INSIGHT: Innovation challenged, but key to long term success

By Heidi Finch

LONDON (ICIS)–Innovation helps to pave the way to long term success in the chemical industry, providing more favourable returns on average when compared to other investments and greater job creation potential. 

But research and development (R&D) spending is showing signs of shifting towards the emerging markets and it is not without its fair share of challenges, believe consultants at Arthur D Little. 

R&D spending provided the average highest returns of 5.7% for US shareholders across industries over an average five year period during 1985-2015, relative to the sample average of all types of investments, said Arthur D Little partner Michael Kolk and his colleagues Robin Francis and Mathias Ottevaere, in an interview with ICIS. The data are from a study by US investment firm BlackRock.

While the data varied slightly across various industries, the results are more or
less the same for the chemical industry, Kolk added.

Innovation is generally the “best way to invest over a longer period of time”, provided there is sound strategy and other important and relevant success factors are all in place, he said

“I am not saying innovation is the solution to all challenges, but I think it is fair to say that, for the vast majority of chemical companies, it is a critical factor for longer term success, said Kolk. However, he added that there is a need to have a long term perspective. 

Innovation can take many different forms. It involves companies using their know-how to their advantage to develop new products, processes, services and new business models, thereby creating value and meeting untapped needs in the industry and society as a whole, according to Arthur D Little analysis.

An example of innovation in a business model is Belgium’s Umicore recycling other companies’ waste streams, implying a double revenue business model, said Kolk. Successful innovation  is “to open up people’s horizons”, Kolk added, and is not just about new products.

On the product side, organic light emitting diodes (OLEDs), lithium ion (Li-ion) batteries and photovoltaic (PV) solar panels represent innovation success stories in the chemical industry over recent years, but it is worth stressing that they have all been slow burners.

OLEDs were first developed in the 1990s, but it took until the 2010s before large format OLED TVs and OLED displays in smart phones gained momentum, the consultants’ research data show. 

The initial research for Li-ion batteries was carried out in the 1970s, but the first mass market launch for Li-ion batteries did not develop until 1991 and it wasn’t until the late 1990s that they became widely used in consumer devices. 

Also, mass market solar panels were first developed in the 1960s. However, it wasn’t until the late 2000s when the global market for solar panels took off.

Breakthrough innovations take longer to reap any benefits, estimated to be between 5 and 10 years before the first revenue is generated, according to results from Arthur D Little’s Global Breakthrough Innovation Survey. 

The survey was carried out around one and a half years ago and looked back over the past decades, according to Kolk.

It took at least a few decades, for instance, for DSM’s ultra-high molecular weight polyethylene, Dyneema, to be developed for different applications across various end-use sectors,. It is a prime example of a longer term innovation. 

There are, however, also many short term innovations, which are more incremental and involve “defending the status quo through short term-feature evolution”, said Kolk.

This includes reducing costs and enhancing performance properties such as functional materials strength. Innovations like this can be brought to market in a much shorter time of between six months to a few years, depending on the type of industry.

Innovating by extending product scope, from commodity petrochemicals and base chemicals to fine/specialty chemicals, also helps to boost job opportunities. This is because fine/specialty chemicals production requires workers with more advanced technical skills.

It is, for example, a broader strategic aim in Gulf Cooperation Council (GCC) countries, according to Arthur D Little analysis, based on data from EU R&D Scoreboard (2015). 

And while R&D intensity (the relationship between R&D spending and a company’s sales) has risen over the past 10 years in most sectors, R&D intensity in the petrochemical and base chemical industries has declined by 0.4% . This is because even though sales have increased over the past decade, these have mainly been sales in less innovative chemicals in Asia, Kolk explained. 

There is also evidence of a shift in R&D spending in relative terms in the chemical industry, mainly to Asia and with growth potential in the GCC. 

More than 40% of chemicals R&D spending was made in Asia in 2015, although most of this spending was made by chemical companies based outside Asia, according to Arthur D Little estimates for 2015-2020, using earlier  “”>OECD data.

There is more potential for R&D in emerging markets, such as China, because there are more basic items being produced and therefore more scope for further development, said Kolk.

“Western companies generally have a higher R&D intensity than Chinese counterparts, but Chinese companies are catching up. The market in China has grown faster than R&D,” he added. 

The latter is despite the fact that growth in China recently has slowed.

And while the GCC countries represent only a marginal share of chemicals R&D expenditure globally, it nevertheless increased by 44% in 2014, according to data from the Gulf Petrochemicals and Chemicals Association (GPCA).

The GCC is a feedstock cost advantaged region, but it is in the early stages of the R&D investment path compared to Asia in terms of moving towards more fine/specialty chemicals and in receiving investment from western countries, noted Francis.

Companies need to balance the long term benefits of innovation and their short term focus on financial results in a challenging environment and volatility in the upstream oil market, he said. Companies face “the paradox of blending these two things”, added Francis.

Technical and commercial hurdles to innovation, uncertainty and changing circumstances, represent challenges to innovation, as do “brakes in the market”, according to Arthur D Little.

To have success in the area of innovation, it is necessary to have support within the company “from the top down”, as well as more widespread support through the chain.

The latter is particularly important in traditional downstream industries where it may be more difficult to get acceptance of new ideas and new ways of working.

There is also the concept of “intricate innovation ecosystems”, on which Arthur D Little conducted some research with Expernova, an R&D analytics firm. This involves creating partnerships at several levels.

Kolk said that, while it takes time for these partnerships to be forged, they are necessary if a company wants to be a forerunner in breakthrough innovations such as in developing biofuels or in creating batteries which last longer.

While innovation involves gaining support within the company and in the wider market for your idea, it also centres a lot on choosing the right areas to focus on, which can represent a big risk and a difficult decision to make.

Kolk said that electric mobility (E-mobility), autonomous driving and lighter weight materials are key areas for innovation. But the burning question is which solutions will be the most successful. 

He said that larger well-established chemical companies will want to bet on a number of mega trends and develop competencies so that they will be able to be a winner in various different outcomes.

“It makes sense to maximise the breakthrough potential and minimise the risk and complexity,” Kolk said, although individual company strategies and how much risk is involved, will depend on the type of company.

Start-ups, for example, are more likely to be more focused on developing a new piece of technology such as in a fuel cells and shareholders will expect them to take more risk for higher returns.

The recycling of waste products, such as CO2, and upgrading to chemicals or fuels (using, for example, genetically modified bacteria) represents a “high risk” innovation area, because it is technically complicated and costly. But it would provide huge benefits for the industry as it could be used to convert waste products to value added materials. 

Innovation helps to keep the chemical industry on track for a more favourable and sustainable future, but it is necessary to navigate through numerous market and economic related challenges in order to achieve this.

It is also important to be aware that it often takes time and needs widespread support before innovation plans can become a successful reality.  

ICIS began the search in April Innovation Awards 2016 winners. This year the awards will for the first time recognise individual as well as company performance in innovation. For more information on the 2016 Call for Entries and on previous winners, click here.