Distribution firms aim to increase activity into China

10 September 2007 00:00  [Source: ICB]

The China approach

Stefan Baumgarten/Toronto

BRENNTAG, UNIVAR, Ashland Inter-national and other chemical distribution firms have been actively sourcing product from China for many years, but their role in distributing product there has been small compared with their business elsewhere in the world.

China is still a developing economy where the many value-added services an international distribution major can offer go largely unappreciated. Simply grafting sophisticated western distribution models onto China will not work. Yet China's growth potential is too big an opportunity to miss out on.

For chemical distributors, the country has primarily been a sourcing opportunity, particularly for fine chemicals, pharmaceuticals intermediates, low-technical specialty chemicals and mineral-based chemicals, say Marc Fermont and Philippe Vigoureuxm, senior partners with Leysin, Switzerland-based DistriConsult. Most European and North American specialty and fine chemicals distributors have generally successful sourcing offices in China, they note.

Their distribution activities in the domestic market have been limited. However, large international producers expanding in China, such as FMC, Dow, DuPont and BASF, create new demand there for the services of the same professional distributors they already prefer to work with in North America, Europe and elsewhere, the consultants say.

Regionally, China's main distribution opportunities lie in the east coast regions and some inland industrial centers like Chongqing and Chengdu.

Key product opportunities for distribution are in food additives, specialty and technical polymers, and personal care, according to DistriConsult.

Self-regulation

DistriConsult characterizes China's chemical distribution market as highly fragmented and regional, with many small distribution firms. Only few sites are compliant with Responsible Care and European health, safety and environmental (HSE) rules.

"The concept of modern bulk chemical distribution with a full service range - that is, returnable containers, formulations and blends - is still in its infancy in China," says DistriConsult.

In terms of strategies to expand in China, the first step for any Western firm is to set up a representation office in the selected region or province, and then to establish a trading and distribution/sourcing company.

"It is worth adding that it is more cost efficient to operate with an own sourcing team and accept the fixed costs rather than to use an agent with variable costs and complex exit or end-of-contract negotiations," say Fermont and Vigoureux.

Joint ventures

The consultants advise generally against joint ventures as a strategy to expand in China. "Management of fully owned operations must be stressed," they say.

One possible exception may be a venture by Singapore's Dovechem - a company owned by overseas Chinese - and CHEMCENTRAL, established in 2000. In April this year, CHEMCENTRAL was acquired by Univar, which now stands to benefit from this proven joint venture, say Fermont and Vigoureux.

"Following the CHEMCENTRAL acquisition, Univar now has the most significant presence of all international distributors in China, both in terms of sourcing and in distribution," the consultants add.

Merging the Dovechem and Univar operations gives Univar a significant presence, not only in China but also in India and elsewhere in Asia.

Last year, Univar bought a small distributor, Shanghai Jixing Chemical. At the time, the company told ICIS news it saw the deal as primarily a learning exercise to better understand China's distribution market.

There are many attractive opportunities for acquisitions of distributors in China, says DistriConsult, but it may be difficult to handle some deals and assess associated liabilities, for example for ground contamination, pension rights and accounting practices.

Some of the key challenges for the international firms in China's distribution sector include credit risks, poor infrastructure, low HSE standards, staff retention, and even corruption, Districonsult says.

"It is traditionally much more difficult for foreign companies to be paid in a timely or safe manner by their customers, including subdistributors."

Districonsult also notes that while China's distribution sector is a "free market" under the country's World Trade Organization (WTO) commitments, there remain many "surprise rules" and bureaucratic red tape on the regional level. Also, there could be difficulties in repatriating large profits to the parent company outside China.

Brenntag, the Germany-based international chemical distribution major, sees China as a very important opportunity. Although China's chemical distribution market is still at an early stage of development, compared with the more mature economies of North America and Europe, it is growing quickly, says CEO Stephen Clark.

Currently, value-added services are not fully appreciated in China, a consequence of a highly fragmented production platform and a less than fully developed market economy, says Clark.

"However, the development of the market is moving towards a stage where full-line distribution and value-added services are rewarded, offering a big opportunity for Brenntag."

China is already the world's second-largest chemical producer and is in a full expansion phase. Once the expansion phase begins to mature and producers put more emphasis on costs and less focus on market share, chemical distributors will become more important in relieving chemical manufacturers of many uneconomical activities associated with smaller accounts.

"In such an environment, Brenntag's business model will become highly valued," says Clark. He sees opportunities on the east coast, particularly in the Yangtze River delta, which contains more than 50% of China's GDP, followed by the Pearl River delta in the south.

In terms of products, the more immediate opportunities for distribution are in paints and coatings, personal care and construction industries, but other industries are quickly developing as well, he says.

"The competitive edge to be created in an emerging distribution market like China is to learn faster than your competition. This is particularly true with respect to Chinese players, who obviously have the home-field advantage and the know-how of doing business in their own markets. If a multinational wants to develop full-line distribution in China, it would somehow have to acquire that kind of knowledge," says Clark.

In terms of strategy, joint ventures are still a primary vehicle to expand in China, but are becoming less necessary as foreign investors are permitted 100% ownership in wholesale businesses and China's market becomes more and more transparent, he says.

Brenntag and Ashland

For Brenntag, one challenge as it grows in China from its local base in Shanghai is human resources management - that is, attracting and retaining qualified people to help the company establish a full-line chemical distribution business in that country.

Another big challenge is timing. "It is crucial to be able to engage resources - financial and human - at the right moment. This can only be done with a deep understanding of chemical distribution reality," says Clark.

Clark also notes cultural difference as a big challenge. "Understanding one another is paramount," he says.

Ashland, the US-based international major, earlier this year strengthened its distribution operations in China with the appointment of a commercial director and a sales development manager, it says.

The company has operated in China for many years. Apart from distribution, it also has a production facility and a regional administrative office in Shanghai and employs a total staff of 400 in China.

Ashland said in July it would invest an additional $80m (€59m) to set up a new unsaturated polyester resin plant - its second - and a new business center in China.

Ashland sees hiring and training of good employees as a key challenge as it seeks to expand in China's evolving distribution market, says Larry Hunt, Ashland's commercial director in China.

In tackling China, Ashland will leverage its long-established relationships with top global chemicals companies and the large scale of its global sourcing and purchasing operations, says Hunt.

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