New Chemical Era in China What is happening and how to remain competitive

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September 2015

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Executive summary

“The New Chemical Era in China”

Key success factors of the New Chemical Era in China

The shift of China’s chemical market

Emerging opportunities in the New Chemical Era in China

About Us

Content

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Many top chemical companies often debate about

China, the largest chemical market in the world,

and whether they should focus their effort in the

country or move their appetite elsewhere given

the production over capacity, slow growth of local

demand, and high competition intensity.

Executive Summary

Question marks often surface on how to grow

or maintain market position, as many emerging

contenders are moving up the value chain through

gradual product upgrade, continuous innovation,

and business expansion.

The answers to these questions lie in the ability

of different chemical companies to create their

market identities, which will collaterally become

the new face of the chemical industry in China, or

as we call it, “The New Chemical in China”.

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The shift of China’s chemical marketChina’s chemical market will continue to grow and is moving away from low value commodity products

Fueled by the double-digit economic growth in previous years and significant investment in

capacity, China has become the largest base of consumers and suppliers for chemical products

worldwide.

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Source: Solidiance Analysis

China2003 : USD 128 bn

2013 : USD 1,361 bn

2020 : USD 2,064 bn

Total chemical sales2003 : USD 1,459 bn

2013 : USD 4,103 bn

2020 : USD 5,160 bn

Rest of the world2003 : USD 311 bn

2013 : USD 1,040 bn

2020 : USD 1,266 bn

Europe2003 : USD 505 bn

2013 : USD 819 bn

2020 : USD 832 bn

Japan2003 : USD 137 bn

2013 : USD 197 bn

2020 : USD 200 bn

NAFTA2003 : USD 378 bn

2013 : USD 686 bn

2020 : USD 799 bn

However, as China’s economic growth is slowing down, with 2014 being recorded as the lowest GDP growth in recent

years, the chemical industry has moved away from a double-digit growth rate. Regardless, China’s chemical market is

expected to remains firm, with an 8% growth rate, contributing almost half of the world’s chemical market by 2020.

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NAFTA2003 : USD 378 bn

2013 : USD 686 bn

2020 : USD 799 bn

Source: European Chemical Industry Council; American Chemistry Council, Solidiance analysis.

Rest of the world11%

Europe3%

NAFTA4%Japan2%

China25%

CAGR (2003- 2013)

Rest of the world5%

Europe2%

NAFTA4%Japan2%

China8%

CAGR (2014- 2020)

While market growth is

expected to be firm, a lot of

uncertainties have risen and

thoughts are flying around

on how to deal with the

market’s developments.

• Concerns on the potential deceleration

of business growth have driven many

chemical companies to enlarge their

scope into their customers’ field

• The increasing local competitiveness

has forced leading players, which are

mainly MNCs, to find various ways to

differentiate themselves

The continuous transformation of both

leading players and emerging contenders is

building the new blocks that are expected

to result in a new version of China’s chemical

market, where downstream products are

required to be shorter in life cycle and more

advanced in features; while companies in

the different parts of value chain are moving

towards a solution-oriented business.

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is a phenomenon resulting from the different transformations by various chemical players to gain competitiveness in the country’s changing environment

“As a leading Chinese compounder, we will continue to focus on product development to meet emerging market demand. For example, our project ‘Replace steel with plastic’ is helping us to grow our customer base in the industrial sectors. In addition, one of the degradable products, used in the agricultural sector is also our current focus, which is well in accordance with government policy and indicates future potential.”

Sales Director of Engineering Plastic Department, at a top Chinese compounding company

“The New Chemical Era in China”

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• Shorter life cycle of downstream products is driving the continuous need for innovation and differentiation

New product development is more commonly found in the

downstream area, where product transitions are highly reliant

on the end-users’ movement towards product requirements.

Requirements from end-users towards materials are

getting more complex, ranging from design and features,

to performance and cost. Hence, suppliers of downstream

chemical products are required to continuously update their

product features and specification. This will help them to keep

up with the transition requirements while leveling up the

competition, and many that were not able to keep up have

exited the market.

Many chemical product transitions have taken different

forms, such as: size and weight, properties and performance

(e.g.: tensile strength, heat resistance, as well as value-

added features, such as environmental friendliness or easy

processing specification. Different transitions that support the

alignment towards the increasing pressure from the Chinese

government to reduce emissions and save energy, have

proven to have accelerated the deal-closing process.

