Call to Action
Vision 2030 Outlines Challenges and Highlights Imperatives for the European Chemical Industry
Strategy - The European chemical industry is facing major challenges as value chains increasingly move eastward, drawn by economic growth and market opportunities in Asia. A new, more competitive environment is taking shape, giving rise to state-controlled players and emerging chemical giants. Fragile economic conditions require managing volatility on a playing field where trade flows gradually change direction. Understanding what these challenges mean, and more importantly, identifying the right strategic options to thrive in this new competitive environment are at the top of every chemical executive‘s agenda.
Since the mid-1980s, the global chemical industry has grown by 7% annually, reaching €2.4 trillion in 2010. Most of the growth in the past 25 years has been driven by Asia, which now owns almost half of global chemical sales. If current trends continue, global chemical markets are expected to grow an average 3% in the next 20 years, mostly pushed by the major players in Asia and the Middle East. Enjoying a home-field advantage, Asian players are positioned to own two-thirds of the market by 2030.
Meanwhile, growth in Europe is expected to be moderate at just 1%. In fact, we expect more than 30% of jobs to be lost in the European chemical industry by 2030 as a result of slow growth and productivity gains.
The Ruler Strategy
Considering the stable, slow, and somewhat linear evolution of the European chemical industry, the „ruler strategy" is likely to apply in the next two decades. This strategy disputes the emergence of disruptive market events, arguing that the chemical industry will largely continue to follow the trend of recent years. This is because of the dominance of robust shifts in the global economy, asset longevity, absence of major chemical revolutions and continuing innovation in established areas such as biotech and fuel cells. If the ruler strategy is accurate, Asia will dwarf North American Free Trade Agreement (NAFTA) countries and Europe in terms of chemical production by 2030.
Customer industries will continue their move to Asia, ending the dominance of Western demand patterns and giving rise to a multipolar playing field with diverging requirements. The changing direction of trade flows between the Middle East-Asia region and Europe will also contribute to the sheer dominance of Eastern players.
It is time for players to prepare-to defend their home markets, develop growth platforms based on innovation and better value capture, participate more forcefully in Asian growth markets, and build the skills and scale required to compete.
Defending the European Market
One of the principal challenges for European chemical producers is the looming migration of some key customer industries to Asia. Defending the European market, therefore, begins with the right allies, such as those value chains that are less likely to migrate. In principle, industry value chains will stay in Europe if their customer industries stay intact and remain there. If production costs remain competitive and relocation is costly, incentives to move are low. Also, several inherent advantages of regional or local production can outweigh the advantages of producing in Asia; these include customer proximity, logistics costs, and the agility to respond to often rapidly changing customer demands.
In addition, preservation and further nurturing of the competitive edge in key areas will be important-areas such as innovation and complexity management, which are often brought to life by market dynamics and technological developments. Creating a supportive European regulatory environment will also help defend the European chemicals market.
Selecting the right business model is also essential. Focused specialists with a scale advantage in materials and in customer industries have the highest margins. By comparison, broad-based specialists are often challenged by the complexity of their product portfolios.
We expect focused specialists and integrated players to prevail by deploying their successful business models on a global scale. The business models are based on organic growth through innovation and investment in assets and capabilities. But success will also require courageous moves toward external growth, including mergers and acquisitions outside players‘ domestic markets.
Developing a Platform for Growth
This will mean European players continue their roles as pioneers in developing innovative products-participating in and further developing innovative industries in Europe.
Here, the focus will be on inventions aligned with global mega trends that ultimately generate future growth platforms. These include alternative feedstock and energy sources, improved energy storage, intelligent materials, environmental technology, and nutrition. These platforms will allow the European chemical industry to derive unique products, which are essential for growth.
Innovative solutions will help the chemical industry transition from a traditional supplier role of being paid by the ton of material to play a more important and indispensable role in the industry value chain. Every value chain has sweet spots that companies can use, to a certain degree, to control the development of the industry and earn above-average, sustainable returns. In chemicals, these include materials advantage, process excellence, patent control, and application know-how-and they reach far beyond the chemical industry to have, ultimately, an impact on end users.
Participating in Asian Growth
The current size of Asia‘s economic progress cannot be matched by any other region in the world. Therefore, the best option for European producers is to participate in Asian growth. To satisfy the demand in Asia, several customer industries for European players have already shifted activities to Asia and will continue to do so. Indeed, much of the global output in consumer goods, textiles, automotive, construction, industrial equipment, food, and agriculture is now increasingly allocated to Asian production sites.
Growth options for European chemical players include developing local products, collaborating with Eastern players, transferring know-how, developing specific local sales approaches, and adjusting offerings to local regions.
However, we advise our European clients to proceed with caution rather than rushing into Asia. China should not be the only market considered. There are several developing countries to keep an eye on. Although significantly more modest than China or India in terms of output volumes, Indonesia, Malaysia, South Korea, and Vietnam are also considerable Asian markets. The populous Turkey in Europe or Mexico in the NAFTA region are also markets with favorable demographics, ease-of-doing-business environments, and skilled workers. Countries such as Chile, Colombia, and South Africa also hold substantial development potential for similar reasons.
Creating a Supportive Environment
Beyond chemical companies, the broader community of stakeholders also has a role to play in the success of the European chemical industry. The first call to external stakeholders is to create a supportive environment for science and industry aimed at embracing innovation, promoting broader public acceptance of manufacturing industries, and fostering an environment in which the chemical industry and its customer industries can jointly develop a value network.
External stakeholders can also help create a level playing field by offering incentives to encourage fair competition, supporting research in new growth industries, striking a healthier balance of environmental regulations between the European Union and competing regions, and enforcing reasonable approval requirements, processes, and timelines.
Finally, stakeholders can help close the education gaps by building stronger education programs in chemistry, engineering, and other sciences from high school through the postgraduate levels.
Chemical Leader = Strategist
Preparing to meet the global challenges of 2030 is not for the faint-hearted. Tomorrow‘s chemical executives will not only be dealing with the unpredictable aftermath of the global recession and economic volatility, but also anticipating and preparing for a variety of other scenarios-from natural disasters and pandemics to terrorist attacks. Add demographic changes and the depletion of natural resources to the mix, and chemical leaders have their work cut out for them.
Traditional strategic planning is no longer enough. Chemical executives are now required to be versatile strategists, able to think in several worlds and prepare for various scenarios while gaining agility up and down the entire value chain. Success in the 2030 world of chemicals will require nothing less.