The rapid economic development of the BRICs resulted in a rising demand for chemical products and the associated expansion of local domestic production capacities. Within a very short time, numerous new chemical companies developed in these emerging markets, which not only met their domestic demand, but also secured decisive world market shares thanks to increasing globalization and digitalization. Customers of chemical products benefit from this intense competition, for example, lower prices and broader product ranges. However, chemical producers from industrialized countries face fierce competition, which only a few can counter. Therefore, industry experts advise these companies to seek a change of direction.
For a long time, chemical producers in industrialized countries benefited from emerging markets by supplying them with the raw materials and basic chemicals they needed to build their infrastructure. Over time, however, it turned out that these producers were not prepared for the enormous growth in demand. Companies in the emerging markets were forced to create their own production facilities in order to satisfy the insatiable demand for raw materials and basic chemicals. Many emerging countries have large reserves of raw materials that proved particularly helpful in this respect. It did not take long for chemical companies in these countries to develop into serious competitors for the renowned chemical companies.
Since the beginning of the new millennium, BRIC countries have experienced an unprecedented boom – notably China. Within a very short time, the Chinese economy secured large shares of the global market. Experts agree that this positive development is not completely over. By 2030, they forecast that 47 percent of global chemical production will be allocated to China, while the USA, Germany and other industrialized countries will lose prospective shares.
Numerous industry experts indicate that a multitude of companies based in emerging markets produce basic chemicals, so-called commodities, on a large scale. The high raw material deposits and the legal framework conditions enable manufacturers in emerging markets to produce and distribute chemicals at the lowest possible cost. In direct competition with companies in emerging markets, only those suppliers from industrialized countries that have already been able to gain major advantages such as economies of scale or know-how could prove themselves in the long term. In order to avoid stiff competition, experts advise smaller and medium-sized manufacturers to rethink their corporate strategy and to focus on the value of their products through value-enhancing features or additional services. Compared to basic chemicals, chemicals that have a high degree of differentiation and are produced in smaller units are called specialty chemicals. They distinguish themselves from basic chemicals by different product variants and unique product features. Due to the high degree of differentiation among each specialty chemical, there are usually only a few direct competitors. This allows companies to calculate high profit margins, but their customers are willing to pay for the unique features and services.
Companies from industrialized countries, which have closely followed the economic developments of recent decades, specialized their products by shifting their focus away from large-scale production and towards added value for customers. They changed their production processes to meet the different requirements made by the customers and ensured that their products could not be substituted by existing products on the market. In order to create new products, in-house departments were set up to expand research and development activities.
And even though they were quite successful in the past and specialty chemicals are still very profitable, companies are facing new challenges in the specialty chemicals business. Industry analysts are criticizing the ever-increasing disparity between the specialty chemical manufacturers. While some manufacturers are continuously conducting new product research as a result of increased research and development expenditure, the average R&D investment in the industry is declining. Many of the products sold as specialty chemicals are already commoditized due to the lack of research activities. They are also offered by the same companies that sell basic chemicals on a large scale. It is important to differentiate products through continuous research and development.
Recently, manufacturers of specialty chemicals, who used to receive praise from their customers for stable pricing policies, are also having great difficulty imparting the rising and volatile raw material costs onto their customers. These companies will have to consider a long-term and adequate pricing policy in the future so they would not lose the trust of their customers. In order to stand out from commodity chemicals, it is also necessary to clearly explain the value-enhancing features and services, alongside deep market knowledge. Especially at a time when manufacturers of specialty chemicals are unwittingly marketing their commoditized products as specialty chemicals, it is crucial for innovative specialty chemical companies to advertise their product advantages to customers in an understandable way.
The price problems caused by a volatile environment and commoditization in the chemical industry are major challenges that chemical producers must face. In another blog post, we explain how chemical distributors bypass the commodity trap.