Chemical companies are taking three steps to turn commoditisation into opportunity

Contrary to the traditional view, commercialized chemical business can make as much money as specialized chemical business. The key is to change the business model.

The commercialization of special chemical industry is accelerating. Although the history of the chemical industry is a history of continuous commercialization, and the innovation of one generation has become the standard product of the next generation, its pace is accelerating. There are many reasons behind this change.

In some areas, professional companies are trying to create innovative products, provide significant added value to customers and differentiate themselves from competitors. At the same time, the combination of new low-cost market entrants (especially from China) and excessive capacity means that the price of more and more products is not determined by the value they deliver to customers, but by their production costs and freight to the market.

The commercialization of specialty chemicals business has brought structural challenges to the industry. How should these enterprises deal with it? Chemical companies must realize that if they adopt completely different business modes from professional enterprises, commercialization business can get attractive returns. The key is to adjust the new operation mode to meet the real needs of the enterprise and the cost it can bear.

Our analysis of the performance of shareholders’ returns in the chemical industry shows that since 2001, bulk chemical companies have gained as much value as professional enterprises. Although this performance may be contrary to the assumptions and traditional wisdom generally held by the chemical industry, our data always show that this model is tenable in the long run. Successful supply of these chemicals can also be encouraged to face the challenges of commercialization in other industries. For example, in the aviation industry, the profitability of low-cost airlines exceeds that of their full-service competitors.

To transform commercialization from threat to opportunity, chemical companies should take three steps. First, they need to discover the coming commoditization so that they can act before they are overtaken by other companies. Secondly, they should design a customized operation mode for their commercialization business. Third, they must embark on a comprehensive change effort to make this new model work. Companies that do well in this can get considerable returns, with a maximum increase of 5 percentage points in roe on sales.

Companies known for their innovative, differentiated products and responsive customer service may be understandably reluctant to acknowledge that the market has changed. There are risks. If the trend of commercialization has changed, they will find themselves isolated and their more focused competitors are grabbing their customers.

Every manufacturer of special chemicals should be alert to the invasion of commercialization and systematically look for early warning signals. Here are some questions that executives should ask themselves: does capacity significantly exceed demand? Despite the government’s attempts to raise prices, have prices been steadily falling? Have prices been squeezed to maintain market share? Have new competitors from countries with lower production costs entered the market? Do they offer products similar to those of existing manufacturers but at lower prices? In the past few years In the past five years, have we created any innovative products? Are we no longer dealing with the customer’s product development department, but only with the purchasing department? Have customers stopped asking for and paying for additional services? The center of the analysis should be a clear understanding of the market pricing mechanism. If the price of a product is close to the marginal producer’s cost, then it is a commodity, or will soon become a commodity.