The global chemical industry is undergoing dynamic change, with a range of external factors presenting industry executives with vastly divergent challenges in different regions of the world. As such, running a global chemical company has never presented so many opportunities and challenges that involve two main areas:
- Global GDP dependence, which necessitates vastly different behaviors in emerging markets which continue to expand (albeit at volatile rates); Europe, where embedded structural issues point to long-term stagnation; and the U.S. where a sustained economic recovery seems to be taking hold; and
- Global issues including population growth and middle class expansion; food and water shortage; energy and climate change, all of which drive demand for chemical products under the mantra of making life better and our planet healthier. These continue to drive the march downstream and the search for higher value, science-based chemical products.
Overlay the shale gas dynamics in the U.S. which are moving the supply base of the industry west; while the demand side of the industry continues to move east and south, and executives have another significant issue to grapple with as they set their global business strategies.
Five platforms for development
We believe it is time for the global chemical industry to stop deferring the important decisions and re-focus on the next wave of strategic re-alignment. The world is changing rapidly and there are huge rewards available for the chemical companies who can develop their businesses in advance of the coming trends. We offer five strategic platforms for development:
- Capture growth from emerging markets. Increase the pace of developing emerging market footprints to capture long-term growth and the emerging customer base. There is a need to be creative and look beyond China. A portfolio approach to capture the benefits and offset the risks inherent in different markets comes from balancing geographic expansion.
- Optimize the portfolio. Take a more disciplined approach to identifying business units and segments which will not be competitive in the long-term; or which do not fit with the wider business strategy. In particular, remove the history and sentiment attached to legacy businesses, which often results in chemical companies holding onto areas which are no longer optimal in terms of maximizing shareholder value or no longer fit the strategy.
- Build financial strength. Many of the good things the industry was doing in 2008 onwards have stopped. Supply chains have become bloated, buffers have been built in inventory and discipline around receivables collection has weakened. Moving third and fourth quartile working capital performance back to median performance (among the world’s 50 largest chemical companies) could unlock US$24.9 billion of cash – cash that would be better utilized funding the activities above to drive growth.
- Reduce business model complexity. Build leaner, more efficient business models that are more readily able to adapt to change.
- Focus on innovation to drive price and margins. Among the wider manufacturing industry, the chemical industry is a clear leader when it comes to customer centric innovation and new product development. Basic chemistry is much maligned, but as part of a fundamental GDP building block it offers a platform to foster development
Each of these is based around an existing chemical industry core competency, but there is a clear need for renewed focus and increased pace of change. It is not enough to do one or two of these well. A successful strategy in today’s world requires all aspects to be performed equally well, at the same time, often at different paces in different regions of the world.