Materials (chemicals, metals and building materials) companies and their industrial customers have been building cash reserves and throttling major plant expansion and acquisitions since the recession of 2008-09. Their thrift mindset results from uncertainty about the economic future and a (less discussed) hesitancy about which regions to investment. The dust is settling.
About $7.6 trillion dollars will be invested in industrial projects in the next five years throughout the world. But a convergence of forces is changing how this is allocated versus the pattern of the past decade. The most prominent of these include exchange rates, labor costs, innovation ecosystems, materials and energy costs, logistics/customer proximity and rule of law.
In the late 1990s and the following decade, China provided the ideal location for labor-intensive manufacturing companies from the United States, Europe and Japan. However, after making huge investments, foreign investors, while continuing to invest in China, have begun to shift funds to other locations. In 2003, new foreign direct investment (FDI) in China totaled $108 billion1 but has since dropped, reaching only $66 billion in 2011.2 At the same time, FDI increased from $47 billion to $62 billion in North America and from $22 billion to $52 billion in India.
North America and Western Europe still represent the world’s greatest consuming regions and with advances in robotics and productivity against China’s increases in labor costs and currency appreciation, downstream industrial manufacturers (the customer markets of the materials) are more frequently choosing to invest in developed regions.
North America has a unique distinction in this regard. As a share of world investment, industrial manufacturing is expected to grow in North America from 26% in 2012 to 28% in 2016, taking share from the rest of the world outside of Asia. A geography’s innovation ecosystem and intellectual property protection environment are particularly important factors for selecting the US or Western Europe, especially in applications with new technology. For instance, Samsung recently started up a $3.6 billion facility in Austin, Texas that supplies processors for Apple’s iPhone and iPad3. Part of the reason for the expansion was proximity to the top-notch engineering program at the University of Texas.
Robotics and automation have been reducing the labor intensity of fabricated and assembled products, as well as of pharmaceutical and rubber/plastics products production manufacturing. Prices of robots are believed to have fallen relative to their capabilities and advancements in sensor technology, software and processing power, which have enabled robots to do multiple tasks at higher speeds, lower cost, less waste and better quality. This is reducing the case significantly for building in low labor cost regions. According to 2010 data, the US creates far more value added output (value over purchased materials and services) per person than China. China created less value added output than the US with 20 times more employees!4
But there is still opportunity for improvement. While the US’s use of robots is high compared to developing regions, it is not the leader. Japan, Germany and Italy lead in robot use per unit of output. Accenture estimates that if the US were to increase robot use to the levels of those countries, the US could lower its cost of goods sold, on an aggregate level, by more than $100 billion dollars per year! Robot use is growing rapidly now in China, and although it has a long way to go, competitive dynamics will continue to change. Also, China will still be preferred for the large volume production commodity applications with a significant labor component.
New advantage is developing on the supply-side as well. The largest competitive change in world energy affecting manufacturing investment involves natural gas in North America. By using unconventional technology to tap previously unattractive deposits of natural gas (such as shale gas), the supply has become more abundant, pushing down prices, away from the link to oil prices.
Several significantly large-volume chemicals can be manufactured from natural gas components, including ethylene (by far the dominant petrochemical), methanol and ammonia; many expansions are under study. The energy, steel and minerals industries are also significant energy users and have benefitted from lower cost gas supplies. In a symbiotic relationship, as these sectors expand, they represent growth markets for chemicals, such as in oilfield, metals finishing, industrial gases and mining chemicals, as well as metals, such as is in drill pipe and pipelines.
One downside of the NA shale gas boom is the lack of co-products associated with liquids ethylene manufacture due to the shift to gas raw material. Vital parts of the industry are affected, including butadiene, primarily used in rubber and plastics, and specialty chemicals industries such as adhesives and coatings. The industry can be assured of growth in domestic industrial markets for those products, and companies should look for alternative ways to increase domestic supply.
Global chemical leaders will need a clear vision of the future market potential at home and abroad. Actions to tap the opportunity will include:
- Concentrating on large, competitive domestic customers
- Reducing costs and improving supply chains
- Investing in automation
- Optimizing plant construction
- Getting involved early on in customers’ innovation, development and commercialization
- Fostering innovation for the long term
Figure sources include Accenture Research analysis of: “World Robotics 2011,” The International
Federation of Robotics; Oxford Economics; EIA Short-Term Energy Outlook (March 6, 2012 release)
3 Exclusive: Made in Texas: Apple's A5 iPhone chip, Reuters, Dec 16, 2011
4 Based on reported manufacturing employment and value –added output; Oxford Economics, China National Bureau of Statistics, US Bureau of Labor Statistics.