 1870 German firms moved control of production from foremen to academically trained chemists, while British works stayed under foremen who had learned by apprenticeship. Caro, who worked in both, saw this as a key source of lower German costs.

• Murmann (2003) · pdf pp. 2, 58, 75-79, 82, 84-86, 102, 104-106, 196, 235-236

5.2 Coevolution: firms, science and law shaping each other

Murmann defines coevolution strictly: two evolving populations coevolve only if each has a significant causal effect on the other's ability to survive. He finds three channels linking German dye firms and German universities. First, people moved: professors trained students who ran firms and labs, and industry chemists sometimes became professors. Second, commercial ties: professors sold discoveries to firms, which paid royalties and supplied chemicals and equipment. Caro and Baeyer wrote each other hundreds of letters. Third, each side lobbied for the other.

The loop worked like this. Germany started with a surplus of chemists, partly by luck, so many firms started. Fierce competition, with no patents, made the survivors efficient. When they beat British firms they became very profitable, and spent part of those profits on collective action. Their trade association, founded in 1877, Britain's in 1916, lobbied for more chemistry chairs and new buildings, and helped found the Kaiser Wilhelm research institutes in 1911-14. Chemists in the German Chemical Society wrote the process-only clause into the 1877 patent law and pushed the 1891 reform. The industry kept German tariffs off dyes and coal tar. Each success made the next easier: a self-reinforcing spiral.

In Britain the spiral ran the other way. Weaker firms could not pay top chemists, so they hired second-rank Germans, so they stayed weak. The textile industry was about 100 times the size of the dye industry and wanted cheap German dyes, so dye makers lost every tariff fight. Coal-tar distillers and dyers had strong trade associations from 1885; dye makers had none. And Britain had large investments in Indian indigo, so its establishment saw synthetic dyes as a threat.

• Murmann (2003) · pdf pp. 46-47, 90-92, 101, 189-195, 200, 203-209, 211-217, 236-239

5.3 Firm choices still mattered

National institutions tilted the field but did not pick winners. More German firms failed than British and American ones together. Murmann compares a winner and a loser in each country.

Bayer and Jager started in the same town, Barmen, from the same natural-dye trade, and Jager made synthetic dye five years earlier. Bayer reinvested its profits, took the alizarin gamble, hired research chemists, made non-family talent such as the salesman Rumpf, the chemist Siller and the former worker Tust into partners in 1872, and became a joint-stock company run by professional managers. Jager admitted no outside partner until 1899, stopped hiring chemists, and retreated into dyes for leather, inks and shoe polish.

In Britain, Levinstein, run by a German-trained chemist, recruited German and Swiss chemists, built an international sales network and developed Blackley Blue, of which 1,000 tonnes worth £1 million had been made by 1885. Brooke, Simpson & Spiller inherited the two best British pioneers, bought Perkin's alizarin works in 1874 for £105,000, ran it so badly that it resold it within two years, did not patent the inventions of its gifted chemists Meldola and Green, and was liquidated in 1905. Yet Levinstein stayed small because Ivan ran it as an autocracy and never built a management team.

In the United States, the Schoellkopf brothers had studied chemistry in Germany and their father funded sixteen years of losses; sales grew from $40,000 in 1879 to $300,000 in 1893, and the firm had 250 staff by 1914 against Bayer's 10,600. American Aniline was founded by heavy-chemical and oil men who built a reactor ten times larger than German designs, found no US market for aniline, could not make dyes beyond fuchsine, and lost their works in a flood in 1883.

What the winners shared was strong ties to the centres of organic chemistry knowledge.

• Murmann (2003) · pdf pp. 53-54, 120-129, 147-152, 157, 162, 186-187

5.4 Lessons for judging a specialty chemical business today

The dye story reads like a field guide to specialty chemicals. Five lessons carry over.

First, performance and cost in use beat price per kilo. Dyes were 1 to 2.5% of a textile's cost but decided whether it sold. Pollak finds the key ingredient is still only 3 to 5% of the price of a modern specialty.

Second, application knowledge is the moat. Testing labs, travelling technicians and training courses tied customers to Bayer. Pollak notes that R&D in dyes today focuses on formulation and application, and that the development of new molecules has practically stopped; ink-jet inks use old dyes but the know-how sits in the recipe.

Third, scale lies in research, selling and scope, not in one big plant. Pollak's fine chemical plants use reaction vessels of a median 4 to 6 cubic metres, with little economy of size; R&D runs at 5 to 10% of sales, against 2 to 5% for commodities. The firm with the most output spreads that R&D thinnest.

Fourth, barriers come from know-how, patents and networks together, and they rise as an industry matures. No firm founded after 1870 became a leader in dyes.

Fifth, location and institutions matter, and leadership can move. Europe held dyes for over a century, then lost the volume business to China, India and South Korea. China made over 1 million tonnes of dyes and organic pigments in 2009; India has 150,000 tonnes of capacity. DyStar, formed from the Bayer and Hoechst dye businesses in 1995 (BASF joined five years later), with $1.2 billion of sales in 2009, was rescued from insolvency in 2010 by Kiri Dyes and Chemicals of Ahmedabad for $80 million.

• Pollak (2011) · pdf pp. 35, 74, 88, 120, 152-153
• Murmann (2003) · pdf pp. 130, 217, 238-239, 243-244

See it in the table

Check your understanding

Which fact best undermines the idea that raw materials explain Germany's dye dominance?

Which is one of Murmann's three channels of coevolution between firms and universities?

According to Pollak, where is most dye R&D effort directed today?