End market alchemy: Expanding perspectives to drive

40 Pages·2011·2.45 MB·English

by  Suzannah Carrington

End market alchemy
Expanding perspectives to
drive growth in the global
chemical industry
Global Manufacturing Industry group
October 2011

Table of contents
Why end markets? Why now? 1
Analysis of end markets 5
Seizing end market opportunities 14
Evaluation of end market approaches 26
Conclusion 33
Acknowledgements 34
Contacts 35
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Why end markets? Why now?
The global chemical industry experienced an encouraging dilemma in a competitive and rapidly changing world and
recovery after the unprecedented challenges of the has inspired the Deloitte Touche Tohmatsu Limited (DTTL)
economic crisis in 2008–2009. Several chemical Global Manufacturing Industry group to analyze critical
companies reported record earnings in 2010 as demand questions focused on innovation and growth. Central to
rebounded and improvement actions took hold. Although this debate are issues about the role of end markets and
welcome, this brief upturn could be a short lived peak as the opportunities or risks they present to future growth and
uncertainties about the future have resurfaced. Always an other questions such as the following:
industry with many variables at play, the global chemical • Do customers in end markets, when better understood,
industry is preparing to take on more challenges ahead. offer opportunities and strategies to chemical companies
for growth and economic value? Which markets offer the
Since 2000, the industry’s growth rate has declined by half, greatest promise?
while oil-based raw material costs have steadily climbed.1 • How can a company better understand end market
Significant reductions have been made in overhead and complexity?
fixed costs to offset as much lost profit as possible. Yet • Are there instructive examples of innovative approaches
the industry as a whole is nearing a point of diminishing to customers and markets inside and outside the global
returns in terms of cost reduction being a major value driver chemical industry?
(particularly without structural change); some companies in
the industry have come full circle and are now examining A DTTL Global Manufacturing Industry group study entitled
the role and importance of certain costs in enabling growth, The chemical multiverse: Preparing for quantum changes
or in limiting growth when not spent. This presents a in the global chemical industry reported that megatrends
present challenges requiring new solutions — products,
1 DTTL Global Manufacturing Industry group, “The decade ahead: services, and know-how — developed as a direct response
Preparing for an unpredictable future in the global chemical industry,”
to unmet needs in existing or developing end markets.2 In
17 December 2009, www.deloitte.com/thedecadeahead.
some cases, new solutions were neither the domain of an
existing industry nor easily classified by type of company.
About the research End market alchemy: Expanding perspectives to drive growth
DTTL Global Manufacturing Industry group in the global chemical industry seeks to understand if and
conducted primary research of 60 interviews and how chemical companies are going to tackle the potential
questionnaires with end markets and chemical new demand, and how much deviation from traditional asset
industry executives from around the globe in and value chain driven product development would be
order to develop this report, End market alchemy. needed to be successful (see sidebar “About the research”). It
Secondary research was conducted by exploring can be posited that new business models are anchored in a
both company-specific and market trends. greater focus on systems and solutions thinking, open
Approximately 10 years of financial information for innovation, and consumer and cultural awareness. DTTL’s
230 chemical companies and 3,000 end market Global Manufacturing Industry group examines how such an
companies was compiled and assigned to industry updated, market-focused growth model would take
groups and end markets segments. The analysis committed chemical companies beyond the more traditional
also includes 16 end markets encompassing industry role as purveyors of liquids and solids.
55 segments including personal care, health
care, household, nutrition, apparel and textiles, Summary of the analysis
transportation, mining and metals, machinery, To address the question of how the global chemical
automotive, construction and infrastructure, industry can play a more active role in developing growth
electronics, paper and packaging, commercial
printing, energy, water, and agriculture. 2 DTTL Global Manufacturing Industry group, “The chemical
multiverse: Preparing for quantum changes in the global
Source: DTTL Global Manufacturing Industry group. chemical industry,” 16 November 2010, www.deloitte.com/
thechemicalmultiverse.
