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Complexity as a key entry barrier in the chemical industry
Posted on February 29th, 2016 by Dr. Kai Pflug in Chemical R&D
A key development of the global chemical industry in 2015 was a further shift of leading multinational chemical companies towards specialties. For example, Dow first separated its commoditized chlorine value chain via the spin off to Olin while DuPont spun off many of its commodity businesses including titanium dioxide and fluorochemicals via the creation of Chemours. Later in the year, the announcement of the planned merger of the two companies and the targeted later separation in three specialized companies further showed the current preference of global chemical companies for specialty chemicals.
Of course, a key reason for this development lies in the intense competition from Chinese producers of commodity chemicals. For volume products such as titanium dioxide, TDI and more recently even PVC, China has turned from a net importer to an exporter. For other commodity chemicals such as PTA, BDO, phenol and MDI, China will probably become a net exporter in 2015 or 2016. This puts immense pressure on global market prices as Chinese players often build huge capacities and at the same time have only limited margin expectations. As a consequence, global chemical players have been retreating from more and more of these commodity chemicals.
While this is one way of avoiding a head-to-head competition with Chinese players, it may have led to ignoring other pathways. Observing the Chinese chemical industry for more than 12 years now, it is clear to me that Chinese companies are very strong in producing a limited number of chemicals and selling them based on their specification. They are far less capable of adding services, providing customized formulations, large product varieties or innovative products.
Western companies have so far mostly focused on the weakness of their Chinese competitors with regard to innovation. However, a more general statement can be made that Chinese chemical companies are not good at handling complexity of any kind – whether arising from new products, from customized offerings, product bundles, technical services, etc.
As a consequence, any multinational chemical company embracing complexity has the best chance to reduce direct Chinese competition. The move towards specialty chemicals – with the concurrent focus on smaller production volumes and innovative materials – is only one way of embracing complexity. What are examples of others? ExxonMobil has almost 500 different grades of PP and PE – including grades for specific applications such as medical – rather than the dozens produced by Chinese competitors. BYK, a producer of coatings additives, asks even its distributors to have testing laboratories, so requests for specific products or effects can be customized by lab testing. Western chemical distributors (such as Azelis or IMCD) active in China do not just sell their principal´s products but actively market them, which includes offering customers ready-made formulations. In water treatment, Veolia takes over the water management for whole municipalities rather than just offering individual water treatment chemicals, the preferred approach of Chinese competitors. All these approaches create complexity, a market entry barrier that is far more difficult to overcome for Chinese competitors than just the establishment of production.
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Dr. Kai Pflug
CEO, Management Consulting – Chemicals
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