Industry perspectives

2015 Chemicals Trends

Chemicals companies can no longer afford to be passive about restructuring their business models or technological transformations.

Global sales of chemicals more than doubled over the last decade, hitting a record US$5.2 trillion by 2013 ( Emerging economies drove a large share of these gains, most notably in China, where chemicals sales expanded at an average compound annual rate of 26 percent over that period. Growth in basic chemicals, which make up nearly two-thirds of the industry, also benefited from the general uplift in oil and gas prices.

But at the same time, the chemicals industry is going through a tremendous period of change that will help define opportunities and challenges in both the short and the long term. Among these disruptions: The nature and role of chemicals innovation has continued to move away from the blockbuster breakthroughs that characterized the late 20th century, and toward more incremental advances targeted at new solutions for particular problems. We’ve seen the increased commercialization of alternative manufacturing technologies, such as converting coal to liquids and gas to liquids. Manufacturing footprints have changed to take advantage of new shale gas supplies. And, finally, new customers are emerging in a wider variety of regions and markets.

To succeed in this shifting landscape, chemicals companies need to focus their strategic thinking on three areas: (1) adapting and refining their business models and manufacturing footprints; (2) identifying growth opportunities in emerging markets — which, especially for Western companies, will require a new mind-set; and (3) harnessing the potential of digital technologies to capitalize on the next wave of value creation.

While success rubrics have changed, many chemicals firms still have antiquated business models.

Retooling business models

Although markets and requirements for success have changed dramatically in recent years, many companies in the chemicals sector continue to falter under the weight of antiquated business models and go-to-market approaches. For some chemicals firms, the problem is manifested in overinvestments in specialty chemicals businesses that have offered differentiation and higher margins in the past but that are rapidly commoditizing. Other companies have been too myopic, cutting costs in specialty lines that would actually benefit from more nurturing, innovation, and focused investment. In some cases, chemicals companies have been late in recognizing the credible threat from lower-cost capacity built in Asia over the last decade, rendering themselves uncompetitive in these regions, often after they have installed costly assets in commoditized marketplaces. Frequently, these actions reinforce one another and companies end up in a death spiral, forced to close or divest businesses.

To avoid this fate, chemicals companies need to more deliberately adjust their business models not only across different lines of businesses within their portfolios, but within the businesses themselves, to keep pace with the changing requirements of distinct subsectors. This retooling process should start with the answers to three questions:

  • How differentiated are the company’s current products? Managers should assess which products are unique in the marketplace, which are moderately distinctive, and which are indistinguishable from competitors’ offerings. They should also gauge whether increased levels of service could incrementally differentiate some products.
  • How intense is the competition? Companies should determine how many suppliers exist in a given market, and whether the primary basis for competition in the market is low cost, increased customization and innovation, or superior customer service.
  • What are the key operational imperatives? Companies should assess whether market needs can be best addressed by running a plant at full capacity or by operating more flexibly to produce more customized and distinctive products. Should the operational imperative be quality and reliability, or is there greater advantage in tailoring the production process to satisfy unique customer requirements?

Business model innovation depends on selling existing products to a variety of markets differently, while taking into account specific market realities in each region. By answering these questions, managers can shape and align the components of their business model to address the key components of their overall strategy: how the company’s value proposition compares with competitive options in the marketplace; how changing revenue streams and market shifts will affect the company over the next one to three years; whether the company’s cost structure is appropriate; which businesses require investment and which need pruning; what core capabilities, processes, and competencies are required to prosper in the market; and how the company can best align market demand, revenue streams, and cost structures to increase profitable growth.

Taking the lead in emerging markets

Future growth of the chemicals industry will be driven by developing markets, where gains are likely to range from 6 to 10 percent, compared with 2 to 3 percent in developed economies. Global chemicals companies have been trying hard to tap into this booming business, but most have found themselves losing in a head-to-head rivalry with local players, for both supply and demand reason.

Global chemicals firms are losing in a head-to-head rivalry with local players in emerging markets.

On the supply side, nascent domestic companies are advancing rapidly along the learning curve, and are already highly competitive with multinationals. They typically have a lower cost base, display greater agility and decision-making flexibility, and are delivering acceptable value to customers. On the demand side in emerging markets, volume growth is shifting from export-oriented businesses to companies catering to local customers; these companies are highly price sensitive, and perceive Western firms as uncompetitive. Very few of these domestic businesses are interested in premium chemicals, and typically they strive for 70 to 80 percent of product functionality at 50 percent of the price point in Western countries. In addition, demand is shifting to regions that are difficult to access owing to under- or undeveloped infrastructure.

