Fecc: Emerging economies entice

Elaine Burridge

01-May-2015

Whether by merger, acquisition or joint venture, chemical distributors are looking to expand their footprint in developing markets and regions

Chemical distributors are looking overseas to expand their businesses. As people’s spending power increases in emerging economies, so demand rises for chemicals in end-use markets such as food and nutrition, personal care, pharmaceuticals and water treatment.

 

 Copyright: Rex Features

Companies have to be selective, though, when choosing to invest, and several key factors have to be taken into account. The obvious criteria include a stable and functioning legal and financial/banking framework, political stability, the presence of a manufacturing base and a developing market.

Other factors differ according to a distributor’s corporate strategy and focus, but all have a similar theme, such as having a link with the country concerned, as well as investment being supported or led by principal suppliers and customers.

A link is the key factor for German distributor C.H. Erbsloeh. Christopher Erbsloeh, CEO of the family-owned firm, says the link could be via a customer, supplier or personal contact/employee. “Because of our company’s limited size and resources, we look for something we can build on. We do not go for greenfield development,” says Erbsloeh. He is open to all options for growing the business, be it joint venture or acquisition, but he comments: “We are ready to do anything, but not at any cost.”

The company has been concentrating its efforts in southeast Asia and China. Erbsloeh says the company now has employees in Thailand, and is looking to invest in China. Latin America too is of interest and Erbsloeh says the LEL alliance in Europe, of which his company is a member, is very active in looking at market opportunities in developing countries.

Distributors including Spain’s Ricardo Molina, the UK’s Surfachem, Germany’s Brenntag Group and Africa’s Millchem have all been investing in emerging economies, including Africa, Latin America and Asia.

Family-owned specialty chemical distributor, Ricardo Molina, also a member of the LEL alliance traditionally serving the Iberian market, has spread its wings during the past three to four years to north and west Africa. CEO Jorge Grande explains: “We are investing in this area because we have synergies in geographical proximity as well as both principal suppliers’ and customers’ support.”

Four subsidiaries have been established in Algeria, Morocco, Tunisia and west Africa – this last one covering markets in Senegal, Ivory Coast, Mali and Mauritania.

SYNERGIES IN LATIN AMERICA
The company has also invested in four subsidiaries in Latin America, notably in Colombia, Peru, Chile and in Central America, the latter covering markets in Panama, Guatemala and Costa Rica. Again, synergies with its principal suppliers and in cultural proximity such as language, religion and legal issues were the reasons behind the investment.

Grande says the company’s strategy is to grow organically and build its own subsidiary in each country from zero. “We understand this is slower than acquiring an existing player in the market but this allows us to invest reasonable amounts of money and build the local team according to our company culture,” he notes. He believes this approach increases the control required to develop the business and also minimises the risk of subsidiaries creating different styles of management or inconsistent ways of working.

Poland, Brazil and China have been the targets for Surfachem, part of 2M Holdings. Richard Smith, Surfachem’s managing director, says investment in Poland and Brazil was driven by its sales and marketing activities; that in China was to secure the supply of raw materials for its surfactants product portfolio, Surfac.

The company employed different strategies in each market. For example, in Poland, Surfachem placed its own staff into the market with support from UK head office, with a medium-term strategy of establishing a fully-owned and locally managed subsidiary.

In Brazil, a joint venture was formed with Surfachem holding the majority stake, leveraging the skills and connections of the local partners, which were supported by Surfachem’s business model and contacts. Formed in July 2014, the venture with Vitrine Quimica supplies specialty chemicals to Brazil’s personal care, household, institutional and industrial care markets.

Smith says Surfachem’s strategy for growth in new markets is driven by an assessment of internal capabilities, especially senior management time and the financial resources required to support the new venture.

Being part of 2M Holdings, which includes five chemical distribution and related service companies, enables a flexible approach to entry strategies, states Smith. “Leveraging services from other companies within 2M Holdings enables synergies to be created along various parts of the chemical supply chain,” he says, adding that logistical support from existing parts of the group is also important as a stepping stone to the subsidiary having its own local infrastructure.

