With all the dire news on Europe’s economic prospects and the region’s lack of competitive energy resources, some European chemicals producers are lamenting their fate, while others are actively searching for and harnessing value opportunities.
Where are the bright spots in the European chemicals end use markets?
Virtually all manufacturing and construction industries use chemicals. While construction, furniture manufacturing, building materials, textiles and other heavy industry sectors have been ailing in Europe over the past few years, the domestic outputs of some industry sectors have been growing at a comparatively exceptional rate. These industries typically have a strong value-added component and are the most demanding of their chemical suppliers in terms of innovative products and services. These industries include, for example, aerospace, pharmaceuticals, soaps and agrochemicals, which all had domestic output growth of over 3% per year since 2008. That’s compared to an overall Eurozone GDP that declined 0.2% in that timeframe!
There is also a country-level aspect to this, with production in some industrial sectors performing well only in certain regions, typically driven by strong local growth in per capita consumption and/or exports, but also due to production advantages (such as low cost talent, favorable business climate, etc.) in those industrial sectors. The countries with the highest growth include those with emerging market characteristics, such as Poland, the Slovak Republic and Turkey. Figure 1 shows the highest domestic production growth industries and countries in Europe over the past six years – among the best targets for industrial chemical sales. Not shown in the figure are countries experiencing negative growth during that period. These are mostly in Southern Europe, but also include The Netherlands and Denmark.
European chemical companies are best positioned to serve these markets since over the past few years Europe had experienced a growing chemicals trade surplus, with net exports reaching $58 billion in 2013, mostly in specialty chemicals.
How are chemical leaders positioning themselves in these markets?
Forward thinking chemical companies are positioning themselves for the future by focusing on megatrend business areas (see here for more on this strategy) or providing differentiated products/services to their existing customer base. Megatrends represent major, underlying shifts occurring in society, the environment, technology, manufacturing and resources. Some megatrends include changing demographics, resource conservation, health/ fitness, growing food demand, electronics, shale energy, production efficiency & innovation, etc. Leading companies harness these trends through either organic growth (i.e., R&D) or through M&A.
Chemical company M&A in Europe over the past few years is characterized in Figure 2, based on the businesses of target acquisitions (for instance, an acquisition target making ethanol for fuel would typically be classified as “energy”. However, many targets which cross industrial segments or provide intermediates to other segments have been classified under “materials”). Although M&A deal counts have declined in recent years, likely due to economic headwinds, M&A still continues, but with changed target market focus. Although the “materials” segment still dominates as a target segment (accounting for 54% of acquisitions by the end of September 2014), the “industrial”, “energy” and “consumer staples” segments gained in target share.
The “word cloud” in Figure 3, based on target companies’ business descriptions, adequately illustrates the focus areas of recent EU chemical company acquisitions (286 transactions between January 2013 and September 2014). Services, which typically represent a higher value activity in the chemical business, were included in the descriptions of about 20% of the transactions. Examples of where service opportunities were found include aquaculture, health, energy development, pest control, pollution control and cleaning applications.
Plastics, being a large part of the global chemicals market, naturally come out as a major target segment (20% of transactions). However, acquisitions in plastics are mostly aligned to megatrend targets, as opposed to purely capacity consolidation motivations. Some examples of plastics acquisition target-applications include agricultural films (e.g., silage, mulch, greenhouses, etc.), specialty molding, specialty polymers (e.g., silicones for electronics, aerospace, personal care, etc.), urethane technologies (e.g., for automotive and other markets), recycling technologies, medical plastics and light weight plastics (e.g., for aerospace and other markets).
About 8% of transactions were related to specific technology opportunities, again mostly linked to megatrend areas. The technologies related to oil flow, composites in aerospace, medical applications, super critical CO2 (for solvent extraction and nano-particle production), mining, friction reduction, OLED manufacture, catalysts and batteries.
Other important areas of opportunity included a broad range of additives for various applications (including firefighting foams, lubricants, oils, fuels, coatings, etc.), packaging (including antistatic packaging for electronics and food packaging) and fertilizer (including specialized applications, such as in aquaculture).
Clearly, European chemicals M&A has been centered on gaining a greater presence in high value/growth applications.
How to start participating in market-oriented value growth?
Growth and value-oriented companies are focusing on megatrends, new technologies (e.g., nano-, bio-, etc.) and service oriented businesses (e.g., supply chain services, technical applications support, customization, etc.).
Finding growth opportunities does not necessarily mean entering areas unfamiliar to your business, but rather, it means paying closer attention to current customers and knowing their value levers. To pursue this means of growth, some considerations include:
Getting closer to customers and understanding their buyer values.
Establishing a dedicated effort to monitor your customers’ needs, new technologies and other areas of opportunity in your company’s ecosystem.
Understanding your industries’ ecosystem, where you can add value and the means to do it (e.g., organic growth, inorganic growth or a combination of both).
One way to help accomplish these goals is to leverage analytics and big data to find promising areas of focus in your customers’ markets. Also, customer relationship management capabilities can help identify where growth and value potential exist in your customer base. New ways of using information technology continue to develop.
With slow world economic growth it is essential to maximize competitiveness in costs and innovation. A key way to do this is with a well thought out, fact-based strategy to add value. This way, companies can grow revenues and margins, even in times of poor economic performance.