Four trends driving convergence in the chemicals industry

30 October 2019 6 min. read
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The global chemicals industry is one of the most stable sectors of the world’s economy – but as disruption sweeps businesses of all shapes and sizes, it too is changing. According to a new report from Arthur D. Little, firms in the sector are increasingly focusing on four key trends to deliver greater value in the future.

The chemicals industry is seeing strong growth on the back of growing global demand. Overall the industry has been relatively stable in terms of the number of merger and acquisition deals over the past decade, hovering between 500 and 650. 2018 was a relatively slow year to begin, before each successive quarter saw increased deal activity. Eventually, this meant that deal value increased slightly to $72.4 billion – as the sector began to recover from a drop of more than $150 billion in value between 2016 and 2017.

While the steadiness of this market might surprise some, this is in actuality because the chemicals industry has quietly maintained an impressive history of value creation. Even during the financial crisis, the chemicals industry outperformed other industries, with a substantial difference in value creation. While a $100 investment in telecoms in 2000 would have returned just $164 by 2018, the same investment in chemicals would have returned over $500.Four trends driving convergence in the chemicals industryBeing asset-heavy is no impediment to good returns in the sector, then. However, this by no means insulates the chemicals industry from the disruptive change currently sweeping global business. According to a new analysis from Arthur D. Little researchers Michael Kolk, Koji Uchida and Marc de Pater, the chemicals industry needs to capitalise on the convergence of four independent trends – digital technology, technology transfer from one sector to another, new management approaches and new business models – if it is to harness their disruptive power for growth in the near future.

Digital technology

“Digital technology poses a threat to any company using innovation to command a premium over commodity grades,” Michael Kolk warned, “unless it gets its act together soon enough. For example, what will happen to formulators of coatings, detergents or plastics once Amazon or Google is able to instantly 'calculate' the optimal recipe for any customer? The flip side is that even if chemicals companies are unlikely to dominate any particular digital technology, the value of such technologies lies in their application to the 'chemicals complexities' that only chemicals firms truly master today.”

While the threat sounds ominous, if companies can get ahead of the curve the rewards could be enormous. According to Arthur D. Little, chemicals companies estimate that the success rate of breakthrough innovation projects can be tripled by implementing the right digital solutions, with some 90% of companies estimating that digital innovation is transformational. At the same time, digital technology links to the other important trends, as it can enable chemicals operators to optimise their solutions in all fields of their work.

Technology transfer

At present, the researchers found that there is a key trend taking place regarding “molecular” technologies coming to fruition in industries in line with traditional chemistry. The report found that sector players such as AkzoNobel are playing with the idea of smart materials, or looking for enhanced functionalities such as self-cleaning or self-healing surfaces and coatings.

Giving another example, Kolk expanded, “Synthetic biology holds the promise to produce industrial-equivalent products with significantly enhanced benefits in terms of production efficiency, carbon footprint, feedstock flexibility, and replacement of hazardous processes. This was, for example, why Cargill acquired OPX Biotechnologies’ fermentation technology.”

Industry valuations versus performance

New management approaches

Alongside technological advances, new approaches to managing innovation have also become necessary. Without such change, the major potential of new technology could well be squandered. A holistic approach to innovation, driven by genuine business needs rather than fear of missing out, will see chemicals industry players involve themselves in schemes such as start-up collaboration, ecosystem innovation and the use of external incubators.

Kolk stated, “We see more and more companies taking a holistic view of all possible 'innovation vehicles' (R&D, partnering, corporate venturing, M&A, licensing, etc.) and using whatever best fits their goals. At Arthur D. Little, we have been able to do exciting things for our clients following our Breakthrough Incubator approach – essentially a 'build-operate-transfer' model applied to breakthrough innovation opportunities.

New business models

In the chemicals industry the concept of business model innovation has long been seen as something more conceptual than of strategic relevance, with the notable exception of a few players. Now, however, as Umicore begins reaping the returns of years of perfecting its double-revenue business model, for example, business model innovation is becoming more mainstream, with several interesting approaches being pioneered.

Kolk concluded, “One such example is the concept of 'molecule leasing', whereby a chemicals producer retains ownership of its products while they are in use by its customers. This ensures closed-loop economics that will need to become the standard, rather than exception, in a low-carbon world. This model was pioneered in specific niche markets such as the noble metal catalyst industry, but may well become a more widespread practice driven by new or improved technologies.”