A Global Business Reports publication, presented with IHS Chemical Week

Down the Stream from

This research has been conducted by Pavlina Pavlova and Amelia Salutz of Global Business Reports. For more information, contact [email protected]. Cover photos courtesy of CCSB, ScinoPharm and Sino Japan.

ment. Yet the island’s chemical industry Introductıon remains resilient. Reaching an output of PETROCHEMICALS $146 billion in 2011 and accounting for is known the world over for its roughly 29.81% of the country’s overall A Turning Point for technologically advanced electronics manufacturing sector, the industry is a key the Sector industry, but the island’s $146 billion economic driver for the island; the private With little hope of realizing its invest- sector and government alike are keen to ment in Taiwan, the KuoKuang Petro- chemical sector is also worthy of ensure its continued success. chemical Technology Co., a joint ven- attention. Boasting one of the region’s Surveying the changing dynamics of ture between CPC and private sector the national and global landscape, gov- producers, is eyeing a site location in oldest chemical complexes, Taiwan ernment in has formed a strategy. Pengerang, Malaysia. The group’s in- is host to a behemoth petrochemical Environmental opposition to cracker ca- vestment in Changhua was expected sector ranking 11th in the world in pacity expansion has mounted in recent to increase Taiwan’s ethylene capacity years, culminating in a decisive blow to by more than a quarter, adding 1.2 mil- ethylene production capacity. the island’s petrochemical players, com- lion mt/y overall capacity at the cost ing in the form of President Ma Ying- of $21.3 billion. Although the project Over recent years, however, Taiwan’s jeou’s decision in April 2011 to cancel would have helped Taiwan to meet the chemical industry has found itself con- the $21.3 billion KuoKuang Petrochemi- Ministry of Economic Affair (MOEA)’s strained by rising regional petrochemical cal Technology Co. investment project goal of achieving a national ethylene producers and overshadowed by other planned in Changhua . self-sufficiency rate of 90%, President innovation-driven economies. Pressed by The government is now pushing the Ma cancelled the project before the these market dynamics and propelled by industry towards an area where the island completion of the environmental im- government policies, the industry’s time has already proved competitive: high- pact assessment (EIA). to make its mark is now. tech, high value-added products. For a The government’s decision came not Helped in no part by the global econ- country endowed with a strong electronics only in an election year, but closely fol- omy, Taiwan’s industry is highly suscep- industry and highly skilled workforce, the lowing a particularly accident-ridden tible to lagging international demand. For industry’s focus on upgrading its value- year for the sector. In 2010, Formosa a market with an exports-to-GDP ratio added rate does not seem like much of a Plastics recorded four major fires, three of 74%, and an industry as integral as gamble. However, when it comes to play- of which at its Mailiao complex and the the chemical sector, the global economic ing the innovation game, Taiwan lacks the fourth lasting for two days at a nearby crisis has not been forgiving. After slow attractive R&D incentives of neighboring desulfurization unit. Environmental years in 2008 and 2009, with economic countries like Singapore and high R&D groups have been fighting fiercely to growth rates of 0.7% and -1.8% respec- investment to sales ratio of Japan. In order limit cracker expansion, citing not only tively, Taiwan’s GDP growth jumped to compete, Taiwan’s chemical sector will these accidents but an increase in can- to 10.7% in 2010, only to drop to 4% in have to adjust rapidly in order to complete cer mortality in the area around the 2011 and fall further to 1.25% in 2012. its transition into a regional hub of high- Mailiao complex. After a challenging 2012, an uptick in the value chemical production. In the wake of industry disappoint- year’s last quarter has led analysts to esti- In spite of these challenges, Taiwan has ment over Kuokuang, the government mate GDP growth for 2013 will be close a solid foundation upon which to advance has used the end of the Changhua proj- to 3.5%. its chemical sector. With the island’s gi- ect as an impetus for change, urging the The outlook for 2013 is a welcome re- ants of the petrochemical sector—state- national chemical industry to embrace lief for the island’s chemical producers. owned CPC Corporation and private fine chemical production. Accounting Softening global demand, coupled with conglomerate — for almost 30% of the island’s total rising competition coming from mainland providing upstream processing, Taiwan’s manufacturing, the industry’s survival China, Southeast Asia and the Middle downstream industries can flourish along is crucial to the health of the overall East, as well as increasing regulations with the tremendous growth seen in the economy, yet the government has made on the home front, have thrown many island’s specialty chemicals and pharma- it clear that a future for chemical com- challenges in the way of their develop- ceuticals sectors. modities is simply not possible.

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CPC, for its part, has formed strategic for Taiwan’s High Value-Added (HVA) alliances with both domestic and foreign Petrochemical Industry in June 2011, petrochemical companies in order to de- inviting domestic and foreign experts, velop production of specialty chemical scholars, as well as petrochemical in- materials that can replace current im- dustry business representatives to devise ports. While giants like CPC and For- HVA development strategies. In con- mosa Plastics Group have the resources clusion, the group identified six major to invest outside of the island for its basic emerging industries for which the indus- chemical needs and forge specialty part- try should develop specialty materials: nerships, the government’s new action biotechnology, medicine and health care, plan is a challenge for the small and me- culture and creation, tourism, green en- dium chemical players that have long op- ergy and high-end agriculture. erated on the island with little oversight As part of this initiative, the MOEA or opposition. established the High Value Petrochemi- Yen-Shiang Shih, Former Minister of Economic The way forward has been dictated by cal Industry Promotion Office in 2012, Affairs the government; therefore the question to implement the promotion of the HVA remains how far the administration is development policy and assist in the for- enhance Taiwan’s petrochemical output. willing to go to support one of its largest mation of upstream-downstream R&D “For the next five to ten years, Taiwan’s industries in a costly and technological- alliances for joint product development. petrochemical industry policy will push ly-demanding transition. Amongst Tai- In the coming decade, the MOEA the industry towards HVA product de- wan’s petrochemical players, there is no has announced plans to invest in the velopment,” says outgoing Minister of sign of a great uptake of this agenda or R&D of 43 HVA product items in order Economic Affairs Yen-Shiang Shih. “We any significant reallocation of resources to stimulate the HVA portfolios of local hope Taiwan will become an important in favor of R&D and fine chemicals. producers. Additionally, the government focus in the Asia-Pacific region in terms To promote its new plan, the MOEA is looking to attract overseas manufac- of HVA petrochemical product develop- convened a Strategic Planning Meeting turers to invest in local production and ment and logistics.”

