INSIGHT: Tailoring businesses to meet emerging market challenge

19 December 2011 16:29  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--It is the mid-stream and specialty chemical players that are likely to suffer most over the coming months from lower demand growth and still relatively high feedstock costs.

The current slowdown is putting stains on most supply chains which remain finely balanced in terms of supply and demand. But downstream, closer to struggling end-use markets that really are under pressure from anaemic economic growth and financial market insecurity, is where the trouble lies.

Coatings makers are finding the going tough as are those businesses that sell chemicals into construction markets, particularly in Europe and the US. Chemicals that sell into consumer electronics are not doing that well on recent evidence.

Specialty chemical producers find themselves under constant pressure as margins sink. The fundamentals of many of these businesses have changed in a relatively short period.

A decade or so ago margins for additives, pigments, personal care products and other such chemicals were extremely attractive. But competition has increased markedly and there has been a push into lower added-value products to maintain market share. The margins on these materials do not always support the spending on research and product development needed to maintain and enhance them.

A big part of the speciality players’ business model is devoted to staving off commoditisation, Booz & Co suggested in a report released earlier this month. And players are in the midst of a price war which, the consultants suggest, will prove to be long and costly.

This underlying trend has not been widely obvious through much of 2011 as major players have used amassed cash to take significant strategic steps.

US DuPont’s acquisition of Denmark’s Danisco is a case in point.

DuPont has bought a great deal of expertise in enzyme technology and Danisco’s strength in cellulosic ethanol. It is sometimes better to buy-in research know-how and product strength than to try to develop it yourself.

Solvay’s acquisition of France’s Rhodia has given the Belgium-based producer quick access to markets in Asia and South America. The step forward in China could prove to be of particular benefit.

Yet China’s growth rate is slowing as the economy is cooled down. So Booz & Co suggest that: “Chemical companies must develop well-thought-out strategies and skills to deal with the changing dynamics in emerging countries, including establishing reasonable production and R&D footprints in Asia to best compete with local suppliers for both market share and talent.”

The consultants believe that companies would do well to adopt more tailored business plans, operating and distribution models. If the easy days for specialty and mid-stream chemicals makers are over, then a better or, rather, a more finely-tuned allocation of resources to different businesses makes a great deal of sense.

“Tailored business streams (TBS), in which distinctive management approaches are designed for products and regions, depending on customer preferences and product life-cycle status, are already essential today but will become even more critical as commoditisation escalates in the chemical industry,” Booz & Co says.

Sales teams may be dedicated to certain true specialties, for example, to help diversify product sales, while a different model is adopted for products that are on the road to becoming commodities.

Companies need to be adept at managing the commoditisation process and to recognising that business needs change as the margins available from certain products shift. The right business model has also to be carefully aligned to regional market dynamics.

“Uppermost in mind should be emerging economies with their potentially large markets," Booz & Co says.

“Companies need to develop plans not merely to grow in these countries but to outpace the rate of growth in local markets. Consequently, tailored business streams should be developed to target unique aspects of the local business environment and customer behaviour and buying patterns.”

($1 = €0.77)

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By: Nigel Davis
+44 20 8652 3214

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