22 November 2012 16:24 [Source: ICB]
Increasing numbers of specialty chemical companies are choosing to use a new breed of chemical distributors to help them enter into and grow in many global markets, especially in the challenging Asia region.
A new report and survey of opinions about Market Expansion Services (MES) providers suggests they can help specialty chemical producers and other industrial segments penetrate markets by offering a more comprehensive and innovative package of services than a traditional distributor.
As Asian economies become sophisticated, MES can play a vital role
With a strong understanding of the local market, ability to spot sales opportunities and supporting with physical distribution, MES providers help companies to increase their existing market share and expand into new territories.
The report - based on 350 survey responses and 25 in-depth interviews - is authored by Asian-focused MES provider DKSH and Roland Berger Strategy Consultants. It suggests there is going to be continued growth in the MES sector, particularly in emerging regions. The global MES sector will grow at a compound annual growth rate of 6.1% between 2010-2015, increasing to $3,100bn (€2,441bn) from $2,200bn.
Growth will be driven by Asia, which is forecast to expand by 8% over the same period. Western companies which are not familiar with this region want to expand there, harnessing the high rates of GDP growth here as their traditional home markets in the US and Europe suffer ongoing stagnation related to the eurozone crisis.
The MES market is less well-developed in specialty chemicals, accounting for around 10% of this market or $41bn in 2010. This contrasts with healthcare (44%) and consumer goods (16%). The report says MES is particularly suited to industries which require on-the-ground personalised sales services and after-sales support as well as distribution capabilities.
The bulk chemicals industry has not expanded into MES greatly because it requires very specialised distribution networks for bulk quantities. But the specialty chemicals are much more suited to MES which can offer extra services such as testing, formulation, compliance management and product innovation. These products are also often sold in low volumes at high prices.
Survey respondents said that service innovation by MES providers is vital so that they can help clients and customers deal with emerging trends and continuous change. According to one respondent, "Service innovation is a means of differentiation. You have to achieve it to be successful in the MES industry."
Technology and efficient handling of data is one important area the report highlights. Companies can collect huge amounts of data on customers' behaviours and desires. MES providers can help clients make sense of this mass of information to make better decisions for future product development and growth strategy.
The report groups MES service innovation into four areas:
Every client segment has its own requirements, according to the report. In specialty chemicals, companies are more willing than other industries to pay for advanced innovation and certification services because of the strict regulatory environment in which they operate.
By 2015, Asia will be the largest single MES market, overtaking Europe and North America. The report groups Asian nations into five categories according to how well-developed and sophisticated they are in their service offerings in the MES markets. This correlates strongly to economic development. It is crucial for service providers to tailor offerings to the level of service sophistication in their regions.
The leaders: Top of the list is Japan, which has become the largest source of foreign direct investment in Asia, outsourcing production to lower-cost countries. It is considered the leader in terms of service innovation.
The pursuers - Singapore, Taiwan, Hong Kong and South Korea - are next. They grew rapidly between the 1960s and 1990s, have advanced economies and are able to offer high levels of service sophistication reflecting their global status. Australia, as a key raw material producer, lags behind slightly.
The chasers - New Zealand and Malaysia - are economies still heavily reliant on agriculture, but showing strong service development. One reason for their slightly weaker position is that their level of service sophistication has not yet come into line with their high level of economic development. They are chasing Asia's leading economies. The attackers - China, Thailand, India, Vietnam and Indonesia - they are operating at a lower level of economic development but have made rapid progress in recent years. China, India and Indonesia are vast, making service delivery difficult. Although many urban areas in these countries already boast a highly sophisticated service landscape, the corresponding infrastructure in rural areas can be described only as negligible.
The starters - Cambodia, Philippines, Sri Lanka, Myanmar and Laos - the least developed Asian nations with primitive, though growing, service sectors. Development of the service sector is therefore still in its early days in these countries, although they have witnessed significant growth in recent years.
COLLABORATION IS VITAL
It became clear as the study progressed that collaboration between service provider, client and customer is vital for the successful development of an MES service.
The survey shows that 95% of clients/customers would like to be involved in the innovation process. Also 51% would like to play an active role in engaging in close dialogue with the service providers as processes are developed. Finally 24% of respondents see themselves as co-developers of service innovations.
MARIO PREISSLER, DKSH PERFORMANCE MATERIALS
Because we do more - a lot more than simply distribution. Unlike distribution partners, we offer MES along the entire value chain from sourcing, research and analysis, marketing and sales, distribution and logistics to after-sales services. 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 to increase their market share and revenue.
The MES market is growing particularly in Asia for three reasons. Firstly, Asia is the growth region per se, and driving this growth is the ever-expanding Asian middle class with their demand for high-quality consumer goods, health care, plus luxury and lifestyle products.
This leads to emerging domestic industries, which is driving the demand for industrial equipment, materials and ingredients so as to develop the local infrastructure and production capabilities. Moreover, companies these days need to stay competitive and are focusing on core competencies while outsourcing everything that others can do more efficiently. All the factors above are contributing to the growth of the MES industry in Asia.
As for your second question, I think the answer is simply that clients these days prefer to work with a partner which can offer them the complete solution package - a one-stop shop approach, rather than having to work and coordinate with multiple partners. This is what DKSH can bring. Additionally, we offer certain services such as those from our innovation centrescenters that no other traditional distributor can provide.
For DKSH Performance Materials, we continue to expand our network of 23 innovation centres to offer valued-added services to clients and customers. The most recent opening was in Bangkok, for coatings products.
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. We are very positive that this model will have a bright future in the chemicals distribution sector, too.
DKSH Group has set the target of continuing its path of achieving sales growth at least on par with the growth of the MES industry in Asia and double-digit earnings growth for the coming years. We focus on leveraging our solutions-oriented business model to achieve strong organic growth, complemented by strategic bolt-on acquisitions.
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