Chemical industry at tipping point

Chemical company CEOs should pay more attention to a convergence of technological and industry trends which could fuel transformational change and value creation, according to consultants at Arthur D Little.

In a new report, “Breaking the mold: Unleashing the power of convergence in the chemical industry”, the authors argue that the sector is undervalued by the financial community because it is not seen as innovative and is slow to adopt new technology. Chemicals CEOs should recognise the huge opportunities offered by the convergence of several trends. These include digital technology, technology transfer from other industries, new management approaches, and deployment of radically new business models.

Chemical companies are thought of as generally conservative and unwilling to fund transformational innovation or consider projects which will yield long-term results. Instead a “business as usual” approach often leads to inertia and maintenance of the status quo.

Michael Kolk, partner and a co-author of the report said: “Something is bothering and frustrating chemical industry leaders. The industry consistently creates value for shareholders but is seen as underwhelming in terms of future value creation. Is that a given or could it change?”

Arthur D Little talked to analysts and asked how they evaluate future growth potential for chemicals compared with other sectors. It found that chemical company value is based on cashflow whereas other sectors are valued based on 5-10 year growth plans.

“Companies such as Amazon or Facebook are expected to be bold. Chemical companies can spend $10bn on a shale-based cracker, but if they want to do something outside of their core people get nervous,” added Kolk. He argues that companies with a proven ability to provide solutions show a premium valuation – those which can commercialise a solution and deliver it to market.

The report suggests that chemical companies struggle to move beyond being simple suppliers of molecules to become providers of solutions to customer needs. They face four main challenges:

■ Locked in assets: a large burden of capital goods and business portfolios which require major reinvestment

■ Long development times where major innovations take 5-10 years or more to bring to market. This is caused by the existing research and development (R&D) process, conservative customer value chains and regulation

■ Slow adaption of digital technologies

■ Falling R&D spend

DIGITAL TECHNOLOGY

Major investment in digital technology can help to boost the speed and success of innovation projects. Beyond that, Kolk believes it can be used to accelerate core processes including innovation and support new business models.

“Traditionally it was used for processes, maintenance and safety. Now we are starting to see it for innovation – to predict the properties of new materials before we synthesise them. It can be used to offer new services based on data you have. For example predicting the performance of a customer plant based on data.”

TECHNOLOGY TRANSFER

Technology transfer from adjacent industries also offers huge potential for chemicals, the report says. It gives the example of 3D printing where chemical companies are already developing new materials and additives to service this nascent sector. Chemical groups are getting involved in industrial biotechnology as well as chemical recycling as they move into adjacent parts of value chains.

“Different trends and the industry are coming together and bringing about accelerated change and innovation where previously it wasn’t so visible. There is a parallel with autonomous driving which is emerging much more quickly than expected where there is a convergence of different sectors and technologies enabling it,” Kolk said.

NEW MANAGEMENT APPROACHES

New management approaches to innovation can also help to accelerate the process, says the report. By outsourcing R&D to external incubators or start-ups it is possible to reduce the risk and access new ways of thinking. It says France’s Total, Germany’s Evonik and others have used this approach to speed up digital innovation. The authors argue that chemical company R&D teams are lean with on average around 5-10% of sales being spent on new business development.

This means they cannot afford to put big teams together for an ambitious project. Chemical companies are very focused on large capex, low risk projects but are very poor at dealing with high risk projects with a high degree of uncertainty.

“But they could do this externally so the uncertainty is dealt with by outsourcing. You can wave goodbye to an external company much more easily than you can to 100 of your own R&D employees,” said Kolk.

He believes Silicon Valley technology companies are so successful because lots of ideas are turned into projects using a plentiful supply of money from risk-seeking sources of capital.

“Lots of resources, money and people are involved – the challenge is to emulate that in chemicals. There will be a moment when new technologies will need some serious money,” he said.

NEW BUSINESS MODELS

The circular economy offers big opportunities for developing new business models. Many mainstream chemical companies are already moving into the recycling sector by investing in chemical or mechanical recycling technologies.

The report argues that this could be taken a step further to the concept of “molecule leasing”. Here the chemical producer remains the owner of the molecule it produces whilst being used by customers.

Report author Marijn Vervoorn explained that with the circular economy it should be possible for chemical companies to not release ownership of the molecule but take it back to recycle and create a closed loop.

“This would be difficult but not impossible if you could track where the molecules go to, the problem is you need purity of plastic streams. If you sell the molecule there is no relationship to the end user – to create a fully closed loop you will need a massive investment in digital technology equivalent to a $1bn plant,” she said.

In the long-term, chemical companies may no longer need to own production assets if they have the digital resources to simulate, predict and optimise plant operations, says the report. It gives an example from the glass sector where three technology companies will manage production settings at an externally-owned pilot plant.

“Could you be a chemical company without physical assets? Kolk asked:. “If you know a lot about optimising plant operations you can hand that to any owner. Someone else has the assets on their balance sheet; if you can control operations remotely with just a couple of people on the plant, then why do you need to own it?”

He says it seems like the industry has a low appetite for innovation with the percentage of sales going into R&D declining gradually and other sectors spending a lot more.