The past few years have seen tremendous upheaval in a number of global industries. In 2000, giant Western companies such as Ericsson, Nokia and Nortel Networks ruled the world’s telecommunications-equipped industry.
Now, Chinese companies such as Huawei Technologies and ZTE have risen to the top. In the process they have forced established multinational companies (MNCs) into joint ventures or even out of the market. In the photovoltaic industry of 2005, US, European and Japanese companies accounted for 90% of global production. Today, four of the world’s top five players are based in China.
The fact that leading Multi-National Companies (MNC) and Emerging Market Players (EMPs) in the global chemical business are roughly at a parity in terms of revenues illustrates the advanced stage of social competition in this industry.
The current landscape: The fight for global leadership
As in the automotive supply and construction industries, global demand for chemicals is shifting to emerging markets, which now represents roughly half of the $5tn market worldwide. Major MNCs in chemicals have considerable local production in emerging markets and have known these economies well for decades. However, the balance of power has now shifted: several EMPs – most of them with close ties to national oil companies – have become global leaders. With $60bn in revenues in 2013, China’s Sinopec is larger than Dow Chemicals. Sabic, a $50bn conglomerate based in Saudi Arabia, is bigger than Lyondell Basell Industries, DuPont and Mitsubishi Chemicals. The sheer numbers obscure big differences among market segments, however. As of now, EMPs dominate base chemicals and basic plastics, and incumbent MNCs generally are stronger in specialty chemicals, industrial gases, agrochemicals and fertilizers.
EMPs have also become more aggressive in mergers and acquisitions on a global basis. From 2007 through 2012, the amount that EMPs spent on such acquisitions grew from $7.9bn to $10.6bn. The transaction volumes of MNC acquisitions of emerging market based chemical companies dropped from $4.6bn to $2.8bn during that same period. EMPs are making bigger deals too. The average EMP outbound acquisition, $881mn, was nearly nine times larger than the average outbound MNC deal.
The future landscape: The battle moves to specialty chemicals
Global demand trends are likely to continue to favour EMPs, especially those based in Asia. By 2020, the Asia-Pacific region is projected to account for approximately 53% of global sales of chemicals. The shares of North American and Western Europe are projected to shrink to 21% and 15% respectively by 2020.
It is no surprise then, that if EMPs manage to maintain a certain degree of growth they will soon exceed MNCs in size. Based on our interviews, we also expect EMPs to further expand into specialty chemicals – not only because they are more profitable but also because these companies want a large share of the fast growing local market for such chemicals. China identified new materials as one of the key strategic areas on which to focus in the twelfth five-year plan, for example, meaning that the government will support additional efforts in areas such as specialty materials, advanced polymers, inorganic materials and composites.
Competing: Winning globally in the chemical industry
Largely because MNCs and EMPs are roughly at parity in terms of size, the executives we interviewed from both types of companies in the chemical industry perceived a similar set of urgent challenges.
Their highest priorities, however, depend on the industry segments in which they compete.
In terms of products and technology, the following strategies were cited prominently by executives:
Diversify into higher margin products
Executives from both MNCs and EMPs stressed the need to develop their product portfolios so that they can earn higher returns. Executives from MNCs see the need to constantly adapt their portfolios and generate new business opportunities. In part, that will require developing ever more customised solutions for their clients. EMP executives, not surprisingly, still see large white spaces for their companies in the realm of specialty chemicals. They highlighted the need to add more value for customers in their existing businesses rather than enter completely new product areas. One example of such a premium product is Zetag, a polymer developed by BASF that more effectively de-waters sludge, reducing the cost of disposal for the customer.
Create products tailored to local markets
Makers of specialty and base chemicals alike said that their biggest challenge is to create products that are better adapted to local markets. When creating tailored, local products, it is important to keep in mind that there are several ways of doing so. Both MNCs and EMPs should systematically follow three strategies; proprietary product development, licensing of technology in exchange for market access, and, acquisition. In any given segment, a combination of these strategies may become appropriate, but experts expect that licensing and acquisition will gain in relevance. Dow Chemical is showcasing these strategies in its electronics chemical segment, for example. Through its own R&D, Dow brought Silveron, a sustainable surface-finishing solution that avoids cyanides, nickel and lead, to market in 2014. At around the same time, Dow entered into a licensing agreement with Nanoco Group for the exclusive worldwide sales and manufacturing of cadmium-free quantum dots (Trevista), which allows for better colour in electronic displays. What’s more, Dow acquired Lightscape Materials in 2012, adding phosphor technology to its existing LEDs and improving the quality and colour output of displays.
In terms of operations, the following priorities emerged in our interviews:
Localise R&D and management
Although a local R&D presence is necessary to be close to the customer, it is no longer a real differentiator. Eight of the top ten MNCs in the chemical industry have at least one research centre in the Asia-Pacific region. For example, at its Shanghai R&D campus, BASF develops new products tailored to the needs of its emerging market customers. Being closer to customers, sometimes requires fundamental adaptations of an organisations management structure. In a globalised industry such as chemicals, this can even mean relocating the global centre of a business unit, including functions responsible for key strategic decisions and profit and loss, in its most important market.
Lower cost and secure feedstock
Cutting costs is a particularly important priority for basic chemical producers. Because the majority of production processes for bulk base chemicals such as ethylene are well understood, there is limited room for players in this segment to make breakthroughs on cost. Of course, large cost-optimisation programs that target operational effectiveness at plants can solve a piece of this puzzle. But experts agree that securing cost-competitive supplies of feedstock is essential. As the chemical industry grows, so will demand for feedstock. But reserves of major feedstocks – such as natural gas, coal and oil – are not distributed evenly across the globe. Both MNCs and EMPs, therefore, are looking to secure access by forming partnerships or even buying assets, such as palm oil or sugarcane plantations. Sadara Chemical is one of the most prominent examples between an MNC and an EMP to tap the world’s largest oil reserves.
In our interviews, executives emphasised the following key strategies regarding their go-to-market approach:
Increase the focus on the environment
Executives we interviewed from both MNCs and EMPs are greatly concerned about sustainability. They brought up the importance of complying with local environmental regulations in multiple interviews. Chemical producers should do more than comply with regulations, however. Executives believe that green processes can be a true source of differentiation. Lenzing, a producer of viscose fibres, provides a good example. When Chinese competitors took 55% of the global viscose market in 2010, Western companies including Acordis, Kemira and Svenska Rayon had to close production sites. Lenzing remained in business, realising that it is regarded as a world leader in environmentally friendly and efficient viscose production. A sustainable production process based on 100% natural beech wood appealed to customers that were focussing on green approaches and were willing to pay higher prices for such products.
Maintain reliable global quality standards
A consistent global offering is an enabler of competitive advantage and an effective way to protect and broaden the customer base – especially in highly specialised chemical applications. When customers are global and require that their suppliers serve them globally, the ability to produce consistent quality everywhere in the world can create a competitive advantage that is not easy to copy. In fragrances, for example, the ability to produce exactly the same quality everywhere in the world is a requirement for staying on a list of core suppliers. And constant adaption to regulatory changes in all countries, such as prohibitions against natural essences that cause allergies, is absolutely necessary and be a means of differentiation.
Who will win in the chemical industry – the MNCs or the EMPs? Most experts and executives agree that this is the wrong question. There will be successful players from both camps. Rather, executives need to ask themselves: what do I need to do so that my company is among the winners?
