A tailored geographic approach is needed
Chemical companies take advantage of scale to have a global presence. However, different regions are in very different stages of the business cycle. Additionally, local market demand; access to technology; infrastructure capacity; and labor, tax and political stability all have notable impacts on geographic decisions. Therefore, executives must focus on different criteria in terms of strategy and analyze different issues during due diligence, depending on where they are investing.
US market dynamics drive global reallocation and growth
The sheer abundance of proven shale gas — a 200 year supply based on current US demand outlook — has been a global game changer. Suddenly, it has become cost effective to build or move manufacturing facilities to the US.
Emerging markets provide both eager acquirers and favored investment destinations
Asia, and particularly China, continues to be one of the strongest engines of growth for the global chemical industry. In 2010, China overtook the US as the largest chemical producer in the world1, and despite the slowdown in the global economy, domestic production in Asia for 2011 grew by 9.5 percent compared to 2010. In addition, the last 12 to 18 months have seen an increased interest in newer emerging economies such as Indonesia, Vietnam, the Philippines, Thailand, and Eastern Europe.
Divestitures likely in Europe
Europe continues to be plagued by slow growth and long term structural issues, including overcapacity in certain segments, as well as an abundance of inefficient plants. However, Europe can be an attractive market for certain global players. It has a large end-market with a high intellectual capital base with profitable differentiated products.
In the US, the strength of the business case and a matching of long-term supply and demand is critical at the commodity end of the market. At the same time, delivering on synergy targets and robust integration are keys to returning shareholder value on highly priced specialty deals. In emerging markets, up-front risk mitigation, combined with a portfolio approach that is not limited to China will help companies capture the broad array of available benefits. In Europe, the strategy is to focus on quality business units, ruthlessly restructure the operational cost base, and take the time to carve out and successfully divest non-performing assets. In all locales, a tailored due diligence is key and can help acquirers engage in the most successful deals.
The challenge for global chemical companies is that achieving one of the above is simply not enough. A successful business strategy requires all aspects to be performed equally well (and often at the same time) to fully benefit from an upturn in chemical industry M&A activity.
1CEFIC, Facts and Figures Report, September 2011