09 January 2012 00:00 [Source: ICB]
Chemical distributors with regional expertise can help global producers by using innovative business models to make local market inroads
Growth for global chemical distributors in emerging markets will accelerate as a burgeoning middle class demands goods and technologies that cannot always be supplied locally, according to a new study by Switzerland's DKSH and Germany-headquartered strategy consultants Roland Berger.
Nanjing Road, Shanghai: Asia's more affluent middle class is driving demand for advanced specialty chemical products
The study, which also focuses on specialty chemicals, highlights the extra opportunities for distributors that are prepared to move beyond traditional working methods to become providers of Market Expansion Services (MES).
There are huge opportunities to benefit from a fast-growing specialty chemical market that is opening up to greater penetration from distributors and MES providers.
The study forecasts that growth of the MES market for specialty chemicals globally will grow at 5.6%/year between 2010 and 2015, from a base of $41bn (€32bn) or 10% of global consumption in 2010 to $54bn by 2015.
By focusing on Asia-Pacific, the opportunities are greater than from seeking global growth. The study suggests Asia-Pacific's middle class as a percentage of the global middle class will rise from 28% to 66% between 2010-2030. It defines middle class as those able to spend $10-100/day.
In the specialty chemicals industry, integrated MES providers move beyond the traditional distribution model to offer value-added services such as formulations, product development or applications support. They can also offer sales and marketing expertise, according to the study.
Overcapacity and the increasing relocation of production to lower cost Asian countries have exposed manufacturers to unrelenting price pressures in recent years and more are turning to MES providers and distributors. The study says the penetration rate in emerging markets is already much higher than in developed regions.
DIFFERENTIATE THROUGH MES
The study claims MES providers can offer knowledge of local markets and an established network of competence and contacts. They can help gain access to customers, setting up marketing, sales and distribution structures. Companies seeking growth and new outlets will need to understand how those markets can be targeted. That expertise is the core competency of a market expansion services specialist, says the study.
It says: "By delivering highly customized, end-to-end integrated services, MES providers can generate new impetus for their clients by reshaping their business operations in a new and unique manner. MES providers help companies find their way through the labyrinth of local practices and conditions when entering new markets or expanding in existing ones".
Roland Berger interviewed more than 100 manufacturers from different sectors, but the challenges of operating in Asia-Pacific seemed to be similar. At the top of the list of challenges are peculiarities in local regulatory and legal systems, cultural differences, local languages, difficulties in accessing local customers, and the lack of local market knowledge.
Such situations are in some industries aggravated by the fact that would-be exporters are unfamiliar with domestic infrastructures and face massive competition from local players.
The study claims that MES providers, by contrast, occupy a premium position in the outsourcing landscape by not only reducing costs but also improving revenues. To help clients access new markets they focus on front-end processes such as marketing and sales or customer services that are highly interactive. As a result, clients can increase market share, penetration and coverage, while reducing fixed costs and operational complexity compared with traditional outsourcing.
It says MES providers focus on integrating numerous different services into end-to-end solutions. This sets them apart from what are commonly known as single-service contractors. The latter - such as market research firms, sales agents and pure play logistics providers - each concentrates on a specific element of the value chain.
Although MES providers concentrate on across-the-board service packages, many of them also offer modular options to compete directly with the services offered by single service contractors.
The report says it is important to distinguish between these two business models because they offer different value propositions. The integrated approach allows clients to reduce complexity and coordination costs. At the same time, transparency and one-stop shopping ensure a consistent flow of information from end customers to client and can generate additional client market insights.
Offering a relatively low-risk and high-return option for growth, MES providers help companies tap into substantial market potential at relatively low cost and risk, claims the study. Manufacturers do not need to invest heavily in local assets and resources; they can draw on the infrastructure of the MES provider. Hence, MES providers offer major benefits compared to other forms of market entry or development.
Commenting on the MES study, consultant Guenther Eberhard of Switzerland-headquartered DistriConsult says: "Chemical distributors have always been looking at broadening their service offering to suppliers and customers alike. Particularly in less mature markets, there are good business opportunities and high growth rates to be found".
Eberhard believes that more producers have grown aware of the benefits that distributors can bring to their channel strategies and have intensified co-operation with them. He maintains that: "Market expansion services as an outsourcing concept can be an attractive proposition. However, an up-front analysis regarding what must be retained as core competencies within the company is an absolute must."
DKSH LEADS MARKET EXPANSION SERVICES INDUSTRY
Mario Preissler, head of Business Unit Performance Materials explains why DKSH has pushed ahead with Market Expansion Services.
Why did you undertake this study? Why is there a real need for real innovation in distribution?
DKSH as a pioneer in the MES industry sees value in educating the public and in particular potential clients about the industry we operate in. As there is little publicly available information available on this industry, we recognized a joint study with Roland Berger to be the best approach to achieve this objective.
What lessons have you taken from the results of this study? How are you planning to adapt your business model as a result of its finding?
The study clearly showed that MES is one of the most promising sectors in the outsourcing industry. It adds exceptional value and, unlike traditional outsourcing, its focus is on sales growth and increasing market share - not only on efficiency gains and cost reduction.
The main drivers of market expansion services are a growing middle class in emerging markets, which is giving consumer and industrial markets a major boost, and the ongoing manufacturer focus on core competencies, which will further drive the penetration rate of MES.
Please give us chemical-specific examples of your innovation in supply chain management or MES.
Specialty chemicals are often sold in lower volumes and at higher prices. They require a capillary network and specialized services such as testing, formulation, product innovation and compliance management and application support. Therefore, they are an important industry for MES.
We continue to expand our network of 19 innovation centers, the most recent in Mumbai, for personal care products. More are planned for Taiwan, Thailand, India and China.
Our supplier agreement program ensures that suppliers understand the needs of customers and are able to deliver on quality, product purity, competitive price, and worldwide on-spec delivery.
The bottom line is our clients receive a complete service package for the whole of Asia. Thanks to our service-driven business model we are able to work and think like a specialty chemical company.
How does the MES model differ from a traditional model?
We offer MES along the entire value chain from sourcing, research and analysis, marketing and sales, distribution and logistics to after-sales services. Unlike other distribution partners, DKSH not only helps companies bring products into the market, we also take responsibility in building the brand and our clients' reputation and help companies to grow. As a global company generating transaction value of around Swiss francs 10bn ($10.7bn, €8.2bn) in 2010, DKSH is well positioned to provide innovative and high value-added services.
Please give us any growth targets for the chemicals division of DKSH, and how you expect these to change as the MES model strenthens your business even more.
DKSH Group has set the target of continuing its path of achieving double-digit sales and earnings before interest and tax growth for the coming years. We focus on leveraging our solutions-oriented business model to achieve strong organic growth, through replicating success stories and new business development. Our organic growth will be complemented by strategic bolt-on acquisitions.
ASIA'S MIDDLE-CLASS BOOM
Asia-Pacific's middle class will grow at 9%/year from 2010−2030, rising from 572m to 3.228bn
Asia-Pacific's middle class as a percentage of the global middle class; 28% in 2010 to 66% in 2030
Asia-Pacific's middle-class spending as a percentage of worldwide consumer spending; 24% in 2010 to 59% on 2030
Definition of middle class
People who live comfortable lives; enjoy health care, stable housing, education, and are able to spend $10-100/day
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