Challenges ahead for Central and Eastern European firms

Many chemical executives appear publicly to dismiss the opportunities presented by the new, much wider Europe – the European Union’s (EU) now 25 member countries. If, indeed they do, they do themselves and their companies a disservice.

Post accession, the EU’s internal market is much bigger and its chemical companies face increased competition. Yet structural problems that have dogged producers in central and Eastern Europe for so long will soon ease as reorganisation and consolidation accelerate. In such times of change, there will be winners and losers. All producers will want to ensure that they are on the right side.

Consultants PricewaterhouseCoopers (PwC) focused on the environmental challenges in their recently released report on the new wider EU* but also highlighted other threats and opportunities. A great deal has been written about the ongoing petrochemical power plays that are unfolding across countries like the Czech Republic and Hungary. What are not always so widely apparent, however, are the changes underway across the sector.

Eastern Europe’s fine chemicals producers might be expected to consolidate fast post-EU accession, for instance. If they do, stronger competitors to producers in the west will emerge. In fields like detergents, western companies see clear opportunities for further brand building and consolidation.

Forecasts suggest that economic growth in the accession countries will accelerate in the medium term faster than in the former EU 15. That is hardly surprising but if it is the case, paints, cosmetics and possibly detergents would benefit.

Stronger demand growth in these segments would stimulate new entry, PwC suggests, either through greater exports or direct investment.

In this new, more competitive environment, domestic producers had better watch out. They might benefit from the injection of new funds and western technologies but big name players will be on the prowl. Domestic competition in fine chemicals, detergents and other markets will intensify rather than abate. Western companies have made inroads into the detergents sector but have hardly been as active in fine chemicals. Some currently competitive domestic producers face a challenging and uncertain future.

A key point is that productivity, on which so many companies might expect at first to rely, will prove transitory. PwC rightly warns of the problems expected should wages be allowed to rise faster than output. It will be no means be an easy road but as wage inflation takes hold and standards of living rise, the ways in which companies are organised and run will have to change.

Companies will have to find ways of reducing costs and differentiating their products to compete. EU 15 countries may hardly expect a flood of new imports but they are on the lookout for new partners and opportunities to expand their businesses.

Enlargement raises some technical issues around customs, trade and labour laws but these are sideshows to the power plays that position companies better to compete and capture rapid growth. The most attractive scenario is one of relatively high rates of growth in local markets and a greater degree of change in those businesses.

Producers in the accession countries are thrust that much more forcibly by enlargement into a highly competitive global arena. Here they will have to fight that much harder for survival. Rapid domestic growth and new competitive threats suggest a period of accelerated restructuring for the EU chemical sector’s new producers. Which firms emerge as the winners in this transformation remains to be seen.

The opportunities and risks for chemical companies from EU enlargement will be thrown into further sharp relief on 15 June at a seminar** in Frankfurt organised by the European Chemical Marketing and Strategy Association (ECMSA) and the German  chemical industry association VCI.

* Looking Forward: The Impact of EU Enlargement on the Chemical Industry. For further information, contact Saverio Fato at Tel: +1 267 330 2407 or Pawel Peplinksi at Tel: +48 22 523 4433.

**Opportunities and risks of the EU enlargement seminar, organised by ECMSA and Chemical World Database, a subsidiary of the Association of the German Chemical Industry (VCI). For further details see: www.ecmsa.org