McKinsey, in a report on Chinese chemicals has said that the country offers four competitive advantages over other countries. These advantages give domestic companies a leading edge as they have easy access to all four. However, foreign companies are not completely excluded when it comes to some cost saving areas.
1. Lower capex
McKinsey has said that the main drive behind China having such low capital expenditure is the low cost of labour within equipment, engineering and construction work. Chinese chemical equipment manufactures are, according to the report, ramping up capabilities to produce more high end equipment to ensure that they keep domestic company costs down and have a bigger part of the chemicals market. However, McKinsey has said that equipment manufacturers are not likely to make a big impact just yet due to the reputation for Chinese equipment being ‘inconsistent and unstable’. The report says that ‘good quality control with more frequent quality audits and strict supplier certification systems could address this challenge successfully.’
Also, it has been said that procurement for projects can be cheaper in China with leading EPC contractors saving an average of 5% on sourcing hardware from China and other low cost countries. McKinsey has reported that in some low cost countries, the procurement savings can be as high as 10% when compared to developed countries.
2. Operational labour costs
As part of opex, McKinsey has said that China’s labour costs do have an advantage over elsewhere in the world, however it does say that ‘it does not have a clear advantage in other production factors such as utilities and raw materials for most chemicals.’ But despite this, the Chinese chemical industry does have a competitive cost cutting edge for the labour intensive portions of the market. The low labour costs do not of course only benefit domestic companies, as, if a multinational corporation is setting up in China it will have access to the same pool of potential employees.
It has been voiced, McKinsey report, that as prosperity in China increases, wages will be driven up and the country will loose its low labour advantage. McKinsey have said however, that this is an unlikely change and that while wages in the country have increased, so have productivity levels amongst workers.
3. Superior selected technologies
McKinsey has said that China has a strong standing in the technological world when it comes to scaling up and optimising technology that already exists, and it also is continuing to build large scale plants which enhances the workforce’s skills in technology optimisation.
In general, the report says that domestic Chinese chemical companies regularly work with their local research institutes to develop products and applications meaning they are fully able to participate heavily in the low end and mid priced market. This, in combination with low cost labour gives China’s chemical companies a big step ahead of multinational corporations, according to McKinsey.
However, the report does say that the Chinese chemical market has not yet developed a high enough skill level to invent its own technology or develop new applications within the sector.
4. Select natural resources
China is home to approximately 13% of the world’s coal reserves which puts it in a good position to benefit from its use as a feedstock for products such as methanol and olefins as well as for energy. Oil is a very different story in the country as it is home to only 1% of global reserves. McKinsey has reported that due to the abundance of coal, the chemicals industry is boosting its production of coal based chemicals rather than oil and gas based, and this is apparently especially true for the petrochemicals sector. In this portion of the chemicals sector, China is importing a large portion of cracker derivatives. The McKinsey report says that through coal to chemical conversions, ‘China could have around 2 – 4 million tons of ethylene and around 3 – 5 million tons of propylene’ by 2017.
China also reportedly has large reserves of unconventional gases and McKinsey has said that these could become alternative feedstocks for petrochemicals. However, due to the lack of correct technology, these reserves are relatively untouched.
China and its chemicals sector clearly does have some competitive advantages over others, however, it is also clear that these advantages cannot be kept back from multinational corporations and in some instances are very limited.
Adapted from a McKinsey report by Claira Lloyd.
Read the article online at: https://www.hydrocarbonengineering.com/petrochemicals/05112014/mckinsey-chemical-industry-advantages-china-1547/