September 22, 2021

Chinese chemical companies are learning from the West

Most participants in China’s chemical industry believe that China’s chemical industry is not as developed as that of the West. Now the question is whether Chinese enterprises can learn from the history of the chemical industry, so as to speed up their own development. Since the establishment of the chemical industry in the 19th century, the global (more specifically, the Western) chemical industry has experienced different stages of development.

This is a relatively typical industry life cycle, from the initial research-oriented stage, through three different stages of strong growth, to the mature stage, and finally to the deceleration stage. In addition to these key features, many other aspects have changed. For example, the initial focus was on R & D, then on industrial manufacturing, and then on the sale of the chemicals produced, while more recently, at least the focus on mature goods has been on cost-effective production. Other areas that change according to the stage of development are growth rate and industrial structure. In order to provide reference for Chinese enterprises from this development history, we must first determine the current situation of China’s chemical industry in the plan. Such a determination may not be absolutely decisive, but the preliminary results of this assessment are shown in the red box in Figure 1. The specific assessment is as follows:

*The current key characteristics of China chemical industry (e.g. Metal plastics in the automotive, petroleum and coal Petrochemical products), internationalization (as shown in the recent overseas acquisition of petrochemical state-owned enterprises and Sinochem Group and Bluestar) and other companies to expand the investment portfolio

*The key factors for success are the increasing emphasis on R & D / process development (as shown by the increase in research activities of many Chinese chemical companies) and the guarantee of raw materials (especially Sinopec, which is more and more actively involved in overseas oil exploration)

*The growth rate of output value of chemical industry is much higher than that of GDP (about 20%)

*The activities of domestic chemical companies are still mainly national rather than global, but they have usually carried out activities in many different segments of the chemical industry

Generally speaking, if we evaluate according to the scheme shown in the figure, China’s chemical industry is still in a relatively early stage, and in many aspects has the characteristics of the “volume growth” stage as shown in the figure. Assuming that China’s chemical industry will follow a similar development path to the global chemical industry, what important lessons can Chinese enterprises learn from the subsequent industrial stages that the West has experienced? They can be summarized into three key points: operation improvement, internationalization and specialization.

Given the large number of qualified engineers and scientists (in academia and chemical companies) in China, it is unlikely that there will be substantial problems in optimizing chemical operations in order to control the cost of reducing raw material demand for domestic chemical plants. Two other points deserve further consideration.

The internationalization of Chinese chemical enterprises is still in a very early stage, especially if we do not consider the overseas activities only for the purpose of purchasing raw materials. The real importance of internationalization is access to global markets. Neither Chinese chemical enterprises, which produce a large number of products for export, nor state-owned enterprises, which focus on overseas raw material procurement, have such a sense of existence. In contrast, Evonik and other companies in Germany sell more than 70% of their products abroad and have production and distribution networks in more than 50 countries. Not to take Evonik as an example, basically any large western chemical company can use it. Obviously, the advantages of international existence, such as expanding sales in new regions, finding new markets for old products, being close to existing customers, being more attractive to global customers, achieving better economies of scale and optimizing the cost structure of production, are highly relevant. Given the time-consuming nature of this organic growth, i.e. opening branches overseas, such internationalization is likely to require Chinese companies to acquire overseas companies.

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