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Greater Hopes for 2013 Interview with Dr. Eugene Lin, In light of its recent political and regula- Executive Director, Petrochemical Industrial Promotion Office, MOEA tory challenges, r the petrochemical sec- tor’s performance remains impressively What is PIPO’s mission invest in more advanced modest. Softened demand from mainland and what goals do you technology to minimize hope to achieve in its waste and pollution. China, which consumes about 60% of second year? Taiwan’s petrochemical output, has weak- PIPO’s mission isy to In what ways does the ened the island’s performance, but 2011 promote R&D in the US shale gas boom was nonetheless a record year of $65.2 sector. Taiwan has wel- stand to benefit or dis- billion in output. A slight decrease in 2012 comed foreign compa- advantage Taiwan’s ended the year at $64.4 billion. nies in setting up R&D chemical sector? According to Petrochemical Industry centers in Taiwan, which US shale gas may be a Association of Taiwan, ethylene produced a number of companies, threat to certain products in Taiwan in 2011 totaled 3.52 million mt, such as Dow Chemi- in the Taiwan industry cal and Evonik, have already done. We because they build up cracker capacity. a dip of 10.36% from 2010. Total demand also work to create alliances connecting Taiwan has to cope by focusing on high for ethylene in Taiwan was also down the upstream and downstream sectors to value-added products and considering in- 7.71% and total demand for all petrochem- promote R&D, develop their markets and vestments in the United States. Formosa ical materials was 6.26% below 2010, build plants. Another goal is to eliminate Plastics Group has already announced coming in at 24.83 million mt. To match problems related to investing in Taiwan, they are going to build an 800,000 mt/y lower demand, output of petrochemical through collaboration withthe Executive ethylene cracker and a propane dehydro- intermediates decreased by 5 to 10% for Yuan’s organization InvesTaiwan. genation plant in Texas. Other companies monomers and 10 to 15% for polymers. are also planning investments and we are For the coming year, Formosa and How has the cancellation of the waiting to see what progress will be made. Kuokuang project impacted the indus- CPC are expanding their refinery capaci- try’s willingness to invest? What key advantages does Taiwan have ties and pushing the development of C4, Since we cannot increase the quantity of in the global market place? C5 and C9 petrochemicals. Formosa’s raw materials in Taiwan, we are focusing Taiwan’s chemical sector benefits from Mailiao complex recently amended its 6th on increasing the value of our products. If the integration of its infrastructure. The phase of expansion to focus on producing the private sector wants to invest outside industry also excels in its ability to cut synthetic rubbers and high value-added of Taiwan, the government also requests manufacturing costs to a minimum. Be- petrochemicals. CPC is moving along them to invest the same amount into in- cause we frequently use technology pur- with its renovation of the No. 3 Naphtha creasing the value of Taiwan’s sector. EPA chased from Europe or the United States Cracker, which is expected to boost eth- regulations are getting tougher and regu- and we do not have the advantage of raw lations are increasing cost to the indus- materials, manufacturing cost is a key area ylene capacity between 230,000 mt/y to try, but it is a turning point that will push where Taiwan’s producers gain a competi- 600,000 mt/y. companies to focus more on R&D and tive edge. “CPC plays an important role in Tai- wan’s economic future. In order for the

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petrochemical industry to remain strong, tax benefits from chemical complexes, be- Though challenges persist, govern- we must narrow the gap in the supply of cause the majority of taxes go to the cen- ment voices remain optimistic that high raw materials, while also expanding the tral government,” says C.T. Lee, chairman value-added goals are achievable. “The scale of petrochemical production and en- of Formosa Plastics Corporation. “The lo- world’s biggest market, China, is in our hancing the quality of industrial safety and cal government cooperates with environ- backyard, and we have trade agreements environmental protection,” says CPC’s mental groups against the central govern- with some Southeast Asian countries. In chairman Sheng-Chung Lin. “For CPC’s ment and the industry ends up in between. five years, we will have more foreign and part, we have initiated a renovation and We are trying to work with the govern- local companies investing in Taiwan,” expansion project for our No. 3 Naphtha ment to increase tax benefits for the local predicts Eric Kuo, section chief of the In- Cracker at the Linyuan petrochemical government to incentivize the approval of dustrial Development Bureau’s Chemical complex. The cost of the project is esti- our investment plans.” Industries division. mated at $1.6 billion and will increase the cracker’s capacity substantially. After its completion in 2013, the project will gener- ate an annual production value of $2 billion and will stimulate further investment in the downstream petrochemical industry.” The increase in ethylene coming on- line in June 2013 is expected to boost the performance of downstream producers. “The No. 6 Cracker is very close to me- chanical completion, after which we will hand it over to CPC for commissioning and start-up,” says John Yu, chairman of CTCI Corporation, the EPC firm handling the project. “Many downstream manufac- turers are simultaneously expanding their facilities to utilize the ethylene produced by the cracker.” As the industry looks to the future, worries about the political climate and government support for the sector per- vade. “It should be possible to attract more foreign investment in Taiwan, but environmental problems may stop this. The government says it is trying to pro- mote high value-added production, but the EPA has rejected a Formosa Plastics hydrogenated hydrocarbon resins joint venture,” observes Steven Chen, chair- man of alkyl benzene producer Formosan Union Chemical Corporation. In hopes of improving the investment climate for local expansion, industry lead- ers like Formosa are leading the charge to increase local benefits for chemical complexes. Because the central govern- ment collects almost all tax revenue, local governments have no incentives to sup- port investment, which has created further concerns about the industry’s ability to sustain its future. “The changing environmental legis- lation in Taiwan is because of political problems, not environmental problems. Local government here receives very little

