Business Transformation in the Chemical Industry Are You Ready?
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Business Transformation in the Chemical Industry Are you ready? Business Transformation in the Chemical Industry | Are you ready? The chemical industry – proud of the past 04 The chemical industry going forward – mind the gap 06 Business transformation in the chemical industry 12 Deloitte – The partner for a successful business transformation 17 Contact 18 03 The chemical industry – proud of the past Today's chemical industry is a €3,347bn and grow in excess of 4.5 percent p.a., market with growth rates exceeding 5 well ahead of its supplier and customer percent per annum, a value 1.8 times that industries. Consequently, we are seeing of Germany's GDP as well as considerable increasing investment in global chemical profitability and stability. It has created capacity and new process technology to more value for shareholders, employees transform natural resources directly into and customers than most other industries. chemicals, avoiding the stagnating refinery value chain step. And it has the unique ability to transform natural resources into formulated products Unlike high tech and other industries and materials that provide better solutions, witnessing above-average growth, the differentiation and innovation to both cus- chemical industry has also been enjoying tomers and consumers. considerable profitability due to high entry barriers such as physical dependencies Better solutions create additional growth (pipelines, economies of scope, transport by substituting other materials, such as and storage access), favorable access to glass, stones, metals, ceramics, paper, infrastructure and resources (energy, rubber, natural textiles or leather. Differ- feedstock, raw materials, skilled labor, entiation and innovation trigger growth capital), regulatory protection (license to by enabling new products, solutions and operate, product approval and registration, applications, such as new forms of mobility, transparency of origin, regulatory compli- zero-energy housing, precision farming, 3D ance, tariffs, taxes and duties), and high printing, computing power, touch screens, switching costs (single source situations, and OLED displays. This, coupled with the requalification costs, exclusive distribution demographic development of the middle agreements). class, accounts for the strong growth in the industry. At the same time, the industry has been very stable due to high barriers to exit, Recycling, resource-efficient production, examples being non-transferable assets, and material-efficient precision applica- high redundancy, and clean-up and discon- tions will reduce the specific and absolute tinuation costs. This has been true in spite demand for virgin chemicals and materials, of several structural step changes from but despite these negative volume demand Chemistry 1.0 to now 4.0 in the industry’s effects we anticipate that the chemical over 150-year-long history. industry will continue its upward trend 04 Business Transformation in the Chemical Industry | Are you ready? Fig. 1 – Value chain in the chemical industry (schematic) atural esources oer tilities il as etals inin · ery · rude · era · eam · aura a · ea · aer · e ueydroe · oa · oaeeae eedstoc nery Chemical industry reeue Buildin Blocs Inoranics ranic etrochemicals Aoarea eao oreauydroe ao yeroeAro • Olefins uur yee Ad ye royee ora eredae uadee C4) a ra eredae Chemicals Inredients ddities aterials Consumer Chemicals Inredients olymers other materials 23%) ddities a ooud aerae are ea oa eere ye uer er uao oe aery aera aoaera Adee eaa e aay oa a ye ye roe oaera ro roeo ood eed rede eaer ee u aer ea oruo ea dura uoa yee a oa ea Customers Consumers uer a aa eaer roe ud oruo ood Auooeraorao ereao or era ero Aruure eda ee u r ood eerae araeua urure u aer eroa are aery ue e ro ood ee Source: IHS, CEFIC, Deloitte 05 The chemical industry going forward – mind the gap Since late 2018, we have observed slowing growth and diminishing profits. According to the European Chemical Industry Council, chemi- cal output in Europe is on course to grow by just 0.5 percent this year. Is this a normal effect of the business cycle, as we have seen several times before? If so, we should not worry, just ride out the business cycle and introduce cost-cutting and restructuring measures as usual. Or is it more than that this time? We believe the latter is the case and have identified four key reasons why the current trend is a structural and fundamental issue. National players/incumbent nations not only in Asia, but also in the Middle East, ultimately no longer be credible players capture the growth Africa, and Central and South America. in selected segments of the chemical China has