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Herbert Dow

How Herbert Dow Beat an International Monopoly

Dow Chemical is one of the towering giants of industry with a market capitalization of more than $55 billion. But early on, the business was like many small businesses. It faced aggressive competitors and a raft of early failures. Plus an international cartel bent on putting it out of business.

In the late 1800s, Herbert Dow discovered a much cheaper way to manufacture bromine. At the time bromine was a common ingredient in medicines and photographic chemicals. While Dow found research in chemicals easy, he wasn’t good at running a business. His first business went bankrupt and the investors kicked him out of his second business. His third company folded into his fourth company – which finally found some success. Unfortunately, the market for bromine was small in the US and his fourth company needed scale to be successful. To survive, Dow had to find a way to overcome the international cartel all by himself.

The Struggle

Growing in foreign markets was going to be tricky to say the least. Germans discovered bromine in the 1820s, more than 70 years before Dow made his advances. The head start resulted in massive German monopoly in bromine. The largest companies worked together as a cartel to squash competitors and push up prices. The only country not touched by the cartel was the US. At the time it was an emerging market, not worth German effort. So the unspoken rule existed: American companies didn’t expand abroad and the Germans would leave them alone.

That wasn’t going to work for Dow. His business needed to grow abroad if he was going to get the scale he needed to make his new process profitable. The US market wasn’t large enough yet. But he was too small to deal with the Germans head on. He had a problem.

In 1904, Dow started selling bromine at 36 cents per pound in England. He hoped he was small enough that the Germans would ignore him. Even though he was selling bromine far below the monopoly priced 49 cents per pound, he thought he might get away with the move. Except that he didn’t – the Germans noticed.

Monopolistic Aggression

A few months after Dow’s move into the English market, a German agent showed up at his factory in Michigan. The agent told Dow to stop selling in England or the cartel would take massive action. They would dump so much bromine on the US market that every bromine producer in America would go bankrupt. The only thing Dow had to do to keep the cartel at bay was to stop selling in England.

The problem was that Dow would go out of business if he didn’t expand abroad. He needed scale. And now, if he found scale abroad, the Germans would put him out of business as well. A tricky catch-22.

So he did something crazy. He kept going – selling not only in the UK but also starting to sell in Japan. And the Germans did exactly as they said they would. They dumped tons of bromine on the US market at 15 cents a pound, far below both their own 49 cent offerings and Dow’s 36 cent per pound pricing.

A few months into destroying the US bromine market, the Germans were befuddled – not only with Dow, but with American demand. Price decreases can have an impact on demand, but the US market was well beyond expectations. The demand felt unlimited. There were more buyers willing to buy bromine every time the cartel offered more.

As tensions began to mount, the Germans arguedover who’s turn it was to supply the artificially priced bromine. American agents selling for the cartel were stuck holding buy contracts they was unable to fulfill. On top of everything, the confused Germans couldn’t figure out how Dow was surviving. Thinking they underestimated how much the US needed bromine, they cut the cost to 12 cents and then later to 10.5 cents per pound.

More and more bromine came to the US market, but no matter what – Dow was still there, smiling in his factory. Despite all the other American bromine producers going out of business, Dow wouldn’t budge. If anything, he seemed to be getting stronger. Finally, after four years of trying desperately to crush Dow, the cartel backed down and penned a truce.

The Sting

So how did Dow do it? How did he defeat an international cartel all by his lonesome? After the menacing visit from the agent of the cartel, Dow understood he’d have to find a way to use their aggression against them. Otherwise he’d be out of business.

Dow realized that the only way the Germans could flood the US market was if they made up for the losses with profits elsewhere. The best way to beat them would be to lower their profits not only in the US, but abroad as well. The costs would be so high that they would have to stop. They couldn’t undercut themselves everywhere indefinitely.

So as soon as the cartel started flooding the US market, Dow stopped selling in America. Instead, he only sold his bromine in international markets where his costs were lower than the Germans.

His real stroke of brilliance, though, was to buy German bromine in the US and resell it abroad. When bromine started flowing into the US, Dow employed agents in New York to buy as much as the Germans would sell. He then sent the bromine back to Europe, repackaged it and had agents resell the chemical all through Europe at 27 cents per pound. He sold the bromine under different labels, not his own. The move frustrated the cartel because they didn’t realize it was Dow. They thought one of their members was cheating the rest – creating friction in their cozy monopoly.

By 1908, the Germans figured out what was going on and finally offered a truce. But Dow had done his damage. His business now had agents selling products around the world. And he was now selling dyes, aspirin, profane, phenol, and acetic anhydride. The ‘bromine war’ had provided the cheap capital Dow needed to grow. Additionally, the price cutting had put nearly every other US bromine producer out of business. In one fell swoop, an international chemical business was born from an attempt to kill it.

Dow is now used as a classic case in how to bust a monopoly without using government. While much of his strategy may not work for you today, the thought process is important. How can your weaknesses end up being a strength? How can you use your competitors strengths to your advantage? What is the unintuitive play that would transform your business?

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