Major player Brenntag continued to expand its global footprint during the period 2013-2015 with investments in Brazil, Nigeria, India, Colombia and South Africa. In April 2014, specialty solvents distributor Gafor Distribuidora, headquarted in Sao Paulo, Brazil, was added to the Brenntag stable, boosting its critical mass in the country.

This was followed in June by the establishment of Brenntag Chemicals Nigeria in Lagos. At the time, Brenntag said Nigeria ranked number one in terms of Africa’s GPD and held great potential in its oil and gas sector, as well as serving as a regional and pan-African production centre for industries such as paint, cosmetics, food and agriculture and water treatment.

Brenntag has been exporting to Nigeria for more than 30 years and sees the country as a key market in Africa. To set up the new entity, the company worked closely with its Multisol subsidiary, which is focused on high-value fuel and lubricant additives. Brenntag says a local presence will enhance its understanding of customers’ needs and enable it to improve its service capabilities to the lubricants additives market. The distributor already has offices in the Maghreb region, Ghana and South Africa.

LONG-TERM GROWTH EXPECTED
In 2014, the group acquired SurtiQuimicos in Colombia, a distributor of specialty chemical products and formulations for the paint, food, textile and construction industries.

The most recent purchase in February this year was the takeover of Lionheart Chemical Enterprises in Johannesburg, South Africa, a specialty distributor mainly operating in the food and beverage sector. Brenntag sees long-term growth there because of rising demand for convenience foods as well as the expansion of South African retailers into Sub-Saharan Africa.

Looking forwards, CEO Steve Holland expects Brenntag will have a greater presence on the African continent in the longer term. Notwithstanding the current challenges relating to political instability, compliance, safety and security in parts of the region, he believes Africa nevertheless holds strong potential for the future.

Indeed, Africa is home territory for MillChem, which is present in Zimbabwe, Malawi and Zambia. CEO Matthijs Mulder has a strategic objective to expand to Tanzania, Namibia and Botswana but plans are postponed at the moment because of a lack of funding.

Mulder has an entrepreneurial approach to investing in emerging economies. He says: “You can test yourself in frontier markets and modify and improve.” He asserts that multinational distributors have the financial strength to grow in greenfield markets and believes passionately that companies have a social responsibility to help less developed countries. “Go to Africa and make people succeed, but do it in a profitable way. Africa is a great resource for added value, high-value products,” he states. Markets in Africa, as well as Latin America, remain targets for Ricardo Molina in the medium term. “Countries in both regions will become targets in the medium term once we consolidate existing developments,” Grande comments.

Smith says Surfachem’s focus for the immediate future is to consolidate and grow its sales positions in its existing overseas operating in Brazil, Norway, Poland and Benelux.

However, he adds: “We are evaluating a number of markets within the MINT [Mexico, Indonesia, Nigeria, Turkey] and CIVETS [Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa] group of countries which will form part of our medium-term strategy for growth. We have narrowed down our potential countries to enter in the future, but will make a final decision based on market and competitive factors.” Political and social stability will be key factors in determining market entry, he states.

For Brenntag’s Holland, Asia-Pacific and China unquestionably still provide significant growth opportunities for developing the chemical distribution business. “There are still many parts of Asia that have significant potential for further growth. The region is generally more fragmented in terms of distribution than Europe or North America,” he says.

Brenntag’s strategy for growth is both organic and by acquisition. This often means that expansion in new distribution regions is already supported by the group’s customer and supplier relationships which have been established in the area, initially as an export market but could also include the presence of a Brenntag local representative office.

There is no doubt that the emerging economies are an exciting prospect for those seeking to expand their business. However, success should not be taken for granted and can take longer than expected. Whatever their strategy, firms should ensure they have sufficient funding, management time and commitment, local resources and, finally, patience to ensure a successful realisation of their venture.

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