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Tasco Chemical Corporation, citing the scarcity of raw materials INNOVATION and difficulties with local government. Rather than develop advanced technology for current product Making the Switch portfolios, other companies are simply expanding into new busi- Without a precedent for high levels of R&D in the petrochemical ness areas. “A great deal of our producers has diversified their industry, meeting higher value-added rate goals will require a businesses into electronics, telecommunications, and biotechnol- shift in strategy for the sector. “Taiwan has not been very suc- ogy, which consume many petrochemical materials. This helps cessful in R&D up until now, because most companies did not provide petrochemical products with new outlets and applica- allocate enough of their budgets to R&D efforts. In Taiwan, the tions,” says PIAT’s Shieh. percentage of revenues invested in R&D is about 1%, compared “The way forward is to diversify into new products,” agrees to 3 to 5% in the United States,” explains J.H. Shieh, executive Chen of FUCC. “We are trying to understand what our custom- manager of PIAT. ers need, and developing products to meet their demands. Our “Most of the high value-added fine chemicals are still in the focus is on new specifications for existing products, as well as hands of other industrialized places like the US, Europe or Japan. completely new products. The low-volume hydrogenated hydro- We cannot easily get production technology in Taiwan because carbon resins we make are manufactured by only one other com- we need to license it and other countries are reluctant to issue pany in Asia. Many Chinese companies are producing yellow it. When it comes to selling fine chemicals in the global market, resin, but they do not yet have the technology to jump to high there is already competition from other countries. Countries that value-added hydrogenation.” produce their own fine chemicals, such as South Korea, prefer Through the operations of its subsidiary United Performance to use their own materials for their application production,” says Materials, FUCC is able to locally produce aromatic Shieh. resins, while also conducting customer-driven R&D and produc- Taiwan’s largest solvent manufacturer LCY Corporation, tion process improvement. Four years ago, FUCC also merged which invests 2% of its revenues into R&D on an annual basis, with an agrochemical company and is exploring market opportu- recognizes that licensing technology no longer guarantees any nities in insecticides. competitive edge in the global market. “We have just announced Given the growing demand for specialty chemicals in the an $81 million investment in an R&D center in and Greater China region, and the vast potential for pharmaceuticals, we have just launched a thermoplastic elastomer, Styrene-Eth- this move on the part of petrochemical players is astute. If home- ylene-Butylene-Styrene (SEBS), which is the result of a totally grown innovation is proving hard to flourish, R&D is a choice homegrown process,” says Bowei Lee, chairman of LCY Corpo- area where international companies who are looking for entry ration. “A lot of companies in Taiwan use the old strategy of li- points into this attractive region can step in. censing technology and scaling it up for commercialization. This does not work today, because companies in India and China can Importing Innovation do exactly the same thing.” Indeed, one of the government’s key strategies in advancing sec- Faced with more immediate market constraints, focusing on tor innovation is attracting R&D resources from abroad. Only R&D is not a top priority. “The industry sees increasing our high six months after Taiwan’s signing of the historic Economic Co- value-added as a long-term target. Today, we are facing very operation Framework Agreement (ECFA) with China, 15 foreign short-term difficulties,” explains C.H. Hwang, vice president of enterprises had filed applications to establish R&D centers in

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Compared to its fellow Tigers Taiwan has the least favorable R&D incentives, yet it is international chemical innova- tion centers with the prospect of develop- ing materials for the electronics sector. In early 2011, Evonik Industries opened its first R&D center outside of Germany in Taiwan to explore the role that a chemical company can play within the electronics industry. “Establishing Evonik’s ‘Light & Elec- tronics’ Advanced Project House in Tai- wan will help consolidate our leading position in the world and bring Evonik closer to one of the most important elec- tronics markets, while also developing greater opportunities for growth in Asia,” says Gerard Berote, president of Evonik Industries Taiwan. Merck, in turn, has announced plans to set up an R&D center close to Taiwanese panel makers to develop materials for Or- ganic Light-Emitting Diode panels, light- ing and solar power technologies. The company’s new center will be in addition to their LCD R&D center, established in 2005. “We see Taiwan as one of the few places in the world where you can not only develop new technology, but you have the opportunity get it into a world class manufacturing facility and complete the product development process locally,” says Karl Skjonnemand, R&D director at Merck Display Technologies Taiwan.

Deepening the Talent Pool While the electronics industry has R&D benefits to share with the island’s chemi- cal sector, it also monopolizes Taiwan’s talent. Taiwan has one of the highest den- sities of universities in the world, yet there is little talent to spare for chemical com- panies. “There is a shortage of qualified R&D professionals in Taiwan because graduates here prefer careers in electron- Taiwan. Offering a favorable corporate tax Ranking 13th on the World Economic ics rather than in the chemical or pharma- rate of 17%, investment subsidies and as- Forum’s Global Competitiveness Index, ceutical industries,” explains Weichyun sistance in sourcing talent, the government Taiwan enjoys the world’s highest rate of Wong, president of API manufacturer SCI is opening its doors to innovative foreign US-granted patents per capita. Yet while PharmTech. players who can help transform the chemi- the majority of these patents and R&D Because of the scarcity of chemical cal industry from a destination of technol- centers are coming from the electron- professionals, companies like SCI Phar- ogy transfer to a point of origination. ics sector—Hon Hai alone was granted mTech take advantage of Chinese talent The results show, with the number 2,013 patents by the United States Patent to staff early-stage laboratories in main- of overall patents granted by the United and Trademark Office in 2012—they are land China. Industry players also supple- States in Taiwan increasing to 8,238 in nonetheless deepening the local R&D re- ment their internal R&D staff through 2010 after four years in the 6,000s range. source pool for the chemical industry. partnerships with academic and state-run

