China´s Mid-market for Chemicals and Innovation

Posted on April 27th, 2016 by Dr. Kai Pflug in Chemical R&D

Many markets in China, including the one for chemicals, have seen a shift towards a stronger mid-level from a previous relatively straightforward split between a small high-end segment of mainly imported products and a much larger low-end segment. In fact, capturing this mid-market is now regarded as the key to further growth in China.

Characteristics of the mid-market for chemicals include

• Medium level prices: In most segments, prices are actually closer to the low end segment than to the high end
• Large and growing market share: Typically, the mid segment now accounts for 40-50% of the total market from only about 20-30% a decade ago
• Key players: So far in most chemical segments domestic companies seem to be better at capturing this market than multinationals
• Absolute quality levels: Compared to Western markets, the Chinese mid-market has quality characteristics that would still put it in the low end of Western markets.

What does this mean for innovation? Obviously, domestic companies and multinationals target chemical mid markets from very different starting points. For Chinese companies, reaching the mid-market is a clear progress from their previous portfolio, requiring better products, better technological knowledge and process control. In some way, this is “typical” innovation – improving existing products via additional experience and research, facilitated by the broadening base of qualified researchers available in China (frequently with a past research career in multinational companies). As such, progress in the direction of the mid-market is almost unavoidable.

In contrast, while successfully targeting the Chinese mid-market also forces multinational chemical companies to innovate, the requirements are quite different. Changes from existing offerings mostly do not consist in adding but in subtracting properties. This is necessary not only to achieve the lower production costs required for the mid-market, but also to protect the existing high-end segment of the market via differentiation. As a consequence, typical issues for innovation of multinational chemical companies targeting the mid-market include the broadening of potentially too tight specifications, the use of cheaper raw materials, the simplification of the product portfolio or even the reduction of technical support or the streamlining of distribution channels. Achieving this kind of innovation is not an easy task for multinationals, but given the importance of the chemical mid-market not only in China but also in other emerging economies, it is a must if multinationals want to keep their global market share. The mental starting point is the realization that stripping down existing offerings is a worthy objective for innovation.

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Dr. Kai Pflug
CEO, Management Consulting – Chemicals

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