In order to avoid falling behind in China’s specialty chemicals market, multinational chemical manufacturer needs a new method.
In the past 10 years, although the scale of Chinese market has more than doubled, many international specialty chemicals companies have failed to realize their desire to grow and make profits in Chinese market. As China’s economy shifts from investment oriented to consumption oriented, it’s time for international companies to learn from their mistakes and rethink their strategies. In this paper, we review these changes in China’s specialty chemicals market and the steps that multinationals need to take to establish a long-term position in this key market.
It’s time to rethink how to deal with a tough market
There is no doubt that the expansion of the food market with Chinese characteristics has been a big story of the industry since this century. Since 2008, the company has grown at a compound annual rate of 13% with sales of about $140 billion in 2016. But the rapid growth of international specialty chemical manufacturers has masked some important but less attractive aspects of their performance in China, especially profit margins and market share.
Our research shows that the profit margin of specialty chemicals in China is structurally lower than that in other regions: the average profit before interest, tax, depreciation and amortization of specialty chemicals manufacturers (including local and international companies) operating in China is 4 percentage points lower than the global industry average. There are some multinational companies that are doing better in China, but they seem to be the exception.
What is the stimulus? In many areas, China is a well-known difficult market, and the special chemicals market is no exception. In many products and market segments of China’s specialty chemical industry, overcapacity and fierce competition caused by scattered industry participants are common factors. Although the competition in some areas of the industry is not fierce, such as high-performance engineering plastics, these areas are not typical in the market.
Many multinational chemical manufacturers believe that their low profit margins are an essential part of their global strategy to capture China’s growth, build a long-term presence and serve global customers in the region. Some multinationals also believe that doing business in China is a valuable strategy to understand the Chinese competitors they are increasingly meeting in other parts of the world and at home. This idea has led to a lot of investment for a long time, including organic investment and acquisition investment.
But there are signs that multinationals have also failed to keep up with the pace of market growth. Our research shows that the market share of international companies decreased from 28% in 2005 to 23% in 2014. In the same period, the share of Chinese private enterprises increased from 35% to 41%. The share of SOEs in China is basically flat, at about 36%.
However, the size and potential of China’s specialty chemicals market means that any international company with ambition has no choice but to participate. China’s demand for special chemicals will continue to grow steadily: China’s per capita consumption of special chemicals is about one third of that of developed countries. Although China’s chemical demand, like its overall economy, is growing at a slower rate than at the beginning of this century, it is still the main force behind the sales growth of the global chemical industry. By 2020, China’s demand for specialty chemicals is expected to grow at an annual rate of 7%, while the global growth rate is about 3%. Overall, by 2025, China is expected to account for 50% to 60% of the growth in global demand for specialty chemicals. Given that the Chinese market cannot be ignored, it is time for international specialty chemicals companies to rethink their strategy.