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

Source page: https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/p5/

[Understanding Chemicals](https://www.materialinsights.org/learn/chemicals/) / [Module 11: How a classic specialty chemical market works: the synthetic dye industry](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/) Part 5 of 5

## Why Germany won, and what any specialty market can learn

Britain had the coal, the coal tar, the biggest textile industry and the first lead. By 1913 it made 3% of the world's dyes. Murmann's answer to this puzzle is coevolution: firms, technology and national institutions such as universities and patent law shaped each other, and small early differences grew into huge ones. The part ends with lessons for judging specialty chemical businesses today.

### 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.

Data The institutional gap, Britain, Germany and the United States

| Measure | Britain | Germany | United States |
|---|---|---|---|
| Members of national chemical society, 1880 | 1,034 | 2,265 | 303 |
| Members of national chemical society, 1900 | 2,292 | 3,410 | 1,715 |
| Members of national chemical society, 1910 | 3,073 | 3,359 | 5,081 |
| Share of organic chemistry papers, 1877 | 5.9% | 74.4% (with Switzerland) | 0.9% |
| State spending on universities, about 1900 | £26,000 (whole country) | £476,000 (Prussia alone) | Above Germany per university after 1895 |
| Same, 1911-12 | £123,000 | £700,000 (Prussia) |  |
| Chemical industry trade association founded | 1916 | 1877 | 1872 (heavy chemicals focus) |
| Organic chemistry in chemistry PhDs | PhD still a novelty in 1918 (Rutherford) | Dominant focus of university chemistry | About 5% (1860-1914) |

France had 15.2% of organic chemistry papers in 1877. The US chemical society overtook Germany's by 1910 but organic chemistry got its own division only in 1908.
 Source: Murmann (2003), pdf pp. 82, 85, 88, 90, 235-236

- 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.
 Case

#### Levinstein's patent crusade

Ivan Levinstein, owner of Britain's largest dye firm, told the Board of Trade in 1898 that of 600 coal-tar patents granted to foreigners in 1890-95, not one was worked in Britain. With the Manchester Chamber of Commerce and trade unions he won a strict working clause in the 1907 Patents Act. German firms promptly built plants near Liverpool to protect their patents, which created British competition rather than licences for Levinstein. In 1909 a judge reinterpreted the clause and drew its teeth, and from 1908 German firms had stopped buying his intermediates in retaliation.

- 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.

Data How the dye story maps onto specialty markets today

| Lesson | Evidence, 1857-1914 | Evidence today |
|---|---|---|
| Sell performance, not tonnes | Dyes 1-2.5% of textile cost; Congo Red won by removing the mordant step | Active ingredient 3-5% of specialty price (Pollak) |
| Application knowledge is the moat | Bayer's 16 travelling technicians, testing labs, volunteer courses | Dye R&D now centred on formulation and application |
| Scale in R&D and scope, not plant | Shared batch lines; 2,656 compounds for 36 launches (1906) | Median 4-6 m3 batch vessels; R&D 5-10% of sales vs 2-5% in commodities |
| Barriers rise as markets mature | No firm founded after 1870 became a leader; 8,000 Bayer patents | BASF leads pigments and bought CIBA Specialties in 2008; Merck KGaA holds two-thirds of liquid crystals behind patents |
| Institutions and talent pools decide location | German universities, patent law and trade association | China over 1 Mt (2009); India 150,000 t capacity; Kiri buys DyStar (2010) |
| Proliferation must be managed | I.G. Farben cut 33,000 mixtures to 6,000 (1927-32) | 9,475 dyes listed but 1,500-2,000 sell well |

 Source: Murmann (2003), pdf pp. 175-176, 217, 263, 272; Pollak (2011) pdf pp. 73, 88, 120, 152-153; Kent (2012) Ch 13 pdf pp. 485-487  Worked example

#### Reading the Kiri-DyStar deal

An investor could read the 2010 deal through Murmann's lens. The volume chemistry of dye intermediates, priced at about $5 to $30/kg and about 30% of a $9-10 billion dyes and pigments market, had moved to low-cost Asian plants close to the world's biggest textile industry. What DyStar still held was the specialty layer: a brand, a range of high-end dyes, application know-how and a global customer list. For $80 million an Indian maker bought that layer. The question for any such deal is whether the know-how and customer ties transfer with the assets.

- 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
[St Steel](https://www.materialinsights.org/commodities/steel/)[Ct Cotton](https://www.materialinsights.org/commodities/cotton/)[Dye Dyes](https://www.materialinsights.org/chemicals/dyes/)[Pig Organic pigments](https://www.materialinsights.org/chemicals/pigments/)

### Check your understanding

Which fact best undermines the idea that raw materials explain Germany's dye dominance?
 Britain mined about six times as much coal in 1859 and German firms imported coal tar from Britain, so raw materials cannot explain the outcome.

Which is one of Murmann's three channels of coevolution between firms and universities?
 The three channels are exchange of personnel, commercial ties, and lobbying on behalf of the other sphere.

According to Pollak, where is most dye R&D effort directed today?
 Pollak writes that dye R&D focuses on product formulation and application, and new molecular entities have practically stopped.

[← Part 4: How firms competed: laboratories, chemists, salesmen and cartels](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/p4/)[Mark read · Wrap-up →](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/review/)

## Other sections

- [Module overview](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/index.md)
- [Why dyes are the archetypal specialty chemical](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/p1/index.md)
- [The birth of an industry, 1856 to the 1870s](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/p2/index.md)
- [How the market was structured](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/p3/index.md)
- [How firms competed: laboratories, chemists, salesmen and cartels](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/p4/index.md)
- [Key terms, quiz and sources](https://www.materialinsights.org/learn/chemicals/how-a-specialty-market-works-dyes/review/index.md)