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Managing Relationships And Demand In China

Business, China, Polyolefins
By John Richardson on 10-Apr-2016

The_Goose_That_Laid_the_Golden_Eggs_-_Project_Gutenberg_etext_19994By John Richardson

SOME of China’s plastic converters started out life with loans of just a few thousands yuan from private small lenders, or even friends and family. But now these same converters operate nationwide networks of factories and are multi-millionaires.

And with scale has also come sophistication. No longer do they just make basic finished, or semi-finished goods, from polymer resins. Instead, many of these processors are, for example., at the forefront of the drive for higher food safety standards through manufacturing sophisticated multi-layer films for food packaging.

These converters could now grow even further, into truly giant corporations, as a result of the  huge boom in polymers demand that might result from the take-off in Internet sales.

So, does this mean that any foreign supplier of the polymer that remains in the biggest deficit – polyethylene (PE) – cannot but fail to win in tomorrow’s China market?

No, not all, because many of these converters will have long memories. They will much prefer work with the PE sales and marketing people who supported them through their difficult years, by say not pushing too hard for price rises when cash-flow was tight.

The analogy I have been given is this: A customer in such a vital market such as China should always be seen as the goose that will keep on laying golden eggs, and so of course the last thing you do is kill the goose.

Unless you therefore already have great people on the ground, with firm customer relationships  already in place, there is no guarantee that you will win a decent share of future PE demand, no matter how fantastic your cost base.

I have come across cases over the years where a PE producer has been able to charge more than the market price because of the excellent relationship between a particular customer and a particular sales and marketing manager. Friendships will beat cost-curve economics most days of any business week.

And if, as I suspect, global PE markets become very long after H2 2017, when all the new US supply starts to arrive, then these relationships are going to be even more critical. Prices and margins are sure to be squeezed, to the point where pricing might even be off ethane economics.

The winners will thus be those companies that can place maximum volumes through their relationships, even it means returns way lower than had been budgeted for.

Friendships are also going to matter if the worst-case scenario for foreign PE suppliers is realised in China.

This scenario involves Beijing failing to transform the economy from an investment to a consumer-led growth model. In discussions during my trip to Shanghai two weeks ago, many people told me that this transition was in the balance because of one huge challenge: How China goes about financing big improvements in its public healthcare and pension system that are essential for dealing with a rapidly ageing population.

There is a second aspect to this scenario, which is that China aggressively pursues higher self-sufficiency in PE – much more aggressively than is commonly assumed.

You can thus imagine a situation where in a reduced import market, the only foreigners who will win are those that have a long and good track record with local converters.

If you don’t already have enough good people on the ground you don’t have any more time to waste, as success in the New Normal is all about how you manage demand.

Some major PE producers already get this because they have already invested heavily in relationship management. Their good people on the ground not only guarantee them sales volumes, but they are also ideally placed to detect and respond to rapid changes in the nature of demand.

What worries me, though, is that some other producers have been left behind – and could fall even further behind if they seek to cut sales and marketing costs in order to meet quarterly-results targets.