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research institutions. The Industrial Tech- Polysciences serves. Taiwan is also well- nology Research Institute (ITRI), for ex- GROWTH IN placed geographically to support our sales ample, is a unique, partially state-funded efforts in mainland China and, in future, research organization that aids companies the rest of Asia.” in product commercialization and enter- SPECIALTIES prise spin-offs. “In all of ITRI’s laborato- A Window to Asia To China and Beyond ries, commercialization is a main focus,” The Greater China region offers entic- With the world’s largest chemical market says Tsung-tsan Su, general director of ing growth opportunities in the specialty in its backyard, Taiwan and its local pro- ITRI’s Material and Chemical Research segment and a market like Taiwan can ducers are also making calculated leaps Laboratories. “Once we identify a good provide the ideal point of entry for com- into mainland China investment. project, companies can invest through our panies searching for strong foundations in Taiwan Surfactant , a producer of spe- early participation process. Once ITRI has the region. cialty surfactants ranging from cationic to completed a project, we organize various In mainland China alone, revenue non-ionic and amphoteric surfactants, set workshops and conferences to raise indus- growth in 2011 for specialty chemicals up a sister company in mainland China try awareness of the technology so that it was 21%, compared to 7% for the overall in 2004when the market became too at- can be transferred.” chemical industry, according to the Na- tractive to discount. The expansion has The MOEA’s Industrial Development tional Bureau of Statistics of the People’s brought measurable rewards, bringing in a Bureau is currently working to develop Republic of China. From 2009 to 2014, new technologies with the help of ITRI volume and turnover five times larger than to stimulate cross-sector new product the market value growth of specialty the company’s domestic business. As the development, yet R&D subsidies remain chemicals in China is estimated to in- only Taiwanese surfactant manufacturer difficult to obtain. “With regards to gov- crease by 44% to $81.6 billion. in mainland China, Taiwan Surfactant has ernment support, Taiwan has aligned it- With its strong IP protection and stable a significant cost and quality advantage. self with Singapore on corporate taxes business environment, Taiwan is a stra- Although Taiwan Surfactant originally but it is a more complicated and longer tegic location from which international did not want to invest in their own opera- process to obtain subsidies,” says Berote companies can target this enticing growth tions there, it proved too difficult to find of Evonik. “In order to obtain a subsidy, potential. Polysciences Inc., a US- based a reliable production partner. “Many Tai- you have to share information with insti- custom specialty manufacturer with an wanese companies at this time suffered tutions, because the outcome must benefit office in Taipei since 2011, is just one for their investments, but the situation has the Taiwanese industry, which may not be example of a company using Taiwan as a improved in recent years,” says Amber favorable when developing a new and in- springboard in the region. Hsieh, president of Taiwan Surfactant. novative product.” “Taiwan was chosen as a strategic lo- Taiwan has a reputation in the region By opting instead for partial govern- cation for Polysciences for a few reasons,” for its high quality surfactants and enjoys ment support, companies like Evonik can explains Jeffrey DePinto, the company’s its status as a preferred sourcing destina- take advantage of the R&D resources on vice president of International Business tion. To target the projected growth in the offer while also protecting proprietary in- Development. “It is a well-known hub regional market, local producers are ex- formation. for the semiconductor industry, which amining expansion plans beyond China.

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According to Tatsuhito Matsuda, president of Taiwan’s larg- The first company in Asia est and oldest surfactant manufacturer, Sino-Japan Chemical Co. to have bluesign® approval (SJC), the total surfactant market is expected to double globally for the sale of textile chemi- from 2010 to 2030, while the Southeast Asian market should cals in Europe, Jintex is using triple within that same period. this advantage to make further SJC originally manufactured surfactants for agriculture but inroads into the textile mar- has since diversified into applications for different industries, kets in the region, with opera- such as detergents, electronics, resins and construction. Four tions in mainland China and years ago, the Japanese chemical company Nippon Shokubai Indonesia, and agents as far Company became SJC’s major shareholder, facilitating the com- as Bangladesh, Pakistan and pany’s global expansion, particularly in Southeast Asia. Iraq. “SJC is considering setting up operations in Southeast Asia, “Jintex focuses on provid- and it is likely that our next plant will be outside of Taiwan,” ing more value-added prod- says Matsuda. ucts and services to export Expanding internationally is practically an imperative strat- to international markets. We egy for local companies dealing with Chinese products flood- continue to extend our re- ing the domestic market. “Since the ECFA with mainland China sources to new technologies came into effect, SJC’s non-ionic surfactants exported to China and products, expanding into are duty free. Conversely, we now see very cheap products come new areas like photovoltaic into Taiwan,” says Matsuda. “Despite the cheap products flood- technology,” says Tim Lai, ing the market, Taiwan is well-positioned to supply leading tech- Jintex’s vice president and spokesman. nology and high quality products.” Jintex Corporation, Taiwan’s For Taiwanese companies top producer of specialty textile and processing chemicals, began that choose not to partner as a trading company for global brands of textile auxiliaries and with companies in emerging now produces its own brand of finishing technology materials, markets in Asia, they need to la Fanta. be prepared to compete with these new low-cost producers. “New competitors from China and India are continu- ing to grow using a low-price strategy,” explains Tien-Yu Chen, chairman of Diamonchem International Co., the largest active zinc oxide producer in Taiwan and all of Asia. “We knew this day would come, which is why Diamonchem has updated our facilities and introduced automation to cut down on the costs of labor and energy.”

