Chemical Distributors: Fit For The Future?
Key Drivers of Industry Dynamics and Their Influence on Specialty Chemicals Distribution
Beyond This Year's Growth - Major chemical markets are heading for further improvement this year, according to the latest global business update from the German chemical industry association (Verband der Chemischen Industrie, VCI). So despite some headwinds from the Ukraine crisis and the "macro risk" from an unexpected shock in China, it may be a good time to look at what this means for chemical distributors in Europe.
Short term, the flow of good news seems to continue and the bull markets seem to prevail, but what about the longer-term outlook, say in the next four to six years, into 2020 and beyond?
"Re-shaled" Supply Patterns
The shale gas boom and the resulting revival of the chemical industry in the US will have a profound influence on the chemical industry and product supply patterns globally.
Europe will not be exempt from these developments. Driven by a declining cost-competitiveness, products that have so far been produced in and exported from Europe may experience a reversal of product streams and supply chains. Plants that are no longer commercially viable may be shut down, and the respective products may be imported instead.
While the focus will be mostly on large volume petrochemicals, specialty chemicals will see some effects as well. This might benefit distributors, which have the infrastructure and the knowledge to manage sales processes and supply chains on behalf of smaller exporters from the US and to channel these imports into Europe.
Will We Have the Energy to Continue?
Closely related to the product supply pattern is the question of affordable energy at reasonable cost. Particularly in Germany, changes to the legislative framework might result in even higher energy prices that make the chemical industry increasingly uncompetitive. But other industries are under pressure as well. Europe is running a significant risk of losing out when it comes to major reinvestments. The long-term viability of complex value chains, going beyond the chemical industry as such, may be endangered.
If no corrective action is taken, industrial activity in Europe may decline in many sectors served by specialty chemical distributors, among others.
This could limit the distributors' business base and threaten their long-term commercial viability. So distributors are well advised to make themselves heard at the local, regional and national level in order to educate politicians and governments on the importance of having a sound industrial base in Europe.
Cash Is King
Financing has always been a key aspect of any long-term company strategy. Basel III and other regulatory initiatives that followed the 2008-09 financial crisis put increasing pressure on banks, when it came to their equity and underlying capital. That in turn has made the banks look at their credit books more carefully. Many small and medium-sized companies have found it more difficult than before to obtain debt financing for growth initiatives and investments.
Distributors are not exempt from this trend. Alternative sources of financing have been tapped by some companies to fill the gap. But of course, since distribution can be highly cash-generative, many companies are to a large extent still "self-financing," even when they make sizeable acquisitions or grow otherwise in large increments.
The Next Round of REACH
After a big sigh of relief, when the last round of registrations under REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) was completed by June 2013, many companies are now looking at their lower-volume products. The next deadline in June 2018 may seem to be still quite some time in the future. But in practice it may show some effects before the deadline.
A number of mainly non-European producers, which have only limited exports to Europe, may start to prune their products before the 2018 deadline. Or if they decide to continue production, they may seek to market their products at home or in other geographies, free of the restrictions imposed by REACH. A registration is out of the question to them, as its cost may be prohibitively high for a product with less than 100 t/a volume and only low to moderate margins.
As the low-volume business quite often goes through distributors in Europe, these companies will see their business shrinking. If the producer cannot afford the registration, it's unlikely that the distributor can. Customers will also feel negative effects, as they will be limited in their technical and commercial options, when products are taken from the market. This effect will be felt more strongly by smaller distribution companies, which tend to be associated with smaller producers, imported from abroad. But in the end nobody is able to escape this development.
Structure Must Follow Strategy
After all, size matters, in the sense of critical mass. But it's not only the size of a chemical distributor that must be big enough to help carry the increased fixed-cost burden that results from regulatory complexity and the need to amortize investments in infrastructure, such as application laboratories and technical expertise.
A number of medium-sized distributors have the profitability and the financial strength to support the investments required. The question for some of them is "Do we have the right structure to support growth?" In the last 10 to 15 years, a number of companies have grown from a strong home base - in German the "Stammhaus" - adding representation offices and subsidiaries, mostly in neighboring countries but sometimes also in more distant countries.
Small teams around the owner or CEO at the head office developed strategies, and the local subsidiaries were then simply told how to implement them. That worked reasonably well, as long as the subsidiaries were small and the newly developing economies, for example in Central and Eastern Europe (CEE), were relatively immature and such a "generic" approach did the job.
Increasingly, however, some of those economies have become very important in terms of certain user industries, and more sophisticated business clusters - with the need to offer differentiated products and services - have developed. That brings with it a level of complexity and requires a degree of sophistication that can less and less be understood and provided from a faraway - geographically and often also mentally - ivory-tower-like head office.
The winners in this game will be the companies that develop a sort of "distributed intelligence" by locating key personnel closer to customers (and sometimes also suppliers), while at the same time maintaining the "unité de doctrine" needed to run a larger group of companies successfully.
It's a People Business, After All
The increasing complexity of both the supplier and customer markets and the continued volatility of the business also require distributors to upgrade and develop their management capabilities. Cohesion should be fostered by a set of clearly communicated and understandable values that form a sort of guardrail for the work done by the sales force in the field.
Support and back-office structures must be kept as simple and resilient as possible, IT systems designed as closely as possible to the standard templates of the program developers, to make maintenance easy and less prone to disruptions during the upgrades that will inevitably be required in the future. Uniformity of processes must be a key consideration here, to leverage supply-chain capabilities across the organization and to facilitate companywide analysis and just-in-time reporting.
This is not an argument for a one-size-fits-all approach, but rather a plea to seek differentiation in areas where it adds value to the customers, the suppliers and the distribution company. This is mainly at the customer (or supplier) interface and through the service provided around the product, whether it's technical advice or specific laboratory and/or logistics tasks that the distributor performs.
Strategies must be developed iteratively in a combined "bottom-up/top-down" approach. Details of the implementation should be delegated to local staff, based on their understanding of specific customer needs but guided by well-communicated corporate policies.
All this requires polyvalent employees that can translate customer needs on one hand and parent company guidelines and objectives on the other into coherent business strategies and workable action plans. Education and training concepts for new hires as well as attractive career paths for more experienced employees, typically in their 30s and 40s, will become the key to attracting the right staff. Well-structured management development programs must be used to disseminate company philosophy and identify suitable talent at the same time. Remuneration packages must be competitive to attract qualified staff.
Do Your Homework!
The future for specialty chemicals distributors is not without challenges. To address these appropriately requires a dual effort. Firstly, optimizing the set-up within the individual company as well as a coherent approach to strategy development and implementation. Secondly, close cooperation with suppliers, downstream users of chemicals and other stakeholders, in order to address the issues that the chemical (distribution) industry as a whole is facing in view of macroeconomic trends and political plans and initiatives. Distribution companies that do their homework and continuously hone their skills will prevail.