The Chemical Quotient
New Measure to Compare Locations for Chemical Investments
What should be the key criteria when searching for the best location for a chemical investment? One might do worse than to use the guiding principle of famous bank robber Willie Sutton. He reputedly once replied to a reporter's inquiry as to why he robbed banks by saying "because that's where the money is." For a chemical company, this would mean to locate the investment wherever the market is.
But then how to decide this? The GDP of a country may not be an ideal parameter as it includes many industries – particularly providing services – which make very limited use of inputs from the chemical industry. Alternatively, one may use the global chemical market share of different countries (fig. 1) in order to evaluate a country’s attractiveness for a chemical investment.
Global market shares certainly give useful guidance, but the measure still has some weaknesses as will be explained later.
This article introduces a new measure to facilitate or support a location decision-making – the Chemical Quotient (CQ). The CQ compares the global share of a country’s chemical market with the country’s share of global GDP according to the equation:
CQ = (global chemical market share) / (share of global nominal GDP)
A CQ value above 1 means that the chemical market of a country has a higher importance than its share of global GDP would suggest. Similarly, a CQ value below 1 means the chemical market of a country is below its expected value based on its share of global GDP of a country.
CQ Values for Selected Countries
Fig. 2 shows the CQ for the 30 countries with the biggest global chemical market share. Together, these countries with a global chemical market share of at least about 0.4% account for a total of about 90% of the global chemical market.
It is important to note that the CQ is a measure for the relative importance of the chemical industry within a country, i.e., the CQ gives an indication whether the chemical industry is an important one in that country compared to the other industries in the same country. A CQ above 1 means that the relative importance of the chemical industry in that country is higher than global average, while a CQ below 1 indicates that the importance of the chemical industry in that country is below the global average. The CQ does not directly indicate the size of the chemical market. For example, the CQ may be low if overall GDP of a country is very high and its chemical market size is quite large but not dominant, which is the case for Japan.
Market Conditions Related to CQ
For some investments, the CQ may be a more relevant indicator of the attractiveness of a location than the chemical market share – even though the chemical market share directly correlates to the size of the chemical market.
This is because a country with a high CQ (remember, this means the chemical industry is of comparatively high importance in this country) should have a comparatively good chemical industry infrastructure for a country at its GDP level. This may affect many different aspects including
- a larger pool of qualified and experienced employees,
- a broader range of suppliers to the chemical industry, e.g., with regard to equipment, water treatment, waste management,
- a larger portfolio of service offerings to the chemical industry, e.g., more chemical distributors, logistics providers,
- more experienced and potentially more sympathetic government authorities as they both deal with chemical companies more frequently and as those also represent a larger share of their tax income,
- a larger potential for cooperation with third parties, e.g., other chemical companies, downstream clients or research-oriented institutions such as universities,
- and stronger export orientation of the chemical segment or of its main customer industries.
In contrast, a country with a low CQ may indicate that the interests of the chemical industry in that country are regarded as less important (as, for example, the chemical industry provides only a limited number of jobs). In addition, there may be a smaller number of skilled employees, customers may be more widely dispersed, and service offerings to the chemical industry may be much more limited.
To illustrate the difference between chemical market share and CQ, let us look at some examples. At 50.8 billion € in 2013, the chemical market size and global market share of the Netherlands and Italy are almost identical. However, the CQ of the Netherlands is much higher (1.4 compared to 0.6) as the GDP of the Netherlands is smaller – or in other words, the chemical industry is relatively more important in the Netherlands than it is in Italy.
And indeed, when comparing the attractiveness of these two locations, many of the points made regarding the advantage of a higher CQ will apply to the Netherlands but not to Italy. As a consequence, the Netherlands as an investment location benefits both from lower costs (e.g., logistics) and qualitative advantages (e.g., higher proximity of other chemical companies as cooperation partners, suppliers, customers or source for employees). So the concept of the CQ suggests that an investment in the Netherlands may be superior to one in Italy (assuming other factors are equal).
Similarly, Singapore and Canada have similar-sized chemical markets (SGP 27.7 billion USD, CAN 26.6 billion USD) but hugely different CQs (SGP: 2.2; CAN: 0.3). Which of these two locations is likely to be more experienced in dealing with chemical investments? Which one will likely offer better synergies with existing businesses already established at the location? Which one is more likely to offer opportunities for exports?
However, given the size of Canada (the same holds true for other large countries) and the regional concentration of industrial activities in certain clusters, in addition to considering a country’s CQ, an investor may take a more detailed look at a particular region or province. For instance, Ontario is Canada’s province with the highest concentration of chemical industry – almost the entire sector is located in the southern part of the province – and Ontario’s chemical sector is the 5th largest by employment and the 9th largest by shipments in North America.
Mature and Emerging Markets
A high-level analysis of the CQ by country confirms the status of the chemical industry as a fairly mature industry that is part of the overall manufacturing segment. With some exceptions, the CQ therefore is comparatively high for those countries which serve as global production centers (mostly China and its satellite economies). In contrast, the shift to the service sector in countries such as the US and particularly the UK leads to these countries having low CQs.
For Europe, the analysis also shows the comparatively high importance of the chemical industry for Germany – it is the only larger highly developed country with a CQ near 1. In addition, the CQs identify some smaller countries (Belgium, the Netherlands) as locations in which the chemical industry plays a larger than average role.
In addition, the CQ analysis shows the importance not only of China for chemicals, but also of chemicals for China. This latter importance even includes some economies (particularly Korea, Taiwan) which strongly depend on their proximity and economic exchange with mainland China. Given this high importance, it is likely that the requirements of the chemical industry in China as a whole will not easily be ignored by the government.
The newly defined Chemical Quotient (CQ) can be a valuable tool in comparing potential locations for chemical investments, as the relative importance of chemicals in a country´s economy surely provides some information on its attractiveness for chemical companies.
Managm. Consult. Chemicals
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