Expertise in Niche Markets To develop new products and penetrate markets farther afield, local manufacturers have the benefit of a small test market where SMEs have historically thrived. “In Taiwan, small- and medium-sized manufacturers concen- trate on one or two chemicals for a specific process. They work with manufacturers and use their experience to make very high- quality products. International suppliers supply a lot of items and cannot concentrate on specific products,” says Scott Chen, vice president of Geetmann Taiwan Ltd., a manufacturer spe- cialized in producing materials for print circuit boards (PCB). Geetmann, a local producer established in 1992, has expand- ed operations to mainland China to follow the PCB industry. Al- though the company has production facilities there to be close to customers, Taiwan is still an advantageous location from which the company can direct its new product development efforts. “When you are developing a new product in mainland Chi- na this requires many new materials; it is difficult to get them very quickly or easily. Taiwan provides easier access to raw

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ates on a more regular basis with much reaching zero in 2013. Yet many were larger companies.” dissatisfied to see that the chosen petro- Many smaller companies, therefore, chemical products had very little impact choose to focus on niche items. In the on Taiwanese producers. case of Repoly, they have developed eco- In light of this disappointment, the friendly polyurethane products, includ- industry is eagerly awaiting develop- ing materials for LED light bulbs and ments from Taiwan’s ongoing talks with water-based fire extinguishers, which Singapore to examine the possibility of they are bringing to international mar- a Free Trade Agreement (FTA). An FTA kets after years of independent R&D. with Singapore would set a symbolic precedent that would make way for fu- Trade Barriers ture agreements with other neighboring countries. Although its local industry praises its Struggling to compete with other Tatsuhito Matsuda, president of Sino-Japan beneficial positioning in the region, from high-value industries in the region, Tai- Chemical Co. the perspective of international trade, wanese producers encounter fierce com- Taiwan’s chemical sector is at a signifi- materials and the necessary technical petition from South Korea on the basis cant disadvantage. information. We can work together with of the country’s preferential trade agree- universities to communicate and share “Southeast Asian companies are de- ments with the US and Europe. information,” says Warren Tsai, Geet- veloping rapidly and trying to catch up “FTA issues are the main obstacle mann’s managing director. “Overall, it with Taiwan and Korea. Countries that for Taiwanese exporters,” says Cath- is a smoother development process here are ASEAN members enjoy no duties erine Yu, president of Rich Yu Chemi- and it is easy to transfer from the labora- with mainland China, which conversely, cal, a local specialty plastics additives tory to the production line.” is a disadvantage to Taiwan,” explains producer. “Korea has signed agreements Yet due to the high fragmentation Matsuda of SJC. with Europe and the US, while Taiwan of Taiwan’s specialty chemical sec- The signing of ECFA in 2010 gener- has to pay import duties of around 6.5% tor, many SMEs find themselves falling ated excitement in the industry as com- in these regions. When polymer additives through the cracks of the government’s panies anticipated more favorable import already have very limited profit margins, innovation support framework. tariffs with their biggest trade partner. In balancing high standards with competi- “While we do have some cooperation the first round of trade liberalizations, tive prices is a key issue.” with state research centers, because we which most believe will be the most With market dynamics in the US are a small company, we primarily per- favorable to Taiwan, 88 petrochemi- and Europe exacerbated by unstable ex- form our own research,” says Charlie cal products were included in the Early change rates, Rich Yu Chemical has re- Cheng, CEO of fine chemical supplier Harvest list of provisions. With ECFA’s organized its export markets and shifted Repoly Resin Corporation. “We are hop- Early Harvest program, the tariffs for its focus to emerging markets such as the ing to get more support from the govern- 539 Taiwanese products and 267 Chinese Middle East, Russia, Latin America and ment, but Taiwan’s government cooper- products will be lowered in three phases, developing Asian countries.

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Taiwan’s brilliant chemists could not find PHARMACEUTICALS any stage on which to perform. The phar- maceutical field has become an excellent A New Era for Drug area where they can exhibit their talents,” Discovery says Jo Shen, CEO and president of API While other segments of the chemicals manufacturer ScinoPharm. market struggle to reap the benefits of As a boost to the burgeoning sector, government support for R&D, pharma- Taiwan’s Food and Drug Administra- ceuticals are one area in which many tion (TFDA) became a member of the companies owe their establishment to Pharmaceutical Inspection Convention effective economic policy. For biotech and Cooperation Scheme (PIC/S) at startups in particular, the government is the start of 2013, joining 43 countries throwing its support behind the sector in across five continents in a regulatory the hope of improving Taiwan’s chances Jo Shen, CEO and president of API manufacturer scheme aimed at promoting interna- for drug discovery. ScinoPharm tional GMP cooperation. Taiwan’s government identified bio- “We hope to have a new drug, either maceutical firm Pharmaessentia. Attract- technology as key growth area as early as a synthetic chemical or a biological drug, ed back to Taiwan by the government’s developed in Taiwan and marketed glob- 1995, and has passed three pieces of legis- initiatives, Pharmaessentia was founded ally, passing through international hur- lation since 2007 aimed at improving the by a team of experienced Taiwanese pro- dles,” says Dr. Chien-Hsin Daniel Cheng, environment for biotech startups; these fessionals who returned to the island from director of the MOEA’s Biotechnology laws pertain to guidelines for the issuance the US biotech sector. and Pharmaceutical Industries Program of stock options and regulations govern- “Given the size of the market in China, Office. “Currently we have 45 FDA-In- ing R&D and training tax credits, as well there is a lot of opportunity—and respon- vestigational New Drug-approved drug as investments for shareholders. sibility—for us here. In 20 to 40 years, we candidates in Taiwan in different phases In the period of 2007 to 2011, follow- should have one or two local companies and it is possible that in two to three years ing the government’s new legislation, 38 that are competing with big pharma firms. new biotech drug companies were estab- We plan for Pharmaessentia to be one of some of them can go through FDA review lished. Between the National Develop- them,” says Lin. and enter the market.” ment Fund and the private sector, $2 bil- Given Taiwan’s highly skilled work- lion has been earmarked for investment in force and world-class research institu- API Ability start-ups. tions, the atmosphere is ripe for drug dis- While Taiwan’s pharmaceutical firms are “This new era of the biotech sector in covery, even if the island does not have making strides towards drug discovery, in Taiwan is due to the strong financial situ- the muscle for full-scale development. the API segment of the market local play- ation, good IPO market and good policies “The technical chemical side of Tai- ers with a long-time presence in the mar- from the government,” says Ko-Chung wan’s industry has always been very ket are beginning to see a rise in global Lin, founder president and CEO of phar- strong. However, in the last 20 years, demand for their products.

