Strategy Development in the Chemical Industry in China

20.01.2011 -

Strategy Development in the Chemical Industry in China - From a Western perspective, business strategies should be based on two perspectives: an external and an internal one. Differences - From a Western perspective, business strategies should be based on two perspectives: an external and an internal one. The external perspective covers all aspects of the outside world, while the internal perspective focuses on the specifics of the company developing the strategy. While managers of Chinese chemical companies will very likely agree with this general view, there are substantial differences between multinational companies and Chinese chemical companies in the way this view is turned into reality.

External Perspective: Understanding The Market

Analyzing the market environment is arguably one of the most challenging parts of strategy development for the chemical industry in China. The reasons are manifold:
• Market demands, competitors and customers change much more rapidly in China than in developed markets
• The type of market participants in China is broader than in the West, including multinationals, private domestic companies and state-run entities (SOEs)
• Government policy has a stronger influence than in Western markets. For example, some MNCs have recently considered setting up production in China's western provinces in order to align themselves with government policy of promoting these areas
• Reliable data is still hard to come by in China. Any data available - whether customs statistics or data coming from industry organizations - has to be checked for its consistency and reliability
• There are many unofficial but sometimes extremely useful data sources that may or may not be available, e.g., customer lists of individual chemical companies
• Due to the lack of official data, other sources such as phone interviews, face-to-face interviews, fair visits etc. are more relevant than when examining Western markets

With regard to market analysis, local chemical companies tend to be better placed than MNCs as they often have better access to e.g., local industry organizations, customers etc., and a better inherent understanding of the difficulties of getting reliable information in China. On the other hand, their data collection process frequently lacks the rigidity that Western companies apply, and thus sometimes fails to uncover gaps between a company's perception of the market and market realities. Correspondingly, Western companies do better concerning the formalization of the analytical process but have a harder time getting difficult-to-access information or evaluating unreliable information.

Internal Perspective: Company-Specific Aspects
Keeping in mind that strategic choices are best derived from a fit between internal capabilities and external opportunities, an analysis of internal strengths and weaknesses is vital to gain competitive advantage. However, in this respect domestic Chinese chemical companies and MNCs operating in China show fundamental differences.
MNCs do indeed include this analysis into their strategy development. For example, LyondellBasell established polypropylene compounding sites in China not only because of the market opportunities, but also because the company has knowledge in making these compounds that is superior to that of domestic companies.
In contrast, Chinese chemical companies spend very little time on the evaluation of their internal capabilities. Among them, there seems to be a strong feeling that if the market environment is right, a business opportunity should be grasped regardless of whether their own company has any specific competitive advantage in this area.

There are several possible reasons for this focus of Chinese companies on external factors rather than internal ones.
• Many companies, particularly SOEs, have a very broad business scope, which encourages a similarly broad-based search for opportunities. For example, Sinochem is not only active in chemicals but also in real estate, logistics, fertilizers, energy and finance. In contrast, a Western specialty chemicals producer such as Altana has only a limited number of focus segments.
• In addition, particularly for private domestic companies, there is limited company history that could serve as a guideline for future strategy.
• However, the key element probably is that Chinese chemical companies rely less on immaterial (and thus hard to gain) internal capital such as intellectual property, strong R&D or the technical knowledge of their employees than MNCs.

There is an obvious consequence to the limited importance Chinese chemical companies place on internal capabilities. The analysis of chemical markets should give comparable results independent of which company conducts the analysis. Therefore if this is the sole factor determining company strategy, Chinese chemical companies should all pursue similar strategies. Indeed, this "strategic crowding" can frequently be observed in the Chinese chemical industry. Often there is a rush towards seemingly appealing areas (past examples include PE, PP, coal chemistry and vanillin) by many companies and the subsequent creation of substantial overcapacity.

Let us now take a look at the outcome of the analysis and the subsequent development and selection of strategic options. What are typical China strategies of chemical MNCs, what is typical about the strategy of Chinese chemical companies?

China Strategies Of MNCs: Striving For Localization
In their published strategies for China, a number of chemical MNCs emphasize localization:
• BASF claims that "local innovation and local production are driving business growth in this region". As a consequence, BASF is to increase local production to a target of 70%
• Bayer aims to "grow in step with China's economic and social development"
• DSM focuses on internationalization of its asset base and workforce to create a better balance between sales by origin and sales by destination. China is specifically mentioned for its rapid sales growth
• DuPont counts growth in emerging markets among its four main strategic trends
• Dow China's president states that "our development in China is in the third stage, which is to build full local capabilities and capacities"

On the level of business strategies, this is reflected in multitude of activities along the value chain, including the establishment of local production, increased local hiring, moving into direct distribution or establishing local R&D activities.

Strategies Of Chinese Chemical Companies: Avoiding Limitations
In contrast, published strategies of Chinese companies tend to be less specific than those of MNCs. This is a consequence of the unwillingness of these companies to limit themselves in grasping market opportunities, though it is related to the lower perception of a company having specific core competencies. For example, Sinochem's strategy, also known as "One-Two-Three-Four-Five Strategym" is extremely non-restricting with its five components
• "One ability" - Sustainability
• "Two fundamentals" - Internal management/external expansion
• "Three joints" - Resources,technology and market
• "Four measures" -Innovation,integration,M&A and collaboration
• "Five key areas" - Energy, agriculture, chemicals, finance and real estate

Consequently, the business activities of Chinese chemical companies are much harder to put into a strategic framework. Instead, decisions are driven much more by opportunities in the market (e.g., a high price for a specific chemical leading to many Chinese companies extending production capacity) or governmental influence (e.g., the rush into coal chemistry by Chinese companies). This is despite the claim of most Chinese chemicals to indeed have a strategy - a claim that is more likely to arise from the demands of the shareholders than from the desire to provide a guideline for the company. In reality, the vast majority of Chinese chemical companies do not seem to have a stable strategy.


MNCs and domestic chemical companies differ in their approach to strategy development. While MNCs tend to have somewhat consistent business strategies based both on internal capabilities and the external situation, local companies focus much more on market opportunities and overall are less limited by strategic decisions. While this may partly be the result of cultural differences, it can also be explained at least partly by the specifics of Chinese companies such as the combination of good market knowledge and less clear-cut core competencies.



Up Next: Read about the specifics MNCs in China in our April issue.



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