Who Moved My Customer? Industrial Recalibration and the Chemical Industry

June 1, 2018

Profound changes happening in downstream chemical customer industries will have an impact on methods, products, trade flows and service levels in the chemical industry, ranging from the potential for lower chemical volumes to locations where companies decide to invest in new plants. Driven by rising affluence in many parts of the world, and the resulting need to meet rising customer demands, these disruptions already are beginning to surface—and chemical companies need to be prepared for this next stage in industrial evolution.

De-industrialization, Re-industrialization and Beyond

To understand the disruptions now taking place, it is useful to look at the shifts of the past 25 years, starting with de-industrialization. As developing economies entered the World Trade Organization (WTO) in the 1990s, they attracted huge semi-finished and finished goods manufacturing investments based on their low labor costs, with most capacity geared towards exports. Chemical companies also scaled up capacity in China to meet the associated needs for plastics, paints and other chemical products. By the early 2000s, de-industrialization was apparent in North America, Western Europe and Japan.

A decade or so later, as large finished goods companies re-evaluated their next big investments, industrialized countries experienced a ramp-up in manufacturing capacity. This was partly due to a rise in labor costs in developing regions. For example, China’s labor costs relative to major trading partners increased 43 percent between 2010 and 2017.¹ During the same period, U.S. labor costs rose 6 percent and Germany’s only 3 percent, while Japan’s declined 23 percent.²

A bigger factor, however, was the advent of low cost, highly flexible robotics and automation, which reduced the significance of labor costs. For instance, in 2016, Germany, Japan and the U.S. were using 303, 309 and 189 industrial robots for every 10,000 employed persons, respectively. In China, that figure was just 68,³ although China’s use of robots is rapidly rising.

Now, a third wave in the evolution of industry is underway—an “industrial recalibration,” driven by consumers. Consumers are spending more because they are more affluent, with global GDP per person increasing by 1.6 percent annually over the past 15 years.⁴ Consumer spending has grown by US$1.7 trillion in North America over the past five years, versus about US$500 billion in the prior five years (see Figure 1). Western Europe’s spending grew by US$668 billion over the past five years, after a US$63 billion decline in the previous five. China’s consumer spending is steadily on the rise, but the increase was less than that of North America, with a $US1.3 trillion increase over the past five years.

A third wave in the evolution of industry is underway, an “industrial recalibration,” driven by consumers. Consumers are spending more because they are more affluent, with global GDP per person increasing by 1.6 percent annually over the past 15 years.

CLICK TO ENLARGE FIGURE 1

Consumer demand in industrialized countries has fueled changes in international trade, as well. While North America and Europe improved their trade positions between 2007 to 2012, they have lost ground in the past five years. China has continued to grow its surplus, but at a slowing rate.

Now, however, companies are making incremental manufacturing additions in industrialized countries, especially in industries where technologies enable localization. This is particularly true in product segments where technology-enabled capabilities such as customization and speed to market are key to greater market share and profits. While China is still the world’s largest investment draw, total manufacturing investment there rose by US$241 billion less in the past five years versus the previous five years. At the same time, Western European and North American investment grew by US$80 billion and US$95 billion, respectively. This represents an increase in localized manufacturing—and underscores the ongoing industrial recalibration.

The New Technology Foundation

In general, new technologies play a key role in industrial recalibration. They are enabling what we call Industry X.0—the embracing of continuous technology change. Industry X.0 includes the use of technologies such as big data, augmented reality, blockchain and artificial intelligence (AI) to reinvent chemical plant operations.

New technologies will be key to the localized and customized manufacturing of finished goods mentioned above. This trend is being enabled by a combination of robotics/automation (and the ability of humans to work alongside robots using artificial intelligence⁵) and additive manufacturing (also called “3D printing” or 3DP). The use of 3DP is still in its infancy, but it is expected to grow by more than 23 percent per year through 2021.⁶ Judging from discussions with plastics processors, many companies are now using 3DP for prototyping but also expect the technology to improve quickly and be used in full production within a few years.

In order for 3DP to become widespread, the industry will have to determine how to best take advantage of the technology. The situation is similar to what we saw in the auto industry in the 1980s, when oil prices were high and manufacturers looked to plastics to reduce vehicle weight for fuel savings. At the time, they were struggling with how to replace steel with plastic. They soon found that it was not enough to simply do a one-to-one “swap” of plastic for steel in parts. Engineers had to learn to design for the new material and functionality, and even combine parts to serve a function—to do things like replace spiral metal springs with plastic leaf springs.