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sourcing more projects,” says Chang. for the local market and as a result there “With CCSB’s fermentation capabili- are not enough resources being pooled ties, we have a better chance of getting for export purposes,” says Ray Fan, CEO a hold of these contract manufacturing of Standard Chem & Pharm Co., a local projects.” generics producer. Generics producers, too, are target- With PIC/S membership signifying ing export-oriented growth in the face of an international vote of confidence in fierce local competition. For a country of Taiwan’s local regulations, management 23 million people, a pharmaceutical in- systems and auditing standards, the phar- dustry of over 150 companies makes for maceutical sector is well-positioned to a crowded market. “We are all competing meet its global goals.

Steve Chang, president of Chunghwa Chemical Synthesis & Biotech (CCSB)

“Taiwan is ideally placed to serve ‘pharmerging’ Asian markets. We are an easy partner for Chinese companies, while countries like Malaysia and Indo- nesia are not too far away and their Chi- nese populations give us an advantage,” says Wong of SCI PharmTech. Steve Chang, president of Taiwanese API manufacturer Chunghwa Chemical Synthesis & Biotech reports seeing 20 to 30% increases in the market’s exports in the past several years. “Manufacturing costs for APIs are gradually increasing in China, so there is a growing trend of global pharmaceutical companies look- ing for reliable and reasonably-priced suppliers from Taiwan,” he says. In the midst of this growth, API man- ufacturers are upgrading their facilities and strengthening their business devel- opment capabilities. A new product from CCSB—pure ethyl-eicosapentaenoic acid—received FDA approval in July 2012, and the com- pany plans to launch it in generic form within the next three years to become a main source for sales growth. ScinoPharm, another leading local API producer and process R&D pro- vider, is in the process of building a high potency cytotoxic injectable plant for the production of cancer drugs, which will enable the company to provide vertically integrated service to customers. API producers like CCSB are also hoping to use their strong regional repu- tations to gain more business as contract manufacturers for big pharma. “Many are closing down or consoli- dating their manufacturing sites and out-

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region’s smaller distributors and traders The Local Advantage DISTRIBUTION provide the low-volume, localized ser- While international companies are finding vices that MNCs cannot. their place in the market assisting Taiwan- Taiwan’s Window to “In an emerging region like Asia, ese players to go global, local distribution the World reachability is a very important factor. players are expanding farther afield them- In Taiwan’s relatively mature, export-ori- Some customers are so small to the point selves. For Evermore Trading Company, ented economy, distribution plays a cru- that larger distributors potentially cannot a diversified local distributor whose main cial role in the development of the island’s address them. Until the industries con- business is in the supply of specialty ma- chemical market. Between providing in- solidate, there is a role for some of these terials for composite, rubber, resin and ternational representation for growing smaller distributors and perhaps some of plastics applications, building a regional them have the opportunity to grow along- local producers or offering boots on the presence was necessary to develop the side suppliers,” says Azita Owlia, North ground to international players hungrily sourcing and application networks that Asia vice president for global specialty targeting the chemical needs of the grow- could give the company a competitive distributor Connell Bros. Company. ing industries in Asia Pacific, Taiwan’s edge. With multiple offices across China In spite of the dominance of local play- local distribution industry has risen to and an office established in Japan in 2009, ers, international players inarguably have meet the changing demands of chemical Evermore has now obtained a business li- the right to play when it comes to provid- producers. cense in Vietnam. ing the platform necessary for globally- “China is an important market for Taiwan’s distribution industry has his- ambitious local producers. For manufac- torically been a highly fragmented market turers in Taiwan, continued growth will Evermore because of its size, whereas of small trading and distribution compa- inevitably require international expan- the Japanese market has very advanced nies. As Asia Pacific’s growth rates con- sion. applications,” explains Luhao Wu, Ev- tinue to thrive ahead of markets in North DKSH, in Taiwan since 1958, has seen ermore’s managing director. “What Ev- America and Europe, however, more in- growing business coming from local spe- ermore’s Japanese customers use and ternational distributors are moving into cialty players, which translates into grow- require are quite different from other the region. Yet for local players, the ar- ing demand for distribution and market markets and our business there is a very rival of players like Brenntag is not the expansion services. “DKSH can support good learning experience. In Vietnam, threat that one might think. the large number of smaller players in we plan to penetrate this new market by Although industry consolidation Taiwan who have very much improved leveraging our experience in other coun- will be inevitable as the regional chemi- in quality but still lack international net- tries, as well as examining its market as cal market matures, for the time being works,” says Roger Lu, general manager a location for sourcing, especially in the in Taiwan, homegrown players remain of Performance Materials for DKSH Tai- rubber industry.” confident in their specialized product of- wan. “The market here is extremely com- It is no secret that rubber is a volatile ferings and intimate knowledge of the petitive, with tight margins, so it is helpful commodity to trade in, and Taiwan’s rub- local market, language and culture. With for our clients to be able to outsource non- ber distributors are no more immune to over 10,000 domestic specialty chemicals core expertise to us and simply concen- the instability of the market than any of companies in mainland China alone, the trate on their products.” their regional counterparts.

