Smitten by Growth Prospects, Specialty Chemical Firms Invest in China

09 December 2002 00:00  [Source: ICB Americas]

When it comes to investing in China, large-scale commodity chemical projects funded by multinationals have garnered most of the attention. However, the US and European-based specialty chemical companies have also been on the move in China, recognizing the significant manufacturing shift to the region, which is quickly emerging as a base of operations for some customers' key initiatives.

Electronics, textiles, furniture making and plastics products are sectors greatly affected by the pro-business China syndrome. Host to a highly competitive cost structure and a more favorable climate for global enterprise, China offers a potential two-pronged market outlet bonanza.

Domestically, it features a burgeoning middle class appetite taking root in the world's most populated nation; and in the all-important export-driven markets, it fosters a super-competitive production haven for its global clients.

Company managements and Wall Street are highlighting the importance of building a significant presence in China. "A range of companies presenting at our recent investor conference in New York underlined the growth opportunity in China, not only on a percentage basis, but also with the issue rising to a meaningful level of significance," says First Analysis Securities analyst Allan Cohen.

Ciba Specialty Chemicals, H.B. Fuller, Rohm and Haas, Clariant, Ferro, Albemarle, Valspar and MacDermid, among others, all have or are developing substantial activities in China.

This movement into China is not surprising. Since China's admission in-to the World Trade Organization, concern over control and protection of proprietary technology has diminished, notes Mr. Cohen. "Foreign corporations can own 100 percent of their operations now," he says. "Historically, with manufacturers, you were restricted to a minority interest, with your homegrown partner unloading all his expenses on you, and you were forced to watch his employees learn your technology, only to start up a competing operation across the street two years later.

"A portion of the customer base, over time, has shifted from North America and Europe, to Japan, to Taiwan and Korea, and is now headed to Mainland China," explains Mr. Cohen. The analyst sees "no impediments in the way" of the continuance of this trend, particularly with regard to "high-growth at the high-tech end of the product offerings."

"Every specialty chemicals company is looking at China as a must-as a top priority. They feel they need to be there," says Deutsche Bank Securities analyst David Begleiter. "You cannot ignore China if you hope to survive in specialty chemicals. There's too much growth there. There's too much production being shifted there from the Western world."

Ciba Specialty Chemicals

For some specialty chemical companies, it's a toss-up when it comes to ranking the two prominent drivers of their foray into China. "The number one reason for Ciba Specialty Chemicals is the huge, as yet virtually untapped market available there," according to chairman and chief executive Armin Meyer. Per capita consumption of paper, plastic and auto products, "are still enormously low. Any increase will be tremendous not only in percentage terms, but also from the standpoint of the sheer absolute numbers involved." China (including Taiwan) is now the company's third largest market (after Europe and North America, and ahead of Japan).

The second factor for Ciba is "the competitiveness of our manufacturing sites," Mr. Meyer adds.

Ciba uses its seven manufacturing sites in mainland China, all built in the last five years, to supply the Chinese market as well as its regional customers in the rest of Asia. In Ciba's textiles group, most production stays in China, al-though the finished goods of their customers are mostly ticketed for export; whereas the company's plastic additives ship outbound to a substantial part of the rest of Asia Pacific.

Highlighting the current high level of activity in one particular industry, textiles, Mr. Meyer notes that "70 to 80 percent of all new textile machines are being installed in China.... In textiles, we have a global move of the markets to Asia."

Ciba has direct investment in China of $166 million, with 850 people working at its seven sites and another 110 employed in its Taiwanese plant. Ciba's growth rate in China is in the double-digits, compared to flat in Europe and 2 percent growth in the US.

Ciba's China production covers its entire portfolio, weighted more heavily towards textiles, coatings and plastic additives. In coatings, Ciba's main outlet is directed to the Chinese ink producers, where end use is more for local market needs.

The obstacles and challenges of the China foothold for Ciba and others re-main formidable. "Recruiting, training and retaining good people is a top challenge, through all manage-ment layers, from plant floor workers on up through managers," comments Mr. Meyer.

Another challenge is meeting international quality and safety standards. "We do not and cannot compromise on that," states Mr. Meyer. "It's crucial our operations remain close to our customers." Suc-cess is closely tied, he adds, to having "efficient training facilities for our customers." Customers are trained on how to use Ciba products and "how to improve their processes by using our products."

The Chinese government welcomes foreign investment, according to Mr. Meyer. He has seen bureaucratic layers fall away during the two decades he has been doing business there. Now is the right time for fresh investment, he believes.

"Investment in factories must be combined with investment in developing skills, in training people and in establishing a sound marketing and sales organization," he continues. Mr. Meyer's simple declaration about business in China boils down to: "Global companies that are not successful in China will probably not be successful at all."

H.B. Fuller

H.B. Fuller Company believes that going forward, the Chinese domestic market is perhaps the most compelling growth driver. "Over the last few years, we've had constant growth rates of 30 to 50 percent," states CEO Al Stroucken, "a significant portion of which has come from servicing local manufacturing."

Fuller's adhesive manufacturing facility in Guangzhou is now being run autonomously by Chinese citizens. "China ranks high on our radar screen for additional investments or acquisitions," he says. The opportunities for growth in packaging, consumer goods and products that serve consumer goods industries are considerable.

The acquisition route is promising for the future, notes Mr. Stroucken. He intends to target local companies that have, on their home turf, superior market access and knowledge. "There's a recognized need on our part to broaden our base beyond the more developed Eastern region of the country."

Rohm and Haas

Today, Rohm and Haas Company has 14 locations in China, including plant and research centers, which support more than half of its 14 global businesses and engage more than 1,000 employees (over five percent of its total work force).

The company's two strongest areas in China are coatings and electronic materials. The water-based technology of the coatings business performs well on all kinds of surfaces, including masonry, cement, wood and interior walls. The gate leading to Tiananmen Square and the exterior of the Tiananmen Rostrum used Rohm and Haas products.

Rohm and Haas's growing electronic materials division, especially the technology used to make printed wiring boards, is well established in China, with yet another manufacturing site under construction near Dongguan.

Clariant

Clariant recently announced the opening of a new production plant for textile and leather chemicals in Tianjin, China, a SFr4.5 million ($3 million) investment. The new facility will have production capacity of 6,000 tons per year. With a minor incremental investment, plant capacity could easily be doubled. The reduction of export customs, tariffs and trade quotas augurs well for new global investments being made in a variety of industries, including toys, household goods and, of course, electronics. To date, with a total of six production sites and some 1,000 employees in the textile, leather and paper chemicals, pigments and additives and masterbatches divisions, Clariant has invested a total of about SFr150 million ($102 million) in the Greater China Region, which includes Taiwan and Hong Kong.

Valspar

To keep up with the Joneses, Valspar Corp. has a 2003 wood coatings capital project in the works in China. "Furniture manufacturing has been shifting to China from North Carolina," says Deutsche Bank's Mr. Begleiter, "so Valspar has a felt need to follow its customers over to China." Particularly in the high-end furniture lines, adds First Analysis's Mr. Cohen, "the delicate, labor-intensive sections are carved and coated in China, then shipped back to Carolina for the finishing touches and assemblage."

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