China's new chemical-market dynamics
China's growth in chemicals over the past two decades has been characterized by rapid investment and intense competition and fragmentation across large numbers of segments. This has particularly been the case where production technology has been widely available and where access to raw materials and financing has been easy to obtain. This combination has led to rampant overcapacity in many sectors.
But the market and the industry are now moving into a new phase of development. There's a shift toward specialty-chemical growth, reflecting consumer-demand trends and the rising sophistication of China’s industrial output, while consolidation has started to take a grip in certain sectors. These trends are all helping the value-pool growth prospects for parts of the industry. In the meantime, money for investment is harder to come by, and the government is imposing new, stricter environmental regulations on the industry. To succeed in this next stage of China's chemical-market development, players will need to embrace a new set of strategies.
As China's economic policy shifts more to consumption-driven growth from that of investment—and, within that consumption, toward more sophisticated products—the result is likely to lead to additional growth in specialty-chemical demand. At the same time, the Chinese government’s Made in China 2025 policy is prioritizing a number of high-tech industries for development. The strategic directions it indicates could stimulate certain end markets, such as aerospace, electronics, electric vehicles (EVs), and batteries, which could, in turn, create opportunities for expanding production in China of a range of more sophisticated chemical products.
Innovation and technology upgrade in the industry
An embrace of R&D is under way across the chemical industry, from sector giants, such as Sinochem with its “In science we trust” slogan, to start-up companies working in a wide array of leading-edge areas, such as enzymes, catalysis, nanomaterials, and battery materials. China’s chemical-R&D spending is now among the world's leaders. The structure of China's chemical-industry R&D has also changed, moving from one in which initiatives were under government direction to one primarily driven by individual companies within an ecosystem of collaboration with government research institutions and universities—and that has a strengthened regime to protect intellectual property.
China's chemical-technology capabilities are rapidly advancing. There are many examples of Chinese companies gaining technological parity with Western companies. One in the petrochemical field has been Wanhua Chemical, which has developed its own methylene-diphenyl-diisocyanate (MDI) technology. Wanhua is now the world’s largest MDI producer in what had historically been a close-knit sector dominated by a handful of Western companies due to isocyanates chemistry’s challenging technology-entry barriers. Another example is Kingfa Science & Technology, which started out as a supplier of lower-end products, such as plastics for TV-set cases, but has now become an engineering-resin supplier to the top auto OEMs. Kingfa is also one of the small group of producers in the world making high-tech engineering resins, such as polyether ether ketone and polyamide 10T. In the fast-growing lithium-ion-battery area, Shanshan Technology has established a leading presence in cationic- and anionic-anode materials, electrolytes, and separation membranes, with a top three position in all segments.
There are some segments in which the Chinese chemical industry is starting to get a technology edge over multinational companies (MNCs). This has been the case in a number of fermentation-based products, including monosodium glutamate, vitamin C, and xanthan gum. In all of these, Chinese companies are now the leading producers in the world, based on better-performing technology, and they have continued to achieve process and quality improvements. Development of new materials is another example of Chinese players being well-placed. Cathay Industrial Biotech, for example, has established a leading position in bio-based nylon 5,6, a polymer with wide potential application.
New environmental regulations leading to restructuring
China's chemical buildup over the past two decades had prioritized growth over environmental quality. The 13th Five-Year Plan for environmental protection published in 2016 enshrining “clear waters and lush mountains” as a national policy has marked a sharp shift, as China's authorities have started to address environmental degradation.
New national pollution-control standards are being enforced by a system of requirements for production permits and a push to relocate chemical production to special chemical parks. The 2018 ban on imports of plastics waste, which has disrupted Western countries that had relied on exporting to China, is part of the same new policy.
The new environmental regulations are having only limited impact on the big upstream petrochemical and chemical intermediates and polymer plants, most of which are built with appropriate emissions controls and waste-treatment facilities. The severe impact is on the thousands of smaller plants that make all the specialty chemicals, from coatings and dyestuffs and pesticides to food ingredients and surfactants, used by Chinese manufacturing and agriculture and by Chinese consumers. These are typically privately-owned operations often lacking appropriate waste-management capabilities and located in urban areas. The moves to shut down out-of-compliance plants have affected large numbers of these small operations, but the impact on overall chemical output has been less severe.
How players in China's chemical industry can position themselves for the next move
SOEs have led China's chemical-industry development over the past two decades, but it is important to look at this group more closely to see how future developments may unfold. Best known are the central SOEs, while the group of SOEs owned by provincial governments are sometimes overlooked. A number of players in this latter group have, in fact, followed a more dynamic and entrepreneurial trajectory than has the central-SOE group.
At the same time, however, new challenges are emerging for these companies. Maintaining the scale of their operations will need to be balanced with pressure to improve profitability by starting to retire their less-competitive older production assets. They must navigate this while facing increasing competition for their refining and petrochemical business from aggressive new-entrant POEs.
Some of these companies also face underlying questions about their long-term strategies. While they have been successful in the goal of providing basic-chemical supply, that focus may have left some of these companies less well positioned in the kinds of specialty-chemical businesses needed to serve China’s next stage of economic development. Unlike in basic chemicals, these kinds of technologies are not usually available for licensing. Some SOEs struggle with centralization, siloed organizational structure, and layers of bureaucracy that may handicap them in developing a strong specialties segment. Such specialties businesses typically move at a fast pace and depend on cross-functional collaboration among R&D, manufacturing, and sales functions to succeed.
International companies: Facing an uphill struggle
It's not easy to find an example of a chemical MNC that has managed to gain a market share in China that is the same as its market share in the global market, a fact that encapsulates the challenges that MNCs have consistently encountered as China's chemical market has ballooned.
Since the change in rules in 2015, MNCs have been able to make wholly owned investments in upstream petrochemical plants. The size and importance of the Chinese market means that it cannot be ignored by MNCs that want to continue to be leading players in the world chemical market. This has been clearly reflected in recent announcements of major investments by MNCs that see opportunities in China. These include the large investments that BASF and ExxonMobil are considering in wholly owned petrochemical complexes in Guangdong in southern China.
A further challenge is that some MNCs are failing to undertake product development tailored to the Chinese market's needs. As a result, they are finding themselves relying on their original offerings, which were developed for Western markets. Chinese competitors, meanwhile, are increasingly making inroads, resulting in a narrowing area of opportunity. On top of that, MNCs are still contending with the basic cultural barriers to doing business in China, notably in hiring and keeping hold of the best local Chinese employees.
The factors driving success will vary among the different groups of players in the industry, but in all cases, they will need to be informed by a readiness to adapt rapidly and innovate to meet the needs of the market.