14 A Global Business Reports publication, presented with IHS Chemical Week

“Rubber prices are volatile and deals out the region. “In the past, Asia used to are not easy to make if neither side can mean just China—but with costs in China trust the other; this is why most tire mak- now rising, customers are moving their ers in Taiwan always buy natural and businesses to countries like Myanmar and synthetic rubber from us,” says Burgee Cambodia,” says Liao. Chang, president of Ukko Corporation, a local synthetic and natural rubber distri- Taking Control bution company active since 1988. Faced with market dynamics outside “In Taiwan, end-users ask Ukko Cor- of their control, many distributors are ex- poration about prices and we then make amining diversification options, such as inquiries to suppliers. In China, it is quite contract or toll manufacturing andeven different; distributors do not know where original production. the end-users are, so they collect low-cost Evermore, which previously operated material from the market and reap high production facilities in , reports profits when the prices increase,” says Luhao Wu, managing director of Evermore they are reexamining the opportunity. Chang. “In the past 10 years, Chinese “We are trying to move into more high firms have entered the Taiwanese market, proximity is becoming less of an advan- value added products and we are working originally through Taiwanese agents, but tage and more of a threat. in the last two years they have begun to “Ten to 15 years ago, labor and envi- in cooperation with some research insti- sell here directly. As their prices can be ronmental costs in China were very low. tutes,” says Evermore’s Wu. “We have as much as $100 below ours, these firms We made frequent visits to mainland one lab in where we work on de- have been influential in increasing com- China to find the most reliable suppliers, veloping applications. Not many distribu- petition and determining market prices.” and we have been able to take advantage tion companies of our size also carry out Adding further pressure to local rubber of price gaps and our strong service ca- their own development work; however, traders, many Taiwanese rubber producers pabilities to excel in the export business,” Evermore sees research as a good invest- have moved manufacturing to lower cost says Ming-Che Liao, managing director ment to transform the company.” jurisdictions in Southeast Asia, bringing of Keeneyes Industrial Corp, a distribu- Yet introducing innovative materials their local distributors with them. Given tor of polymers, plastic and coating ad- into a distributor’s portfolio can be costly. its central positioning, however, Taiwan ditives and specialty fine chemicals. “In Distributor Keeneyes offers new products is still an advantageous location for ware- the last three or four years, however, costs at little to no profit in order to encourage housing in spite of the production shift, in China have gone up and information customers to test them. “Once they are creating no incentives for companies like has become more transparent. Competi- demanding more, our sales volumes in- Ukko to relocate. tion has become very severe and we have crease and we see greater profits,” says The pressure from mainland China decided to do more work with new fine Keeneyes’ Liao. extends far beyond only rubber trading, chemicals.” A leading local distributor, Union however. As China’s chemical market Companies like Keeneyes are looking Chemical, has also taken a more strate- upgrades its regulations and quality, its to follow customers as they move through- gic approach to developing their place in

15 A Global Business Reports publication, presented with IHS Chemical Week

the supply chain. Specialized in trading, Overall the chemical industry has yet manufacturing and tank storage, Union SERVICES to fully embrace the presence of third- Chemical has also created a subsidiary, Logistics: The Next party logistics providers and the benefits UFC Corporation, through which they of- Frontier that they can provide. TALM estimates fer customers toll and contract manufac- Further helping to facilitate the growth of that only about 20 to 30% of local chemi- turing, as well as custom synthesis. Taiwan’s chemical industry in international cal manufacturers outsource logistics to In addition to production in Taiwan, markets is the logistics industry. With well- 3PLs. “Within this market, producers are UFC Corporation operates three run- developed infrastructure, sufficient car- building their own warehousing as part of ning plants in mainland China. While the rier capacity and strategically-positioned their manufacturing, and they are either Chinese market only contributes 30% to ports, transportation is not a challenge building their warehouses too big or too Union Chemical’s total business today, for chemical producers in Taiwan. When small,” says Ken Breinholt, director of the company foresees it eventually over- it comes to the supply chain management Asia Operations for Rinchem, a US-based taking their local business. “Many big services that the logistics sector can pro- specialty chemical 3PL that recently es- plants have moved out of Taiwan and vide, however, fewer chemical companies tablished operations in Taiwan to service the total demand for chemical materials are willing to pay the higher prices to take the strong semiconductor industry. in Taiwan has dropped,” says S.W. Lee, Global logistics company BDP Inter- chairman of Union Chemical. “Our busi- advantage of them. In a report compiled national sees the market dynamics in Tai- ness in Taiwan grows at a rate of about last year by the Taiwan Association of Lo- wan as a sign that demand for 3PL ser- 5%, while our business grows at a rate of gistics Management (TALM) for the De- vices will increase. “Since the domestic 30 to 50% in China. We expect that the partment of Transportation and Commu- demand in Taiwan is getting weaker, BDP fast-growing Chinese market will contrib- nication, Taiwan’s national supply chain can use its wide network, experience and ute more than 70% of our business in the capabilities were ranked third best of the next decade.” region, behind Singapore and Hong Kong, knowledge to help Taiwanese companies Despite recent improvements in main- and far ahead of China and Southeast Asia. develop new markets overseas,” says Wei land China’s business climate, the invest- “Taiwan has improved its customs clear- Heng Chen, general manager of the com- ment environment remains unpredictable. ance efficiencies, goods trading and ap- pany’s Taiwan branch. “The major chal- “To balance the risks of operating in Chi- plication of information technology. How- lenge is that demand is dropping; howev- na, we are planning to establish a factory ever, our logistics systems still have room er, productivity is still high so they must in Vietnam within the next two to three for improvement,” says James Chung, sec- find new markets.” years; meanwhile we have plans to make retary general of TALM. “Companies here As local players continue to grow, they an investment in Taiwan,” says Lee. “De- generally consider logistics to be of lesser will need to outsource more non-core ser- spite the numerous difficulties of environ- importance than R&D, marketing, manu- vices such as logistics in order to compete mental restrictions and land availability in facturing and finance. CEOs, particularly globally. Given the growth coming from Taiwan, we still find certain advantages to those of SMEs, think logistics are just specialty and pharmaceutical players in having facilities here, where we have suf- transportation and warehousing, and will Taiwan, they will need assistance in keep- ficient technical manpower and easy ac- outsource the work to whichever company ing up with international standards as they cess to capital from Taiwan’s banks.” is cheaper.” continue to evolve.

