A matter of survival

SMEs play to win

01 June 2009 00:00  [Source: ICB]

Small and medium-sized distributors reveal how they survive in these tricky times

Feliza Mirasol, Malini Hariharan, Elaine Burridge and John Richardson

DURING AN economic downturn, the speed and flexibility of small and medium-sized distributors may provide an advantage over larger companies, but the devil is in the details. We looked at several of these small and medium-sized enterprises (SMEs) around the globe to find how they are dealing with economic, financial and regulatory challenges during the global recession.

U.S. CHEMICALS
Tightening credit markets have complicated business for U.S. Chemicals, a 50-year-old specialty chemical distributor based in New Canaan, Connecticut, US.

"The banks have become an obstacle to growth with the oppressive amount of paperwork and requirements required to secure credit lines," says Carol Piccaro, president and CEO.

However, the company has been spared layoffs and even plans to take on a summer intern, she adds, while lower inventories have been a boon, minimizing losses when prices fell.

"Overhead costs are lower, and we run our company with talented, capable, people, therefore requiring a smaller workforce," Picarro says.

On the other hand, changing regulations have become more time-consuming. The EU's Reach chemical regulations and Responsible Distribution Practices (RDP) of the National Association of Chemical Distributors "have created an ongoing need to dedicate employees to this sole purpose," says Picarro.

"While this situation cuts into our profit margins, ultimately these regulations help U.S. Chemicals to be a better business in the long run," she adds.

Sales volumes in the US are falling with the decline of US manufacturing, she notes, but the market for services is expanding.

"This is one of the growth areas for our company," says Picarro. "The large manufacturers do not want to cater to the smaller requests for special packaging and physical properties and this is where we shine."

U.S. Chemicals has expanded its service offering to include special packaging, particle size reduction, logistics and importation.

CHARKIT CHEMICAL
Norwalk, Connecticut-based chemical distributor Charkit Chemical points to quality performance as a competitive advantage.

"Customers always expect the best. In order to keep them happy and maintain our reputation, they need to believe that their satisfaction is our only job," says Charles Hinnant, the US firm's CEO.

Customers usually have many options in the fiercely competitive distribution market.

"It is imperative for us to maintain a good dialog with them to ensure we are meeting their requirements," Hinnant says.

It is also imperative to differentiate.

"A company which has not differentiated itself runs the risk of becoming redundant and easily replaced by those who do the job more effectively," Hinnant notes.

Like Picarro, Hinant notes the growing regulatory burden. "Besides being a demanding task, it can sometimes cause delays in meeting customer requirements," says Hinant.

"As an example, the difficulties we encounter with delays at the ports make it hard to service our customers effectively. These delays are costly to us not only because of the additional manpower required, but they also affect our reputation by reducing our ability to deliver product on time," he says.

"Considering the current economic climate, it seems odd to punish the companies who are actually generating revenue and employing people," he adds.

WHYTE CHEMICALS
Melvyn Whyte, chairman of UK-based chemical and polymer distributor Whyte Chemicals, says SMEs are trying to fend off several challenges at the moment, not least of which are the current economic crisis and Reach.

"SMEs are being badly affected by the current business environment. They have issues with credit, demand and whether or not their customers and suppliers are able to stay in business," says Whyte.

One of the main issues for SMEs centers on finance, he says. The banks are pulling in credit lines and restricting companies on how much money they can draw. "Margins are fairly thin, and companies can slip into loss very easily. Banks will then consider them a risk," Whyte notes.

Companies that practice invoice discounting also face a major headache. A system used by companies with an annual turnover above £500,000 ($796,000, €570,000) to confidentially raise funds from unpaid invoices, invoice discounting improves cash flow and also provides the option of protection from bad debt.

"We need to make sure our customers are credit insured, but it is becoming incredibly difficult," Whyte says. "Insurance companies have withdrawn, or dramatically reduced, credit. Business will be completely at our own risk, which breaches the rules of discounting. It is dragging people into a vicious circle."

As if economic woes were not enough, Reach represents a serious financial headache. In recent years, Whyte has been fiercely vocal on the burden to SMEs of Reach compliance.

"Reach is incredibly bureaucratic, and the costs are a serious situation for an SME who will not have the resources. An SME will likely have to get services externally and will be easy prey for get-rich-quick merchants who see Reach as an opportunity to make lots of money," he remarks.

