A report from McKinsey has made it abundantly clear that there is much on offer in China when it comes to the chemical sector and this has been discussed in the previous articles, The Chemical Supply Chain, Competitive Advantages and Here and Now. However, it is also obvious that China’s chemicals sector has three big challenges that are affecting its success being, inefficiency within a very fragmented industry with a large portion of subscale, non-integrated plants, an uncompetitive feedstock position in many key areas, and a lack of innovation and product research and development when to comes to application and technology development.
The over fragmentation of China’s chemical sector, McKinsey says, ‘inevitably leads to efficiency losses and overcapacity.’ It has been reported that China is in fact home to twice as much caustic soda capacity as the US, and is home to 10 times as many companies active within that portion of the chemicals sector.
When it comes to ethylene, half of the small scale plants across Asia as a whole are located in China. And when it comes to state owned corporations, subsidiaries, according to McKinsey, are not organised business units. Because of this, McKinsey’s report says that ‘different subsidiaries of the same group sometimes expand capacity aggressively and without coordination, contributing to industry overcapacity.’ This fragmentation throughout China and in particular its chemicals sector, has led to a build up in capacity of may commodities and in many cases a complete over build. Sadly, McKinsey has said that consolidation, as a solution to the problem of fragmentation is not at all likely in China’s near future.
Also, when it comes to inefficiency, midstream plants that do not have any integration with downstream or upstream sectors are adding to the problem.
When it comes to the competitiveness of basic chemicals from China in the wider market, it doesn't look good. McKinsey has said that China is short on some key raw feedstock materials which make the production of basic chemicals uncompetitive when compared to other companies in the global market. Oil and gas is in short supply in China and this impacts the production of oil products, olefins and aromatics, not to mention methanol, ammonia and more basic chemicals. Producing methanol in the country can cost twice as much as in regions like the Middle East which has vast reserves of fossil fuels. McKinsey has also said, ‘despite significant production over capacity, the country [China] will continue to be a net importer of this chemical [methanol] up to 2015 and beyond.’
Lacking in innovation
It has been mentioned in previous posts, that Chinese firms are lacking in know how when it comes to process and application development. McKinsey has however expanded on this and said that the lack of innovation and R&D in the country is contributing to the low level of differentiation amongst companies active within the chemicals sector. In fact, McKinsey has said that it is ‘helping to feed the fierce competition on price and low margins in the commodities segment.’
It is widely known that Chinese chemical companies do not heavily invest in research and development and very few companies actually have their own dedicated departments. Medium sized SEOs are highlighted by McKinsey as being particularly at fault when it comes to R&D and the report says that these companies ‘could be facing significant profitability challenges in the coming years and are in dire need of differentiation.’
It has also been highlighted that much of the research and development carried out within China’s chemicals sector is actually done in research institutes and this brings four challenges in to play according to McKinsey. Firstly, research institutes are more often than not non-profit institutions and they do not align their interests with any one parent company. This therefore means that technology is often sold or offered on license to competing companies. Secondly, the report says that research institutes are often independently run and input from businesses and consumers is minimal. The third problem is thought to be that there are not the skills available for a modern management approach to customer oriented R&D organisations. Finally, McKinsey has pointed out, ‘the incentive system for individual researchers in the institutes often drives them to publish as many patents and papers as possible.’ The drawback of this is that when compared to western companies who keep R&D under wraps to maintain competitiveness, technology is available on a wide and broad scope and is not as well protected in the realms of IP.
Edited from a McKinsey report by Claira Lloyd
Read the article online at: https://www.hydrocarbonengineering.com/petrochemicals/10112014/mckinsey-challenges-chinas-chemicals/