16 A Global Business Reports publication, presented with IHS Chemical Week

A GREENER TOMORROW Managing Environmental Concerns With Taiwan’s lengthy EIA review pro- cess and lack of governmental coordina- tion between the MOEA and the EPA, the industry is put in an increasingly difficult Diamonchem is updating its facilities and position to meet ever more stringent en- making the effort to cut down on energy use and John T. Yu, chairman and CEO of CTCI carbon emissions. vironmental requirements. “The EPA classifies the chemical in- Engineering Services to the foreign firms that built Taiwan’s dustry in the highest category of poten- As most local producers prefer self- early crackers in the 1960s, and we en- tial polluters, so the government closely sufficiency in their supply chain manage- tered overseas markets back in the 1970s watches companies and has shifted the ment, many also prefer to keep engineer- while local competition was still concen- burden onto them to prove their inno- ing, procurement and construction (EPC) trated on the domestic market.” cence,” explains Wen-Jei Fang, general manager of the Taiwan branch of envi- services in-house, particularly when it Today, roughly 50% of CTCI’s rev- ronmental engineering and consulting comes to the island’s many specialized enue comes from outside of Taiwan. To firm Weston Solutions. “There are long players. When it comes to EPC service meet its goal of growing from a $2 to $3 monitoring processes to go through if providers in the chemical industry, Tai- billion company, CTCI is aggressively you are at risk of causing minor con- pursuing projects in neighboring coun- wan’s largest and only international play- tamination and the government has the tries and the Middle East. “Next year er is CTCI Corporation. Earning roughly absolute authority to force the closure of 50% of its revenue from the hydrocarbons there will be huge opportunities from sev- operations until they address issues.” sector, CTCI has grown over the years eral projects in Southeast Asia, including As public scrutiny of the chemical in- thanks to a constant stream of work com- the enormous investment by dustry continues to grow, however, Fang ing from key chemical companies in Tai- in Malaysia. Vietnam and Myanmar are notes that company leaders are beginning wan, such as Formosa Plastics and CPC. also heavily increasing their investment,” to pay more attention to corporate social “Our local competitors are smaller in says Yu. “India is booming, and it is dif- responsibility and community outreach. size, with revenues perhaps only a tenth ficult to find well qualified contractors, so “Social responsibility is a new addition of CTCI Corporation’s,” says Yu of CTCI. there are many opportunities for CTCI in to the Health, Safety and Environmental “We grew from acting as a subcontractor the coming years.” audits Weston Solutions has done here

17 A Global Business Reports publication, presented with IHS Chemical Week

for years, and we help clients organize ternational and local companies; the events. Unfortunately damage has al- system helps to mentor small firms and CONCLUSION ready been done, and most firms—even bring everyone up to speed very quick- the multinationals— are still well behind ly,” says Lee. While environmental concerns have the West. Even China has established a Reporting regularly and consistently weighed heavily on the industry, social responsibility index, which Tai- to the International Council of Chemis- wan does not have,” he says. try Associations, TRCA is the best re- companies across the value chain In response to the tightening regula- porting body in Asia along with Japan. are adjusting to meet new standards tions, CTCI Corporation has developed “Across the industry, Taiwan’s Environ- and reduce emissions and energy its service portfolio to meet these grow- mental, Health and Safety accident rate ing needs. Specialized in air pollution re- has decreased, employees’ health has im- consumption. duction, wastewater treatment and water proved, water efficiency is up and green- recycling, CTCI frequently installs envi- house emissions are down,” says Lee. The Kuokuang project’s cancellation may ronmental protection equipment to help While reform could be a significant have signaled the end of high-volume pet- clients meet requirements. help to the industry, most companies are rochemical commodity output, but Tai- Gradually, the industry is recognizing going ahead and making the necessary wan’s chemical industry is by no means that it must step up and undertake sus- investments to meet current require- at the end of its rope. A bright future lies tainability initiatives to ensure its future. ments. Taiwan’s regulations are strict ahead for companies with the ambition Yet on the part of the government, im- by global comparison, but their strin- and competitive quality to succeed in provements in the environmental regula- gency advantages local companies in global markets. Situated in the backyard tory framework could go a long way in the international marketplace as clean of the world’s biggest market and with- helping the industry achieve these goals. production becomes more important on out the investment risks associated with “Taiwan has a unique law, whereby a global level. mainland China, Taiwan stands to be an the EPA selects academics to look at “Years ago, when the regulations increasingly attractive location for foreign environmental impact studies and gives were much looser, most companies in investment. “The contribution of Taiwan each individual veto power ,” says the industry did not even have in-house in the Greater China market is remarkable LCY’s Lee, also chairman of the Taiwan regulations. As the regulations have be- when taking into account the size of the Responsible Care Association. “The sys- come stricter, it has created pressure for country. With its location, entrepreneurial tem creates real difficulties. The govern- us to improve,” says Chen of Diamon- spirit and network, Taiwan is a fantastic ment understands this and is now trying chem. “Diamonchem is updating its fa- hub,” emphasizes Berote of Evonik. to change the law so that it is ultimately cilities and making the effort to cut down As the role of Asia Pacific evolves in responsible for decisions itself, as in ev- on our energy use and carbon emissions. the global chemical industry value chain, ery other country.” As natural resources become scarcer, we Taiwan is poised to evolve in step. Despite TRCA has been exemplary is help- plan to focus more on metal recycling. It the challenges ahead, a strong chemical ing local players to meet international is important to recycle metals from city foundation, political and economic stabil- standards. “About ten years ago, TRCA waste, like electronics, for raw material ity and an innovative edge point to contin- started a buddy system, pairing off in- use,” he said. ued rise of one of Asia’s Tigers.

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