The management charges associated with substance information exchange forum (SIEF) participation alone could be horrific, he says. For example, running costs for a vinyl chloride consortium are estimated at €300,000 ($408,000) and any nonconsortium member would have to pay a 20-30% surcharge to access the data.

"SMEs could find the number of SIEFs they have to join is so significant that they would be forced to exit the product or try to buy from a company that had a full registration," says Whyte.

Loss of business is perhaps the biggest concern for an SME. If a manufacturer decides that Reach is too complex and costly to continue producing in Europe, and therefore moves outside the region, that distribution business is lost for good, he notes.

Producers in the low tonnage bands could be particularly affected. If a company has to spend £30,000-50,000 for just 10 tonnes of a product, the financial impact will be enormous and the business probably rendered unviable, Whyte says.

ELASTOCHEM NEW ZEALAND
Chemical distibutor Elastochem New Zealand, established in 1997, markets plastic, elastomers and chemicals throughout its home country. The company was begun to operate businesses that had been run locally by US crop sciences giant Monsanto, but its roster of clients now includes US-based ExxonMobil Chemical, UK major INEOS and US-based Solutia.

"Because of the nature of the New Zealand market, which has seen a sharp reduction in its manufacturing base, many of the multinationals have opted for working through distributors rather than operating dedicated offices," says Darryl Smith, managing director of Elastochem.

One of the smaller distributors in New Zealand, Elastochem derives most of its sales from the plastics industry. The company distributes ExxonMobil's Santoprene, polyethylene (PE) and polypropylene (PP) resins.

Elastochem also handles INEOS melamine resins and temperature measurement and control products for the plastics industry manufactured by US-headquartered Dynisco.

Because New Zealand's two biggest industries are primary product exports, such as dairy products, and tourism, the bulk of plastics demand is for packaging film for primary products, and demand fluctuates according to the seasons.

New Zealand's plastics industry is small because of the country's low population and lack of manufacturing, but it has expertise in niche food packaging areas. Industry association New Zealand Plastics estimates total plastic-product output at 242,000 tonnes/year (versus 1.2m tonnes/year in Australia and 44.8m tonnes/year in the US).

This niche market is showing signs of recovery from the global economic crisis. As with every distributor or end-user of plastic resins, Elastochem is keeping a close eye on the rapid rise in pricing since the end of February.

PURE CHEMICALS
It is tough these days for any company in the chemical business to escape the challenge of delivering growth in a falling price environment

Pure Chemicals, a 28-year-old commodity and speciality chemical distributor headquartered in Chennai, India, is no exception.

The firm, which represents companies such as the global ExxonMobil, Shell Chemical and Switzerland-based Clariant, has estimated that it must expand volume by 12% this year to maintain its 2008/09 sales of Indian rupees 6bn ($121m).

"Nearly 75% of our business comes from commodity chemicals, which has seen a sharp fall in prices," says executive director M.P. Lakshmipathy. "Then there is the foreign exchange risk and also [the problem of] credit management."

Sales will have to grow even as many multinationals reassess their distribution strategy. Rather than rely on a single distributor to service an entire country, a risk that was highlighted during last year's price volatility, they are looking at appointing multiple distributors, points out Lakshmipathy.

Additionally, speculators have been attracted to the Indian market by volatile commodity chemical prices, making life difficult for distributors that are in the market for the long term.

To achieve an ambitious target of 30% annual sales growth, Pure Chemicals will increase its focus on specialty chemicals, building on its network of 18 branches across India.

"Our core strength is retail distribution," says Lakshmipathy. "We are the largest distributor for Clariant's textile chemicals in India. We have technical staff and a laboratory that is already supporting our textile chemicals business. We will be looking at branding specialty chemicals seriously. Technology is available but people are weak in marketing or do not have application knowledge. We want to exploit that [gap]." He acknowledges that scaling up in specialties will not be easy, and says that commodity chemicals will continue to account for a major share of Pure Chemicals' sales.

To expand in commodities, Pure Chemicals is targeting South Asia, the Middle East and Africa. It already exports from a special economic zone at Kandla, on the west coast of India.

"This has given us some leverage. When Indian prices or demand is low we can export product," explains Lakshmipathy.

The plan now is to open an office in Dubai next year. "There is a good market for solvents in Africa that we can tap with our sourcing expertise," he says.

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By: Feliza Mirasol
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