The global chemical industry is undergoing rapid change. Both demand and consumption of chemicals are shifting eastwards as new manufacturing facilities come up and China’s consumption levels rapidly increase. New production capacities are being developed in the Middle East and in other non-traditional areas.
How does all this impact the incumbent chemical companies? What are the challenges they face and are there some preemptive measures that they can take to protect their business?
It could be useful to carry out an analysis using “Porter’s 5 Forces.” The model, named after Michael E. Porter, an American academic and a professor at the Harvard Business School, is useful in determining an industry’s weaknesses and strengths.
The following section of this blog post classifies the threat from the five forces as HIGH, MEDIUM, and LOW.
Force #1 – competition - HIGH
The chemical industry is intensely competitive. There are large numbers of manufacturers, each vying for a share of the market. In the US alone, there are over 10,000 firms producing in excess of 70,000 products. It is extremely difficult for a manufacturer to differentiate itself from its rivals.
Many chemicals are commodities which are sold purely on the basis of price. The high level of competition can drive prices downwards and firms have to look at ways to provide value-added services if they want to have better price realizations.
Force #2 – threat of new entrants - MEDIUM
Traditionally, the chemical industry has been dominated by players in Europe, the US, and Japan. But the rise of manufacturers in hydrocarbon-producing areas is changing the pattern of global chemical production.
These new producers could possibly pose a greater threat to the incumbents in the years to come. How much of a challenge they pose will depend on three factors.
- They need to develop their own R&D capabilities. Currently, they are dependent to a large extent on the companies from the US/Europe and Japan for this.
- The newcomers would also have to work on their marketing network so that they can sell directly to the consumer.
- They will also have to build their management skills to run operations successfully.
The speed at which these firms develop these capabilities will determine the level of competition that they will offer to the incumbents.
Force #3 – bargaining power of customers - HIGH
With thousands of suppliers to choose from, chemical buyers have a wide range of options. While one of the prime considerations that a buyer would have would obviously be price, there are other factors that influence the purchase decision. Does the supplier make prompt deliveries? Have there been quality problems in the past? Is the supplier compliant with regulatory norms?
Buyers are increasingly using online portals to research suppliers and find those that best meet their needs. A website that provides access to suppliers can be of great use to a company that requires chemicals. An online portal specializing in the chemical sector can provide a number of details about a supplier’s capabilities and past record. These portals can help to significantly increase the bargaining power of buyers.
Force #4 – Bargaining power of suppliers - LOW
As there are thousands of suppliers, their bargaining power is severely limited. Buyers can log on to a B2B portal and obtain details and quotations from companies across the world.
Despite this, it is still possible for some suppliers to retain a hold over certain customers. A client that requires a niche product may have only a limited number of suppliers to choose from. The consumption volumes may be too low to justify the setting up of additional manufacturing facilities by other suppliers.
Force #5 – Substitute products – MEDIUM
Although it is possible for chemical suppliers to develop substitute products to offer to customers, it can be a difficult task to do this. It requires a strong R&D department as well as a high degree of knowledge of the client’s processes.
However, a supplier who can manufacture a new low-cost product that is a viable option for the customer can gain a significant competitive advantage.
Where will the disruption come from?
In its current state, the chemical industry is already highly competitive. But if manufacturers in the Middle East and China are able to successfully scale up operations, the level of competition could escalate sharply. These companies would have the advantage of geographical proximity to the sources of raw materials as well as the markets where demand is growing quickly.
Thanks for reading ! We greatly appriciate it. And i f you want to know more about the issue of digitalization in the chemical industry, check out or blog !
