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The Path to Profitability for Chemical Firms

09.11.2021 - While the chemical sector is certainly a global industry, today’s firms don’t compete on a level playing field.

According to McKinsey, China alone already makes up more than 30% of chemical demand and supply, and the 40% mark appears to be in reach. Meanwhile, projections suggest that volume growth for chemicals outside of China will continue to trend downwards for the foreseeable future.

Succeed in the Face of Adversity

It’s a challenging time to be running a business in the chemical industry. The deglobalization of the sector has created a great deal of tension, and this has only amplified following the supply chain issues that arose from the Covid-19 pandemic. KPMG executives have reported examples of institutional investors and significant lenders asking companies if they can ringfence Chinese operations and re-base supply chains for US and European operations closer to their core markets. They warn that those who run an Asian or a global supply chain model, rather than “China-for-China” may be significantly affected.

This creates a challenging environment for those companies operating outside of the ever-maturing Chinese market. For European businesses, these challenges are compounded by the strengthening euro as well as Brexit.

“The strengthening euro makes exports from producers inside the euro area less competitive,” said Moody’s Global Chemical Industry 2021 Outlook. “The stronger euro also results in lower earnings when sales in local currencies are translated back into euros despite the benefit of lower costs for imported goods.”

Meanwhile, the UK's Chemical Industries Association and the European Chemical Industry Council trade associations estimate that the immediate cost from regulation following Brexit will be £1.0 billion.

What’s more, according to Kearney, over 30% of jobs in the European chemical industry will be lost by 2030 as a result of slow growth and productivity gains.

Is Your Organization Equipped for Change?

A 2021 survey by EY revealed that chemical businesses in Asia-Pacific feel they are making more progress on their digital journey, and are getting progressively more convinced of digital’s value. In fact, Asia-Pacific executives rate the impact of digitalization on corporate strategy, portfolio, business models, and value creation higher than those in Europe and North America.

This requires the ability to make good, informed decisions. Not only about what products should be approved or prioritized at any given time, but about how to allocate budget resources to different projects and how to localize products in a way that is most effective.

According to Gartner, 85% of growth stalls stem from factors that are avoidable – including a breakdown in innovation management that means investments in new products, services, and business development aren’t achieving desired returns.

The extent of the problem was raised at a recent ARC Industry Forum presentation, where Mike Williams, ARC associate, said that although industry research indicates more than 75% of the process industry participates in Industry 4.0 technology evaluation or pilot projects, less than 25% of the industry has moved beyond the pilot phase.

It’s time to adopt a new approach. What could that look like for your company?

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