1
opportunities, it is important to take a broader view of the
end markets and understand the landscape at a granular The Chemical 2020 series so far: This study in context
level. The DTTL Global Manufacturing Industry group The decade ahead is the first report in the Chemical 2020 series
anticipates future strategic plans will include models that and examines the performance of 231 publicly traded chemical
The decade ahead
take into account changing dynamics and trends in key end Puinnr eptphraeerd iginclgotab fbaollre c ahfnue tmuriec al companies over 10 years. The analysis shows that regardless of
industry
markets, as well as potential new solutions that will enable segment, chemical companies dealt with margin pressure, increased
growth and value creation. cyclicality, and reduced investment in research and development
(R&D), sales and marketing. It noted fewer breakthrough
For example, it is clear that a number of end markets Aan rde pDoerlto ibtyte t hRee sDeealrocihtt (eU Tnoituecdh eS tTaotehsm)atsu Chemical Group innovations, and documented a period of global overcapacity in the
are experiencing rapid changes as megatrends such as wake of the economic crisis in 2008–2009. It questioned the formula for future success
green/sustainability, resource scarcity, and urbanization and discussed three scenarios for navigating the uncertainty the industry faced in 2009.
continue to raise new issues and challenges. As society and Surprisingly, the report documented that over one-fourth of the 231 companies analyzed
businesses address these challenges, migration of value can did not earn the cost of capital, which became a point of specific investigation in the
be faster and more dramatic than ever before: disruptive second report in the Chemical 2020 series, entitled The chemical multiverse.
solutions enter the scene, technologies converge, and
interdisciplinary approaches push the frontiers of existing The chemical multiverse, the second report, sought strategies
markets, all in response to an unprecedented number of and solutions that could address the challenges raised in the first
The chemical multiverse
unmet needs. It is not a coincidence that the DTTL Global Pinr etphaer ignlgob faolr cqhueamnitcuaml i nchdaunsgtreys report. With traditional segmentation into commodity, integrated,
Manufacturing Industry group reports end markets seem to and specialty industries proving inadequate as a basis for deciding
be experiencing increased volatility in traditional products the best strategies for the next decade, The chemical multiverse
and markets, enough to impact the performance and looked deeply into the various chemical companies’ starting point
positioning of global chemical industry players. GNloovbeaml bMearn 2u0f1ac0turing Industry Group for the decade based on their performance over the previous 10
years and their current ability to invest in future opportunities. The report also identified
The research in End market alchemy has four key themes: nine strategic drivers that could be pursued and combined in order to strengthen
1. End markets have gone through dramatic change from performance and improve competitiveness in a changing global environment. The
both a profitability and a growth perspective. Not all chemical multiverse also introduces the megatrends that are being examined in more
end markets rebounded after the economic crisis in depth in this report, End market alchemy.
2008–2009; some markets need to reset and are still in
transition. The pace of change has also increased across To read the first two reports, please visit www.deloitte.com/thedecadeahead and
all major end markets. www.deloitte.com/thechemicalmultiverse.
2. New market segments and those with the highest
Source: DTTL Global Manufacturing Industry group.
consumer intimacy were the most profitable. Companies
committed to serving consumers and/or providing new
solutions tended to invest heavily in understanding their DTTL’s Global Manufacturing Industry group found that
customers’ needs, differentiating themselves in the certain active solution providers had the most ideal
customers’ eyes and disrupting the status quo. intimate relationships and creative business models. These
3. The convergence of technologies and new market providers placed greater emphasis on industrial marketing,
demand creates opportunities for collaboration along value pricing, collaborative innovation, and differentiated
the value chain and among industries. Solving challenges and integrated supply chain management.
that arise from megatrends is not the domain of any
given industry — including the global chemical industry. Expanding perspectives
4. A value network approach that links adjacent markets Taking a broader view of end markets is increasingly
and gaps in the overall market’s ability to provide relevant as the pace of change in these markets
solutions for unmet needs can enable early detection of accelerates. Companies are responding to the changes,
new customer segments and potential untapped value. as evidenced by a rise in the frequency and intensity of
collaboration among players with complementary skills
End market alchemy 2
who are attempting to assemble the requisite diverse End market alchemy examines the importance of end
capabilities to develop new solutions and manage risk. markets to the global chemical industry and the shift that
These situations present opportunities for chemical is occurring those markets. It is the third in the Chemicals
companies to rethink, redesign, and reinvent their market 2020 series of reports (see sidebar “The Chemical 2020
approaches, which can result in a portfolio of business series so far: This study in context”), which expressly
models tailored to specific end market requirements. considers how changing trends and revolutionary business
models address new and different market opportunities
This collaboration and new market thinking is apparent (see Figure 1) and profitability challenges in the global
in a type of food technology, known as nutraceuticals, chemical industry. The report has three sections:
which combines food and pharmaceutical products.3 It is 1. Analysis of end markets: Looks closely from different
also visible in the recent upstream integration of NEC, a angles at the current situation in major end markets and
leading global electronics maker combining with bioplastic end market segments. Included is an analysis covering
technology to develop shape memory and recyclability. the performance and attractiveness of 16 end markets
with 55 segments (see Figure 2). It examines if and how
specific end markets rebounded after the economic
crisis in 2008–2009 and highlights the markets that are
resetting, factors in regional developments, and trends
3 Nutraceuticals.com homepage, accessed 17 October 2011, www.
in margins over time.
nutraceuticals.com.
Figure 1: Approach for the study: Analyzing end markets to create more value
Study the attractivess of end markets Approach growth opportunities for the
global chemical industry
Financial
health Identify and outline
Reset/ key capabilities
Investment
rebound
potential
after crisis
Situation
analysis
End market/
chemical Regions Evaluate level of
customer intimacy
relations
Market
sizes
Extend intimacy assessment
to the end markets
Megatrends
Value Unmet
migration Future outlook needs
Align business models
New with end market opportunities
markets
Source: DTTL Global Manufacturing Industry group.
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Figure 2: End markets and segments
End market Segment End market Segment
Personal care • Hair care Automotive • Passenger cars
• Skin care • Trucks and buses
• Cosmetics • Tires and rubbers
• Dental hygiene Construction and • Residential (housing)
• Personal hygiene infrastructure • Non residential buildings
• Cosmeceuticals • Infrastructure
• Fragrances
Electronics • Global electronic equipment and
Health care • Equipment (medical devices) instruments
• Supplies (disposables) • Global semiconduct and
• Pharmaceuticals, biotechnology electrical components
Household • Non-durable household goods • Office electronics
• Home furnishing • Consumer electronics
• Household appliances • Cables
• Housewares • Television
Nutrition • Packaged foods and meat Paper and • Printing and writing
• Beverages (distillers, brewers, packaging • Packaging (plastic)
and soft drinks) • Packaging (paper)
• Nutraceuticals • Fiber (pulp)
Apparel and textiles • Apparel and textiles • Toiletries
• Leather Commercial • Commercial printing (cartridges)
Transportation • Aircraft manufacturing printing
• Ship and boat manufacturing Energy • Oil and gas
• Railway manufacturing • Energy/Electrical utilities
Mining and metal • Precious metals (gold) • Wind
• Iron ore for steel • Solar
• Base metals (nickel, lead, zinc, • Battery
and copper) Water • Water utilities (water treatment)
• Aluminium Agriculture • Pesticides
Machinery • Construction machinery • Fertilizer
• Other machinery • Agriculture products
Source: DTTL Global Manufacturing Industry group.
2. Seizing end market opportunities: Concentrates on 3. Evaluation of end market approaches: Discusses
factors that can affect the outlook for end markets. It various methods of addressing different market
defines and analyzes megatrends that are likely to have opportunities. It closely considers how the starting point
a significant effect on end markets. Behavioral patterns of a chemical company influences its choices. It also
of specific end markets and migration trends in industry looks into the attractiveness of certain opportunities and
value chains are discussed. This results in the definition presents one important measure of the attractiveness of
of various unmet needs that could present growth the major end markets to the global chemical industry.
opportunities for the global chemical industry. Finally, six different business models are defined that
incorporate key capabilities necessary to succeed.
End market alchemy 4
Analysis of end markets
The current situation: End market performance those end markets shows that the chemical industry’s
The DTTL Global Manufacturing Industry group analyzed average EBITDA margin of 14.1 percent compares
the performance of over 3,000 companies in 16 major favorably to the 14.7 percent average of the end markets,
end markets and 55 segments over the last decade. This whereas the average gross margin of the end markets is
analysis is intended to provide insight into the financial much higher (33 percent) than that of the global chemical
health of the various end markets. It highlights trends that industry (25.6 percent). Note that a comparison of global
were either held in common with or different from those chemical industry gross margins with those of its end
observed in the global chemical industry during the same markets is not particularly meaningful, but showing how
10-year period. close EBITDA margins of the end markets are to those of
the global chemical industry reveals how much more end
A major finding of this analysis is a heterogeneous picture of market companies invest in R&D and in selling, general,
performance, as some end markets lost margin while others and administrative (SG&A) expenses.
were more stable. Only a quarter of the end markets analyzed
grew in gross margins (personal care, mining and metal, Companies in highly competitive end markets that
water, and construction and infrastructure). In the same have a lower potential to differentiate themselves (such
period, gross margins of the global chemical industry were as transportation, agriculture, and construction and
also under pressure and declined more than 300 basis points. infrastructure), or that are more regulated and have higher
asset intensity, had lower gross margins. Not surprisingly,
A plot of the 10-year average gross margin versus the those companies had higher cost bases and did not invest
average earnings before interest, taxes, depreciation, and as much in marketing as those in end markets such as life
amortization (EBITDA) margin (see Figure 3) for the 16 end sciences and consumer products.
markets studied and the chemical companies supplying
Figure 3: EBITDA margins and gross margins (2000–2010)
55
Personal care
Average line of end market
0) 50 Average line of chemical companies
1
0
2
0-
00 45
e (2 Health care
g
a
nt 40
e
perc Apparel and textiles Nutrition
n 35
n i Machinery Electronics Mining and
gi
ar metal
m 30 Household Personal care Energy
oss Paper and packagingHealth care Nutrition
erage gr 25 CAountsotrmuocttiioven AEglercictruoltnuicres MininAgg arnicdu lmtueretal
Av Construction/Transportation/Automotive
20 Transportation Energy
Machinery/Household/Apparel and textiles Paper and packaging
0
0 10 12 14 16 18 20 2282
Average EBITDA margin in percentage (2000-2010)
Chemical companies End market
Notes:
Red color differentiates end market supplier from chemical companies.
*EBITDA margin = EBITDA/revenue
Source: Capital IQ data and DTTL Global Manufacturing industry group analysis.
5
Companies in the life sciences end markets (i.e., nutrition, own strategic assessments; they can also help to generate
health care, personal care, etc.), which have relatively high insights during the assessment of growth opportunities.
customer intimacy and business models relying on product
differentiation, tended to be more profitable. With innovative Figure 4 ranks the top 14 end markets in descending order
marketing, life sciences companies were able to sustain good by the size of revenues the global chemical industry has in
margins based on a perception of greater value. Examples those markets. Color coding depicts how the 14 end markets
are companies that follow consumer trends such as designer fared in the economic crisis in 2008–2009 by region. It also
bottled-water products, premium brands of clothing and distinguishes between end markets currently in reset mode,
textiles, and products that lead or follow fashion. those that have rebounded, and those that were largely
unaffected. The figure segments these reset, rebound, and
Almost obsessively, the global chemical industry has been unaffected designations by region and color codes them by
driving down costs for the last 20 years. It reduced average the range of growth expected through to 2014.
SG&A costs by 7.5 percent4 from 2005–2010 to offset
other pressures on profitability. With little room now left Figure 4 reveals some interesting insights:
to cut costs, what will the industry do? Will it follow most • Eight end markets accounted for 93 percent of global
of its strategic leader companies and establish positions on chemical industry revenues in 2009
one or two megatrend frontiers? Will chemical companies • The growth outlook across most end markets and
be able to take advantage of market and technology regions is greater than 5 percent based on 2009 data
opportunities by managing their own resources? What has • The automotive and construction end markets in North
become clear is that a systematic focus by chemical players America and the paper and packaging industry globally
on their end markets is an encouraging approach to help are the only end markets that have not rebounded to
sort through future issues and scenarios. pre-crisis levels
• Life sciences end markets (i.e., nutrition, healthcare,
Analyzing global end markets personal care, etc.) are the only ones that remained
DTTL’s Global Manufacturing Industry group has uncovered stable during the crisis across every region
several factors and key elements that became apparent • Negative growth occurred in 7 out of 14 end markets in
and important during the analysis of end markets. Overall the 2008–2009 economic crisis
end market and segment sizes, drivers of growth, current
financial situation, outlook by region, end market segment Demand growth in one end market typically leads to
performance, and the propensity for megatrends to demand growth in supporting and adjacent markets.
influence all of the above are among the most decisive For example, the outlook for growth in the construction
factors. Once the key factors were identified, they were market is in the Asia-Pacific region is positive.5 This is driven
matched against the individual company’s skills and ability in large part by the expectation that a large middle class
to serve those markets, and an assessment was made of will emerge in China. Growth in the construction market
how well aligned with the needs of other end markets has boosted demand in other markets, such as mining and
the company’s performance and capabilities were. The metals. This significant increase in demand by China has
outcome of the analysis showed wide variation from one resulted in greater competition for basic resources such as
end market to another (see Figure 4). oil, metals, and wood and is a driver for rising commodity
prices. Growth in China, led in large measure by
Figure 4 presents common key factors considered in an construction, has fuelled the global economy but has also
evaluation of end markets and the global chemical industry resulted in over capacity of apartments and the vacancy
itself. The key factors in this synopsis show wide variation
and can form the basis of a model for chemical companies
to start to bring additional depth and understanding to their
5 Davis Langdon, “World Construction 2011,” accessed 18 October
4 DTTL Global Manufacturing Industry group analysis. 2011, www.davislangdon.com.
End market alchemy 6
rate for the nation’s private, commercial housing stock is compounding this was the investment by certain
between 25 and 30 percent.6 “developing” countries in significant new production
capacity. Yet the labor-cost advantages that were
The world experienced shifts in demand from one region responsible for a significant transition of production assets
to another over the last two decades as manufacturing have proved to be temporary. For example, China’s labor
and services moved to lower labor-cost markets. Further costs have been rising in its apparel and textile industry,
which has experienced a 30 to 40 percent cost increase
6 Economy Watch, “200 Million Empty Apartments? China’s Complex
Property Market,” 21 December 2010, www.economywatch.com.
Figure 4: End market current situation, size and revenue, and outlook
End market End market size and chemical Current situation Outlook (2010-2014)
revenue from end market (reset/rebound/stable)
Chemical End market size
revenue (US$ billion)
(US$ billion)
a a
c a c a
meri fic eric meri fic eric
A ci m A ci m
North Europe Asia Pa Latin A Global North Europe Asia Pa Latin A
Construction 695 8,016
Electronics 371 2,458
Household 159 800
Agriculture 142 1,772
Paper and packaging 130 702
Automotive 128 1,932
Health care 113 1,368
Energy 113 3,833
Transportation 61 1,023
Nutrition 29 4,022
Personal care 20 225
Machinery 15 457
Apparel and textiles 11 1,097
Mining and metals 4 1,333
 R eset: Economic crisis in 2008–2009 resulted in a lower base line of activity in the end market compared to pre-crisis levels. End market has not
reached pre-crisis levels (2005–2008).
 R ebound: If economic crisis in 2008–2009 had a larger effect, it was short lived and activity levels have bounced back in 2010 to pre-crisis levels.
 S table: The economic crisis in 2008–2009 had little to no effect. Compared to 2008, the 2009 end market size has declined by less than or
equal to one percent.
Color coding for outlook growth rate (CAGR) ranges for 2010–2014:  less than 0%  0–5%  5–10%  10–15%  greater than 15%
Not available data : Data unavailable to make a comment on the status of the end-market.
Source: Datamonitor reports from 2010 and 2011 and DTTL Global Manufacturing Industry group analysis.
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