SMEs suffer regulatory overload

21 July 2010 10:59  [Source: ICB]

Regulatory pressure is having a disproportionate impact on smaller chemical companies, which are already being hit by the economic downturn

THRIVING, NOT SURVIVING
At the larger end of the SME scale is US specialty chemical manufacturer Syrgis. Its range of products - which are sold into the automotive, building materials, thermoset composites and other industries - includes light absorbers, lead peroxide initiators and performance chemicals for oil and gas applications.

The SOCMA member employs around 190 and has a turnover of roughly $100m (€79m), according to CEO Andy Harris.

What challenges do you face?
Our main challenges are: increased regulations that reduce US and European competitiveness, forcing more business to go offshore; and how to take advantage of increasing foreign markets and opportunities.

Is the worst part of the recession over?
We think so, although there may be a possibility of a slight double dip in manufacturing activity in late 2010 or early 2011 - as restocking takes hold and current manufacturing run rates catch up to the modest inventory restocking effect.

As a medium-sized specialty chemical company, we are focused on diversification across niche markets. This has brought relative stability: Syrgis survived and thrived during the economic downturn.

What are your expectations for the next year?
The next year should be a good year of growth as we expand into new geographic markets and build on the current global recovery in our base business. We are focused on niche products that the world cannot do without. In most cases, the reliance on our speciality chemicals and technical expertise is even greater as we look out over the next five to 10 years.

When the recession hit close to two years ago, the business pages were full of the suffering of the industry's giants - from Netherlands-based LyondellBasell's bankruptcy filing to Germany-based BASF's program of plant closures.

But hidden under the surface, there was - and still is - plenty of pain for small and medium-sized companies (SMEs). While they can be nimbler than their larger counterparts, small size can also be a distinct disadvantage.

"The key concern for our members is the regulatory burden, which is coming at them from a host of different angles," says Peter Newport, director of the UK-based Chemical Business Association (CBA).

He says the need to comply with various pieces of legislation comes at a time when small companies can least afford the time and expense.

"The main burden - though it doesn't particularly affect SMEs yet - is Reach," he says, referring to Europe's new chemical registration law.

FIRST REACH DEADLINE LOOMS
The first Reach deadline, which comes into force this year, is for chemicals made or brought into Europe in quantities of more than 1,000 tonnes.

This is only likely to affect a handful of SMEs - though he points out that they must still work toward compliance for the smaller-volume deadlines in 2013 and 2015.

"Over the last year, most companies have been more interested in surviving than they have been in preparing for Reach," he says.

But there are a few cases of SMEs being affected by Reach, if they are making or importing above the 1,000 tonne limit. One member has historically imported three "salts of a primary substance" - but found that the time and money spent on the relevant consortia could not be justified.

"He's decided not to continue with two of these lines, because it's not economic," says Newport.

These consortia - made up of companies with an interest in a particular substance - are also a bone of contention for Newport, who says that they are not always run in a fair way. Members have told him of consortia where the cost structure penalizes smaller members.

"Usually, you will pay depending on your production volume, so that a large manufacturer would pay more," he says. "In some cases, we've heard of 'equal shares' - where each member pays the same amount."

As well as Reach, there are other pieces of legislation that are stretching the resources of SMEs - including new packaging rules, the Globally Harmonized System of Classification and Labelling of Chemicals (GHS), which is to be implemented this year.

The new system addresses classification of chemicals by types of hazard and proposes harmonized hazard communication elements, including labels and safety data sheets. "Part of our role is to make sure our members are on top of all chemical regulations - not just Reach," says Newport.

In the US chemical industry, the trade group Society of Chemical Manufacturers and Affiliates (SOCMA) is pushing for changes to the rules on tax credits to encourage companies to spend money on research and development (R&D).

"R&D tax credits get renewed each year, for a period of one year - and we're pushing to have it renewed for a longer period," says Lawrence Sloan, CEO of SOCMA. "It's currently part of a larger financial bill that's going through Congress."

If tax credits were renewed less frequently, this would help SMEs to be more confident in their planning, says Sloan. "Sometimes, companies are anxious that it might not be renewed," he says.

LEGISLATIVE BENEFIT
In a way, organizations like the CBA and SOCMA benefit from excessive legislation because their expertise can help to guide members through the minefield. And the regulatory landscape in the US is as complex as it is in Europe. The US is currently grappling with proposed updates to the 1976 Toxic Substances Control Act (TSCA) - which is proving a headache for small companies.

"SMEs bear a disproportionate burden in all new regulations, as they do not have the resources for all the record keeping, monitoring and reporting," says Sloan.

But in terms of the economy, he says SMEs are proving more resilient than their larger brethren. In its recent annual survey of members, 90% of respondents expect sales to increase during 2010. At the same time, 75% expect to outsource more projects this year, and two-thirds believe there will be more consolidation among custom manufacturers over the next three years.

"Some of our members have been performing as well as they did in 2008. It's been refreshing to see them steering through the water like small boats, rather than cruise ships," says Sloan.

SMALL WONDER
If established SMEs are finding it hard, then innovative companies have it even tougher.

Ian Laird is managing director of NiTech Solutions, a UK startup that has developed a new way of mixing substances - for techniques such as crystallization and polymerization - that can produce higher yields while using energy more efficiently.

It has been used in the pharmaceutical, biotechnology and food and drink industries. But this early success, with companies including US-headquartered group Genzyme and Japan's Fujifilm, has slowed in the wake of the recession.

A key challenge for Laird is to fight the slow pace of customer decision making, particularly in the pharmaceutical industry. A raft of mergers and acquisitions has led to nervousness and uncertainty, he says - which does not bode well for selling an innovative product.

"Rather than fundamentally changing how they do things, many companies are focused on cost-saving," he says. "The worst thing for us is for people to keep doing what they've always done." This lack of confidence affected investment opportunities: because he cannot give a clear indication of market demand for his product, investors are more cautious. His answer is likely to be a shift in his business model, looking for partnerships - with other companies, and with academia.

But there is comfort for Laird, in the face of the economic situation and rising energy prices. "Our technology helps people to be more energy efficient and boost yields. Rising energy costs are bad for business, but force people to look for more efficient processes that are less energy intensive - such as ours."

"Most companies have been more interested in surviving than in preparing for Reach"
Peter Newport Director, Chemical Business Association

Sign up for the free ICIS CEO Opinion e-newsletter for exclusive, in-depth interviews with chemical CEOs

Author: Lou Reade

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly