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The Developing World: Getting Your Strategy Right

China, Company Strategy, Economics, India, Indonesia, Oil & Gas
By John Richardson on 01-Jun-2015


By John Richardson

IT IS just plain intellectually lazy, and, more importantly, very wrong indeed: You work for a petrochemicals company and have been asked by your boss to come up with a demand-growth estimate for the next ten years for the rest of the developing world, and so you look at what’s happened in China in the past and automatically assume that history will repeat itself.

If you are in middle management you can be just about forgiven, perhaps, for making this mistake. Over the years, in almost countless conference presentations and “research” papers, you have been bombarded by the phrase “the rise of the developing world’s middle class”. Of course, though, this means you will remain stuck in middle management in the luckiest of circumstances; either that or you will lose your job as the “New Normal” develops.

But you cannot, you should not, you simply must not, be forgiven if you are a CEO and you make the same mistake around which you then build your company’s investment strategy. If you do make this same blunder your employees, your shareholders and your other stakeholders should insist on your immediate removal with, in the ideal world, minimum-possible compensation.

Harsh words? Not really. Time to wake up. In a special series of blog posts over the next few weeks, which will no doubt be interrupted by other posts in response to more immediate events, I am going to look at why the “China miracle” may not be repeated across the rest of the developing world.

The underlying reason for this is that we are no longer in a “supply driven world”. In the past, all you had to do to be successful in petrochemicals was to worry about supply because demand pretty much took care of itself. This meant that, when evaluating a project, your entire focus was  on feedstock advantage.

Now, though, complexity and ambiguity are everywhere, making the demand outlook highly uncertain.

As an example to start this series of blog posts, let’s look at India (I shall return to the subject of India in other posts).

Consider the slide above on India and China. It shows that China’s share of global polypropylene (PP) consumption (you can do the same exercise for any chemicals and polymer and get the same pattern of results) rose from 15% in 2000 to 33% in 2014. Meanwhile, India’s share of global PP demand only rose from 7% to 9%.

Why? Because whilst India’s share of global manufacturing pretty much stagnated, China saw a huge boom in manufacturing to the point where it makes most of what all of the rest of us buy.

This was the result of:

  • China’s accession to the 2001 World Trade Organisation, along with favourable Western demographics and lots of easy credit globally.
  • The huge economic stimulus package that China carried out in 2008-2013 in response to the Global Financial Crisis. This enabled it grow its manufacturing surpluses even more, despite the beginning of the end of the Western demographic dividend – i.e. the retirement of the Babyboomers.

There is a lot of unhelpful talk about India repeating the China miracle by also building vast amounts of manufacturing capacity. But common sense should tell us this is impossible because:

  • China’s vast oversupply in manufacturing will take many years to absorb. It will use the New Silk Road to export some of these surpluses to the rest of the developing world, and will find other ways of supporting its manufacturing sector in order to protect employment. In other words, China will not create the space that will allow other countries to compete against its manufacturers.
  • China also has big supply chain and infrastructure advantages that will make it very difficult, if not impossible, for India to replicate what has happened in China’s manufacturing sector.

This does not mean that the future is not bright for India with the right policy decisions. Absolutely not. But it does mean that it has to pursue its own path to stronger growth, which I shall discuss in future posts.

And this obviously must mean that the growth opportunities for the petrochemicals industry, in India and emerging markets in general, are entirely different from the old feedstock-focused export-based plants.  I shall also outline these opportunities.