become the driving force in the industry. We can already observe that global chemical industry in recent years. At The logic is simple: product and process western companies have been able to present, China accounts for 36 percent of innovation is insufficient to support prof- maximize profits and net working capital, the global chemical industry, but its share itable growth. While western companies but have failed to grow organically and gain is expected to grow to about 50 percent by are switching portfolios and customers for market share. This phenomenon is likely to 2030. China currently employs more than the highest price and margin, Chinese and accelerate as demand in India and Africa 8.8 million people in the chemical industry, Indian chemical companies are building increases. And if there are no major innova- which is more than five times the number segment leadership positions, growing tion breakthroughs for western players, the of employees in EU28 and NAFTA together. their market share, and forging long-term situation promises to get a lot worse. It also invests 3–4 times more in assets relationships in regions of high growth. and 20–40 percent more in R&D than Western chemical companies are growing NAFTA and EU28. Also it has improved its almost exclusively through acquisitions cost competiveness by 2–3 percent every and higher priced value adding services, year compared with its global competitors. whereas Asian chemical companies are China is the growth engine of the chemical capturing the full organic growth potential industry, far more so than the U.S. and of the industry. Many of the fast-growing Middle East with their energy and feed- incumbents are national players, fulfilling stock advantages. The climate-driven fossil different strategic objectives compared to fuel discussion will further benefit China. value-maximizing western chemical com- Whereas western companies focus on prof- panies. Up to now, the western strategies itability and value add, producers in China have worked very well, but going forward and increasingly India are taking market we anticipate that these companies will share and capturing the industry’s growth, lose impact in the different sectors and will 06 Business Transformation in the Chemical Industry | Are you ready? Fig. 2 – Geographical overview of chemicals turnover 2007–2018 Turnover Chemicals industry 2018 [€bn] 100 percent = €3,347bn (excluding €1,261bn pharma turnover) C 1,198 C C C 763 530 524 565 448 458 282 +18% +8% +67% +325% 2007 2018 2007 2018 2007 2018 2007 2018 est of sia 8 T China C 3,347 T est of orld 1,909 C C +27% +66% 173 93 118 104 +75% 2007 2018 2007 2018 2007 2018 orld * e.g., 2018 €173bn, thereof €128bn other Europe, €24bn Africa and €21bn Australia/Oceania 07 (Digital) Disruptions create winners The circular economy requires new and losers operating and business models Together with the VCI and its members we The traditional chemical industry is linear. It have identified 30 major trends on the sup- is about producing chemicals and materials ply/energy side as well as on the customer/ and selling them directly or indirectly to the consumer side of the chemical industry. relevant markets. This is posing challenges Only five of those trends were incremental for more and more companies. Depending and economically driven by chemical where you are in the value chain and what companies. Twenty-five of the trends were product-market segments you serve, this disruptive and politically driven by society can be very different. We have classified or regulators. Digital innovations caused the chemical industry into four different the majority of these disruptive trends, segments: ranging from precision farming and gene – Consumer chemicals, ingredients & editing to 3D printing and eHealth. Those additives disruptive trends create winners and losers – Polymers & other materials among the chemical companies, depending – Organic building blocks on the product and market portfolio that – Inorganic building blocks they are currently servicing. These four segments face very different Disruptive trends are much more prevalent challenges. on the supply or demand side of the chem- ical industry than in the chemical industry itself. This is also the reason that we often see the chemical industry as behind the digital curve, which is actually inaccurate upon closer scrutiny. Within the chemical industry we can observe incremental trends brought about by digital innovation that can improve internal costs and effi- ciency, such as process automation, failure prediction, and demand forecasts. The disruptive potential in the industry involves primarily introducing new routes to market to attract new customers and retain exist- ing ones, offering superior products, and preventing