New Business Mindset Needed

By John Richardson

THE global chemicals industry became used to healthy and steady rates of demand growth during the “Great Moderation” in the West, before the 2008 crisis.

As fellow blogger Paul Hodges wrote in January of this year: “Executives could usefully spend time debating whether ethylene growth rates might be 4.2%, or perhaps 4.5%, or only 4%. The history of the past three years teaches us that the margin of uncertainty has greatly increased.”

Change “three years” to “almost four years” and this analysis has stood the test of time. 

The “margin of uncertainty” hasn’t gone away since January; in fact, if anything, it has increased as, for example, it has become more widely accepted that there are no longer any guarantees that China will carry on booming.

And yet some planning processes still don’t adequately take into account the fundamental and deeply-rooted changes in how the world works, according to an Asian-based chemicals industry executive.

“We tend to take constant growth as a given. In the annual planning process it is almost heresy to talk of zero growth, leave alone negative growth,” he said.

Chemicals and polymer markets have sometimes underperformed growth in overall GDP (gross domestic product) since 2008, most notably in China, as economic complexity has increased.

And yet, he added: “The general expectation is that growth will (still) be at least in line with GDP if not a multiple of it.

“The other expectation is for growth at a rate above the average for the industry/segment. No time or effort is really spent in trying to understand or plan how this growth is going to be delivered – by grabbing market share, by substituting competing materials, by increasing penetration of the product in an application, by increased usage, etc.”

But while this “top down” approach to planning might prevail in some companies, he said that there was a great deal of effort being devoted to being close to chemicals end-use markets. This understanding is being fed into chemicals investment and sales and marketing strategies.

Good people on the ground, in places like China and India where the biggest opportunities still remain, seems to be the key.

The opportunity was defined by the executive as the hundreds of millions of people who have emerged from poverty. In China, for instance, most people now earn less than $10 a day compared with a majority who earned less than $2 a day in 1991, according to the Asian Development Bank.

“This tremendous potential is already being tapped by smart local entrepreneurs,” he said.

“Addressing such markets needs a very thorough understanding of the customer, their hierarchy of needs, their thinking process, a high degree of customisation of products and a very different business model.”

The route that most big manufacturing companies took to tap into these markets was to acquire the local players and then apply their best practices in procurement, supply chains, logistics and marketing, he added.

“The reason most of them fail is that they simply acquire the franchise and the operations; they never acquire the fundamental knowledge and understanding of the behaviour of consumers, their psyche, their decision drivers and the countless other elements that govern buying decision.

“You then have a situation where the local entrepreneur starts anew under a new name and takes back most of the market.”

But he added that were a few companies, such as Unilever, Nestle and Cadbury in India, which had made excellent inroads.

“One reason for their success could be that all of these companies have been around in India for over 50 years, are locally incorporated companies, and have a very distinct local culture and operation style,” he said.

“They have learnt their lessons the hard way and have benefited from it.”

In India, for example, consumer products companies such as Unilever have taken advantage of the huge boom in demand for single-serve pouches, which contain extrusion-grade low density polyethylene (LDPE).

Many Indians are too poor to afford, say, a full bottle of shampoo – hence, the popularity of the pouches, or sachets.

How demographics will shape future demand patterns also needs to be built into planning processes, said a North American-based chemicals industry executive.

“The business mindset will need to be re-orientated in order to take into account the demographics of Western markets,” he said.

“A new value proposition will need to be developed for ageing populations.

“A bigger service sector-focus will be needed to meet the needs of retirees who have longer life spans. We all know the service sector primarily redistributes wealth and does not create new wealth for the economy. So, slower GDP growth has to be the outcome.”

India faces a different demographic problem, which is finding enough work for its youthful population. More than 50% of its population is below the age of 25 and more than 65% below the age of 35, according to the Indian government’s 2011 census.

This is an opportunity as much as a challenge.

“Young people in India, and other developing countries with youthful populations, now have much-better access to money than used to be the case,” added the North American-located industry executives.

“The older generation believed in saving for years in order to accumulate enough money to buy houses and automobiles. This was primarily caused by inadequate financial tools available to the common person.”

But, as a further example of just complex and volatile the world has become, the old certainties over India have also disappeared in 2012.

Economic growth and business confidence have declined as a result of infrastructure bottlenecks and growing concerns over corruption and a weak political system.

Income inequality had doubled in India over the previous two decades, making it the worst performer by this measure of all emerging economies, said a December 2011 Organisation for Economic Co-operation and Development report.

The top 10% of wage earners made 12 times more than the bottom 10%, up from a ratio of six in the 1990s, added the same study.

“India’s statistics on health, malnutrition and infant mortality are worse than those for some countries in sub-Saharan Africa, with the nation accounting for 20% of the world’s infant deaths,” said an AFP report on the World Economic Forum India, which took place in Gurgaon, India, on 6-8 November.

It seems almost certain that in November 2013, we will be looking back on another year of even greater economic complexity and uncertainty.

, , , , , , , , ,

Leave a Reply