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From Products to Services

Posted on August 23rd, 2016 by in Chemical R&D

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In July 2016, RPM International, the sixth-biggest global coatings manufacturer with 2014 sales of 4.4 billion USD, made a small acquisition, buying a company increasing Chinese competition, to a logical conclusion.

From the viewpoint of innovation, the acquisition offers some additional exciting prospects. In the past, a company such as API would have been a customer of RPM, possibly asking them occasionally for new products to solve specific problems. In the future, this will be one business, hopefully with shortened annual net sales of only 14 million USD. The company acquired was US-based Applied Polymerics (API), a specialized civil engineering and construction company that focuses on bridges, roads and similar structures.

What makes such a small deal – adding only about 0.3% to RPM´s global sales – interesting? A look at their website gives an answer: “Applied Polymerics provides services that are tried, proven and warranted. … Applied Polymerics is a certified applicator/contractor for a wide range of innovative pavement maintenance products.”

So even though API will now become part of RPM´s Universal Sealants business, it is primarily a provider of services rather than a producer of products. This takes the ongoing shift from products to services, which may offer Western specialty chemicals companies the best chance for survival in the face of communication lines and more frequent exchange. Will this give a boost to innovation at RPM? Will it lead to better products which can be launched faster? Of course, this kind of vertical integration could also lead to the exact opposite, if for example company structures become more bureaucratic.

In the 20 years from 1995 to 2014, the global GDP share of the tertiary sector – services – has increased from 58% to 69%, and the most developed countries such as the US are already approaching a share of almost 80%. If chemical companies want to participate in this sector, they need to embrace services. Fortunately, many products currently offered by the chemical industry can be turned into services relatively easily. Chemical companies can run water treatment plants instead of selling water treatment chemicals. Instead of selling packaging for food or medical devices, they can guarantee a specific shelf life (something that Clariant has already taken a step towards with the 2014 acquisition of VitaPac, a Chinese healthcare packaging specialist). Agrochemical companies could even potentially give guarantees for specific crop yields based on utilization of their seeds, fertilizers and pesticides. Like chemical R&D, innovation in this area of business models offers huge rewards to creative companies.


 

All opinions shared in this post are the author’s own.

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