• Different customers’ needs have forced suppliers to widen their product portfolio to enable customization for specific clients

The increasing competition among customers in different

stages of value chain has driven more customers to require

different features and properties for their specific product.

Hence, suppliers are demanded to have products that can

entertain these different requirements, which led to hundreds

or thousands of stock keeping units (SKUs) in their overall

product portfolio.

Many suppliers have been actively developing their product

customization through different formulation recipes,

processing techniques, and product delivery forms, among

others. For example, DuPont offers a portfolio of 20+

brands and 100+ product series of chemical products for

the automotive industry covering chassis, auto electric &

electronic, body and other components.

• The movement towards solution-oriented products is driven by the need to maintain and expand customers’ portfolios

With the increasing requirements towards customization,

proximity to customers is currently considered to be of high

value in maintaining the business relationship. Through

this proximity to customers, suppliers are expected to offer

continuous technical support during different stages of

production, including pre-design, design, trial production,

mass production, and after-sales, covering not only the

customers but also end-users. Technical support generally

includes material design and selection, application and

processing know-how, and QCQA, among others.

This close engagement with customers has often resulted in

many of the suppliers establishing a dedicated team placed

within, or close to, the customers’ premises; resulting in higher

operating costs that can only be compensated through longer

contractual agreements between supplier and customer.

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• To enhance business performance and profitability, chemical players are moving towards adjacent sectors, competing with their own suppliers and customers

The continuous shift in the industry has increased pressure among chemical players in different parts

of the value chain. These players have been moving outside of their initial business coverage and secure

market position by competing in their upstream and/or downstream sectors through product expansion

or acquisition. This shift has allowed companies to have a more secure position, from raw material supply

to customer sustainability and everywhere in between. It has also resulted in a more profitable operation

through an end-to-end segment revenue generation model, an enhanced ability to promptly respond to the

market’s demand, and a much more streamlined sales process to reduce operational costs.

“We employ ~200 sales and technical sales professionals to support us with our 100+ direct customers as they are required to be involved in

almost daily engagement with different departments for design, production, end-user communication,

etc.”

Vice GM of a top adhesive supplier

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Due to emission reduction goal, increase of urbanization, and the government promoting seven strategic industries

in the ‘12th Five Year Plan”, various industry sectors are believed to gain different levels of benefits from the

development of the chemical industry in China.

The New Chemical era in China is expected to gradually open up new fields of application in downstream segments and influence the development of different industry sectors

Emerging opportunities in the New Chemical Era in China

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• Automotive

As the world’s largest automotive market, China

will be standing in the front line of innovation

with a push from the government in many

different areas. New chemical developments

in the sector will revolve around advanced

materials, with focus on lightweight, safety,

comfort, and environmental friendliness.

• Energy

The energy sector in China is transitioning:

renewable energy is gaining a favorable push

from the government, while traditional energy

sectors are required to gradually move towards

reducing environmental impact. Applications,

such as solar panels, wind energy, water

treatment, and gas purification, are demanding

more materials with advanced features to

support performance, stability and durability,

while reducing emission rates.

“Air pollution has become a serious problem in China and the government has issued new standards on national air pollution thermal power plants that went into effect since 2012. In order to achieve the target, gas purification technology is becoming increasingly significant. It will boost the consumption of high performance fibers, from large thermal power plants to every small

power plant in China.”

Technology Division, East China Electric Power Design Institute

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• Construction

The major urbanization plan in China is

expected to drive the development of

residential and commercial segments, as

well as public facilities and infrastructure

projects. The development of chemical

products in the downstream segment

could largely support the establishment of

construction projects in terms of safety,

energy saving, and cost control.

• Electrical & Electronic (E&E)

The fast technology transition of E&E, with

higher pressure on environmental concern,

has driven many customers in the sector to

increasingly demanded materials that can

support an improvement in performance

while meeting the Restriction of Hazardous

Substances (ROHS) standardization on non-

hazardous content.

“Lightweight is the top priority in our R&D agenda. For instance, we are looking for high performance engineering plastic to reduce car weight while ensuring safety at the same time. It is estimated to achieve a 20% weight reduction of the car’s weight in next 10 years. At the current stage, only international companies own the advanced technology and

provide high-quality products.”

