Silicone industry challenges shaping NewAge's approach

Cuyahoga Falls, Ohio — Most successful businesses don't reach their full potential without successful leadership.

While industry groups and conferences demonstrate the cooperative nature of the collective, rarer is the individual who pushes for the kind of change that benefits the many.

Such is the tack for Ken Baker, CEO of Southampton, Pa.-based NewAge Industries Inc., who asked an audience of 200 at the Sheraton Suites in Cuyahoga Falls to embrace change during his May 12 talk, "The Challenges and Opportunities of Growth and Change."

Baker spoke as part of the May 11-12 International Silicone Conference, organized by Rubber News.

"I am here to pull back the curtain on the pandemic just a bit," Baker said, adding that he would be challenging his peers across a range of issues — from the consideration of an employee stock ownership program as a business structure to the risks of U.S. dependence on China for silicon metal refinement.

When the pandemic arrived in 2020, the change that it forced in the industry immediately became evident, Baker said.

Businesses deemed essential — like NewAge, a rubber and plastics hose and fittings manufacturer of silicone rubber hoses and vaccine delivery systems — rose to the occasion, while others were afflicted with high demand, low supply and allocations, issues that still face the industry today.

But as the pandemic provided pressure to change, it forced changes for Baker and NewAge, a 300-employee, $200 million organization that recently built an additional $2 million clean room in Southampton, with plans to open another facility this year in Warrington, Pa.

"When Operation Warp Speed was instituted by the Trump administration, everything went to COVID products," Baker said. "What about customers who manufacture cancer medications, flu vaccines, insulin or yellow fever vaccines ... what about our supply for them?

"They didn't care — COVID came first. Look at the U.S. Army Corps of Engineers ... they are used to building bridges, and they were building clean rooms."

Ultimately Moderna selected NewAge as its supplier of silicone tubing for its COVID vaccine, with NewAge providing the tubing to withstand the low temperatures required to transport the vaccines, typically on dry ice.

"Then the supply chain issues in the industry came in," Baker said. "Filters, tubing clamps, drug delivery systems ... everything was affected. Then you throw all this COVID volume on top of it ... and single-use systems already had long lead times. We did not have enough extruders at NewAge to put it all out."

"So how do you rally the troops when there is unprecedented stress across the board?" Baker asked his industry colleagues. "How do you make ordinary people do extraordinary work?

"I submit to you: sell them your company."

The dollar is the driving force in any merger or acquisition, and company purchases by other entities have been numerous in the rubber processing industry thus far in 2022.

As it should be — the bottom line in business is to make money, and a company is worth whatever someone is willing to pay for it.

But an option that often goes unconsidered is employee ownership, which can be accomplished in a number of ways and under various structures, Baker said.

Employees can buy stock directly, be issued stock as a bonus or offered stock options, obtain stock through a profit-sharing plan or even enter worker cooperatives.

Far and away the most common method is the Employee Stock Ownership Program, of which there are more than 6,400 in the country today, according to Baker.

Essentially a retirement program, NewAge established its ESOP in January 2006 when Baker sold 30 percent of the company into an ESOP trust — which does not pay corporate income taxes — as a way to ensure the company legacy and give employees a lucrative retirement plan.

In time, the company became 49-percent ESOP and 51-percent Baker-owned.

And in 2019, NewAge became 100-percent employee-owned.

At their core, ESOPs are retirement plans, essentially placing deferred corporate income tax money into a trust for the benefit of employees. Uncle Sam ultimately gets his cut when an employee retires and draws the money (based on the shares they have) from the trust.

Contrary to popular belief, according to the National Center for Employee Ownership, ESOPs rarely are used to save troubled companies — at most, a handful of such plans are set up each year.

Instead, ESOPs can provide a market for the shares of departing owners of successful, closely-held companies; motivate and reward employees; and take advantage of incentives to borrow money for acquiring new assets in pre-tax dollars.

"In my opinion, ESOPs are the best model out there," Baker said.

Baker pivoted in his speech to a different challenge, one that is as complex as it is concerning to many downstream rubber processors.

He cited the monopoly that China maintains on refined silicon metal capacity, with about 70 percent coming from China (about 6 million of the 8.5 million metric tons produced globally in 2021) and only about 5 percent coming from North American foundries.

Other global silicon metal capacity comes from Russia, Brazil and Norway.

"Do you really trust China with all this capacity?" Baker asked. "You don't really want to rely on one single supply ... especially if it is an ingredient essential to an end product."

Highly refined silicon metal is essential to the silicone rubber, microchip and aluminum alloy industries, all of which require different grades of the refined metal.

When brownouts occurred in 2021 in China, the capacity crunch rippled across all three industries, highlighting the importance of increased domestic supply of the metal for issues of national defense and quality-of-life expectations.

Public-private partnerships have been discussed by industry experts as possible solutions to the dearth in domestic capacity, as foundries can cost hundreds of millions of dollars to build.

And demand for silicon metal is expected to grow by 50 percent in the next decade, Baker said.

"What is long term supply for the ingredient?" Baker asked. "Now is the time to engage in this to support the future supply of silicon metal. If we don't do something soon, it could be too late. If we start considering this now, maybe in two to three years something happens."