To successfully compete against local players, global chemicals companies need to invest in organic capabilities tailored to developing markets’ varied characteristics. These include focusing on where to compete and avoiding a “one size fits all” approach; developing local sales and market support to ensure that customer preferences and requirements are captured appropriately and translated into market-specific product development; keeping manufacturing costs low enough to be competitive; and tailoring supply chains to balance agility and efficiency. Redesigned operating models must optimize both global and regional objectives and skills, leveraging the company’s knowledge and experience obtained in developed markets while ensuring agility in adapting to local needs.

Succeeding in emerging markets often requires a mind-set different from what Western companies are accustomed to. To innovate effectively, multinationals must understand the cost and product preferences not just of immediate customers, but of the entire downstream value chain. This requires local innovation and local resources — and the attraction, retention, and development of high-quality talent. Consequently, multinationals need to offer prospective local employees a compelling and attractive brand that can compete with domestic companies in work–life balance, global career paths, and meaningful leadership opportunities.

Embracing digital transformation

By 2020, an estimated 50 billion devices around the globe will be connected to the Internet. Perhaps a third of them will be computers, smartphones, tablets, and TVs. The remaining two-thirds will be sensors, actuators, and newly invented intelligent devices that monitor, control, analyze, and optimize our world. The arrival of the “Internet of Things” (strategy+business) represents a transformative shift for industry — indeed, for the overall global economy — similar to the introduction of the PC.

Chemicals companies have invested billions in automation and information technology. These investments have increased reliability, reduced costs, and created greater operational efficiencies in production and supply chain management. We believe the next frontier of value creation in the chemicals industry can be reached by realizing the metamorphic potential of the digital revolution that has only just begun.

PwC recently completed its Breakthrough Innovation and Growth ( survey of nearly 1,800 C-suite executive-level respondents, including some 50 chemicals industry participants from 12 countries. Ninety-five percent of chemicals industry respondents said they foresaw digital technology innovation at their company over the next three years, and 50 percent expected breakthrough or radical advances.

In our conversations with chemicals industry executives and through our observations, we see companies making digital moves in four areas:

  • Performance and agility. Nearly all the equipment employed in the manufacture, storage, and transportation of chemicals can be retrofitted or redesigned with digital technologies to improve performance. For example, pumps and compressors can have sensors that signal when a problem or failure is imminent, preventing costly outages. We are seeing other process industries take the lead on this front, such as utilities investing in smart grids and oil and gas companies designing digital oil fields. There is a clear opportunity for chemicals industry leaders to partner with leading vendors in leveraging intelligent devices and achieving the next generation of performance and agility.
  • Customer interface. Frontline, customer-facing staff who are able to access and integrate the massive flows of data that digital technologies provide can become business partners with customers rather than mere salespeople. Agribusiness has been an early adopter. For example, in 2013 Monsanto acquired Climate Corporation, a software and data science firm. We see this as a big step forward into the age of precision agriculture, in which chemicals companies will work with farmers to integrate cheap sensors that constantly monitor soil conditions, satellite imagery, and market price data to create customized, soil-specific solutions for maximizing crop yield and profitability.
  • Innovation. Digital technologies are creating structural changes in the ecosystem of most of the sectors that the chemicals industry serves, such as automotive and electronics. The flexibility of 3D printing, for example, enables manufacturers to make customized parts more quickly and at lower scale to meet dynamic customer requirements. As this disruption penetrates the market, the infrastructure for plastic parts molding and fabrication will look far different from the current arrangement of extrusion molders that offer only limited degrees of customization without significant capital investment. Furthermore, 3D printing will require new materials with unique or modified properties. Collectively, these shifts will favor chemicals companies that can innovate quickly, draw accurate customer insights, and manage complexity.
  • Organization. Many internal processes of chemicals companies — such as HR and supply chain planning — are fragmented and scattered across different geographies, reducing efficiency. To counter this pattern, companies increasingly are using collaboration platforms to coordinate global activities and to drive more seamless employee and customer experiences. However, we believe the potential for organizational transformation goes well beyond better collaboration. The ubiquitous availability of data can flatten organizations — devolving decision rights to local regions and creating new forms of organization that will make chemicals companies nimbler, leaner, and more exciting workplaces for a new generation of employees. Integrating and centralizing enterprise-wide data, for instance, can enable companies to apply predictive analytics to streamline supply chains, and can also boost the speed, responsiveness, and profitability of R&D programs.

The current environment of uncertain GDP growth and shifting market dynamics presents challenges for chemicals companies, but it also offers opportunities. By retooling their business models, focusing on emerging markets, and embracing digital transformation, forward-looking companies can position themselves to outperform their peers and build market share in the years ahead.


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