Research & Development, at FAW

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As the chemical market in China is moving

away from commodity products, specialty

chemical segments (especially fine chemical

products) are expected to be the future

market growth. This is an area in which

the MNCs’ domination is facing growing

challenges from emerging local players.

While MNCs are still leading in the product

innovation and development, the regulatory

environment in China has supported many

emerging local companies in catching

up, in terms of technology and technical

capabilities, allowing them to improve

the quality and competitiveness of their

products. To avoid the narrowing gaps, it

is recommended for MNCs to transform

their R&D model by moving away from

‘localization’ to ‘new product development’

while establishing local production of

fine chemicals, which are currently still

dependent on imports. This move could

help MNCs in supporting customers

to promptly react to market needs and

maintaining the high margins while offering

more competitive pricing.

With the government’s aim to increase

self-sufficiency in chemical materials, major

Chinese chemical companies have enjoyed

regulatory and subsidy support, allowing

them to move away from commodity

products. As these local companies are

able to step up the value chain in terms of

technicality and product quality, they need

to change the consumers’ perception that

they are low value product suppliers. In

order to change the perception, emerging

Chinese companies will need to establish

superior commercial values, which could

be achieved through R&D upgrade by

acquisition or cooperation with leading

international research institution. At

the same time, they must leverage the

advantage of being agile and flexible in

terms of business and decision making

process, to tap into or expand business

with China-based international customers

targeting a global market play through

export products.

Success in the New Chemical era in China lies in the ability of companies to transform themselves in order to adapt to the industry changes

“As a leading global chemical products manufacturer, we will put more emphasis on R&D in future to address the Chinese market. Not only bringing more intellectual property into China for localization, but also focusing on domestic R&D for new products and new

applications.”

Sales director, Top Chemical MNCs in China

Key success factors of the New Chemical Era in China

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World’s largest base of chemical product consumers

and suppliers.

to contributealmost

50%China’s chemical

market to continue growing at

8% rate

of world’s chemical market by

2020.

requires different transformations by various chemical players to gain

competitiveness

USD 128

billion in 2003

Increased to USD 1,361

billionin 2013

Expected to reach

USD 2,064 billion

in 2020

China’s chemical sales:

Concerns emerge in :

Potential deceleration of business growth

Increasing competitiveness, enforcing MNCs to differentiate

To grow / maintain

market position :

“New Chemical in China” Characteristics :

Shorter life cycle of downstream productsMore product innovation, differentiation, and advanced featuresWidened product portfolio, customization for clients’ needsCompanies moving towards solution-oriented businessChemical players moving towards adjacent sectors

Key success factors :

Benefits in different sectors :

Automotive : innovation in advanced materials (focused on lightweight, safety, comfort, and eco-friendliness)Energy : improvement in solar panels, wind energy, water treatment, gas purificationConstruction : chemical development to offer more safety, energy-saving, and better cost control.Electrical & electronic (E&E) : better product performance that meets standards on non-hazardous content

MNCs : Transform R&D model from ‘localization’ to ‘new product development’ Establish local productions of fine chemicals

Chinese players :

Establish superior commercial values

R&D upgrade through acquisition/cooperation with leading international research institution

Leverage agility & flexibility in business & decision making process

Tap into China-based international customers

CHINA

Source: Solidiance

"New Chemical Era in China"

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AboutUs

What We DoSoldiance is a corporate strategy consulting

firm with focus on Asia Pacific. We advise

CEOs on make-or-break deals, define new

business models and accelerate Asia growth.

Through our 10 offices across Asia, we provide

our clients with a better understanding of

intrinsic regional issues. To learn more about

how Solidiance has helped many Fortune 500

& Asian Conglomerates to succeed in Asia,

please visit:

http://www.solidiance.com/clients.

What We Are Focusing OnOur industry experience is centered on

healthcare, industrial applications, chemicals,

downstream oil, lubricants and the

automotive industry. Our Asian market entry

and growth strategy services provide the

required insights and the necessary roadmap

to capture a profitable market share in the

region.

Additional DetailsSolidiance has offices in China, India,

Indonesia, Malaysia, Myanmar, Philippines,

Singapore, Thailand, UAE and Vietnam. We

are fast expanding and always on the lookout

for exceptional people.

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Our Offices

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