Similarly, design engineers are just now learning to exploit 3DP technology. But many engineering schools are not yet teaching 3DP product design—and manufacturers are finding that they often have to train new hires in the art of using 3DP.

As such problems are resolved, 3DP will allow significantly greater design flexibility, which will affect the types and volumes of materials markets want. Per the list below, technology has the potential to enable:

Customization: Easy feature swaps; parts made to order.
Localization: Equipment can be located almost anywhere; it is compact.
Multi-functionalized parts: Efficient internal part design; less assembly. Ability to design with greater functionality without, for example, stamping or molding restrictions.
Creativity: Design flexibility; simplified product testing.
Materials efficiency: Products designed for optimal materials use, such as the printing of lattice or honeycomb internal structures. Various white papers indicate material reductions ranging from 20 percent to 75 percent, depending on the application.
Multi-material use: Metals, plaster, ceramics, silicone, biomaterials, carbon fiber, graphene, etc.
Waste reduction: Process is not subtractive, where extraneous materials are discarded after being cut-away/trimmed.
Flexibility: Works with robotics; reduces retooling.
Consistency: Easily modified within production runs.
Shortened time to market: Supports low-cost, low volume runs; rapid test marketing.

Perhaps most important, 3DP technology can be expected to spur a proliferation of innovative products, from medical devices to household goods, as it allows new products to be produced and market-tested at a low cost. For example, the cost of molds used in injection molding can be prohibitively high, averaging US$30,000 to more than US$130,000.⁷ With 3DP, the new “mold” is the far less expensive and easily modified computer aided design (CAD) drawing.

First Signs of Fundamental Change

New technologies are already having an impact. Consider the adidas SPEEDFACTORY, a flexible shoe factory built local to market. There is one in Ansbach, Germany, and a second in Atlanta, launched in April 2018. Together, they will have the capacity to make one million pairs of shoes per year. The SPEEDFACTORY uses robots, automation and 3DP, among other technologies. Each plant has about 160 production jobs, compared with the 1,000 or more found in a typical factory in Asia. In the future, customers will be able to co-create their shoes on-line and have them delivered in weeks—far faster than the average 18 months traditionally needed to bring new designs to market in the industry.⁸

Imagine the impact on the chemical industry as these new technologies spread across consumer and institutional products. For example:

Converter shops may be classified less as “metal fabricators,” “plastics processors” or “rubber processors,” and more as “materials processors,” where 3DP technologies make it easier to process and optimize the use of a variety of materials.
Chemical trade flows will shift as many chemical supply chain final destinations change to focus more on consumer market locations. China and other developing regions will no longer be the only growing destinations for raw materials—developed regions will grow as well. Likewise, certain finished goods exports from China will decline, as will China’s demand for the raw material to make them.
Chemical volumes, or at least volume growth, will decline unless the proliferation of product inventions outpaces material reductions in existing goods.
Chemical plant investment locations will shift. While a significant amount of investment will still be driven by feedstock advantage, some investment will move to market. This may include some refinery-based petrochemicals (where the inter-regional cost difference may be smaller) and specialty chemicals.
The form of materials (for instance, filaments versus resin pellets) used by customers will change.
New technical support competencies will be needed.

Getting Ready for Recalibration

While these changes are largely still to come, they may be propelled by new international trade regimes, the current positive global investment outlook and new manufacturing investments that draw on more sophisticated technologies. All of this means chemical companies need to take actions such as:

Monitoring customer industries for changing formulations, locations and needed service levels, and starting to plan for the necessary business model, R&D and investment changes.
Aligning with innovative, market-moving customers, offering rapid on-time supply and innovation. These customers expect a procurement experience driven by value-added benefits and innovation. Consider leveraging Industry X.0 technologies to accomplish this.
Exploring opportunities to develop technical competence in a broad range of 3DP materials—not only in polymers, but also in metals, plaster and ceramics. Companies may want to consider technology and supply alliances, or even equity stakes, with other materials businesses. This way, they can offer more products and value to the same customers. (See more thinking on extended value chains in a past blog.)
Assessing where to make incremental geographic investments that can help sell higher value products, achieve higher growth and reap supply chain efficiencies.

The industrial landscape has been shifting for decades, and now, that change is taking a new direction. For chemical companies, the key will be recognizing the coming change early on, and starting to lay the groundwork for thriving in an era of recalibration.

Who Moved My Customer? Industrial Recalibration and the Chemical Industry

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