A tipping point for the chemicals industry

25 September, 2018

Kazi Islam
Assurance Strategy Leader, PwC US

The global chemicals industry has faced many challenges over the years including declining margins, product commoditization, expanding competition in developing countries and customers demanding more at lower prices. However, this year, the chemicals industry may soon be given a break and perhaps even see the first signs of a tipping point. Some chemical companies have begun to rethink their growth strategies, finally moving away from cost-cutting and retrenchment, toward more nimble, coherent, and aggressive business models, all driven by technology advances.

There are three interconnected strategic imperatives that could put the chemicals industry on a path to improved performance in the short-term and offer better prospects for long-term growth.

1. Realize value from M&A

M&A has been a hallmark of chemical companies’ growth strategies for the past few years and we have seen very large M&A opportunities taking place in the industry. Now, we’re starting to see that companies have been compelled to undertake smaller acquisitions and divestments that target specific portfolio shortcomings and deliver tangible results in the short- and mid-term. We expect the next wave of M&A in the chemicals industry to involve midsized companies buying some of the non-core assets of the new megacompanies.

Significant profit opportunities await chemicals companies that are able to lead in digitizing products and services, providing collaborative sales channels for customers, and generating R&D breakthroughs in nanomaterials. Some of these new growth potentials can be through M&A, but only after a company is rightsized and set on a profitable course so that its acquisitions strategy can be aligned with the business model.

2. Solve the digital dilemma

Typically, chemical companies have stayed on the sidelines when it comes to adopting and implementing digital advances. The industry has primarily viewed digital tools as a way to boost internal productivity, not as a way to offer customers innovative products and services.

Now we’re starting to see a shift as chemical companies realign their businesses to enhance profitability and better serve the market. Digital developments are becoming a business-strategy topic, not just an IT function. Our analysis shows that for a hypothetical chemicals company whose revenue from existing products is falling sharply — more than 50% — a digitization strategy would not only make up for lost revenue but also drive more than 10% sales growth.

Many companies have avoided digitization because it seems too complex to implement, and some are not sure where to start or which products best suit a digitization strategy. For those who are struggling, here are four categories to help simplify the process:

  • Core products with enhanced value in the digital world. This is the simplest element of a new technological strategy and involves adding digital layers to a traditional offering to generate standalone revenues or engineering a new product that can be used to improve a technological advance.
  • Customer experience. This element encompasses enhancing customer experiences with digital interfaces and touch points as a way to strike up new and closer relationships with customers.
  • Services as a new revenue stream. In combination with a physical product, this element provides an end-to-end solution to a broader customer need.
  • Partnerships that drive customer utilization. Working with suppliers and partners, new applications can be embedded in a product ecosystem.

3. Confront the challenge of “deglobalization”

The free flow of money, information, and skilled workers has been a critical element of chemical companies’ growth strategies. However, political movements that are forcing some retrenchment in open borders, trade, and shared ventures are causing problems for the chemicals industry since much of the sector’s R&D activities are centralized near headquarters but the results of this research are distributed through global networks for developing new products and services relevant to local markets. In addition, partnerships with regional companies have helped chemical firms take on heated competition from startups and entrepreneurs in developing countries.

To combat these issues, chemical companies should begin to implement more flexible supply chains that are able to deliver parts and feedstock regionally and globally. They also should play an active role in enhancing the skill sets of local suppliers in developing countries so the suppliers can meet the required high standards for order fulfillment.

Chemical companies must also make choices on which market(s) to participate in. Those that are smart will find that new geographic footprints may offer unexpected opportunities, especially as developing countries begin to take control of industrial growth within their borders. In addition, chemical companies should invest in regional R&D centers because they will be pivotal in future chemicals design and development.

Although these chemicals executives understand the importance of being digitally advanced, our 2018 CEO Survey found that 75% of chemical companies’ executives still viewed cost-cutting as their primary activity for driving profitability, and only 9% said that they want to strengthen digital and technological capabilities in order to capitalize on new opportunities. That’s going to make it harder for them to compete in the long run.

The best way to tackle the impact of fundamental disruptions is to first identify how they will affect your company and then develop a set of tactics to take advantage of the opportunities, whether that’s through M&A value and integration, digitization, or deglobalization. Hiding from these issues will only reinforce the slow growth environment that has become all too familiar to too many chemicals companies.

Read our latest report, Chemicals Trends 2018–19: A tipping point of profitability.