China beckons for ‘smart’ chemical companies

Posted on 24 Jan 2012 by The Manufacturer

In the February issue of TM our lead story focuses on export opportunities for British manufacturers in China – the world’s second largest economy. Focussing on the chemicals industry Mark Dickson, associate director for Morgan Sindall Professional Services assesses the market gap for sophisticated new smart materials that add value to existing products.

Mark Dickson, Associate Director - North, Morgan Sindall Professional Services

The recent slowdown in global markets has highlighted the need for UK manufacturers to export their products to a wider range of customers – particularly those from emerging markets. Chief among these are the economies of the Far East, where the rapid growth of China has not only fuelled demand within the country itself, but also attracted services and materials from its technologically-advanced neighbours.

In the chemicals industry, one opportunity to export to the Far East is with ‘smart materials’.  These advanced materials respond to their environment and significantly change one or more of their physical or chemical properties.

Consumer products, such as electronic circuitry, high-end cars with anti-rust paint, and spectacles that adjust to light levels use these smart materials.  Demand for these has been fuelled by the relatively small but rapidly expanding middle class that has developed within China. This rapid growth in demand and a lack of local supply for some of the more specialised materials provides an opportunity for the UK chemicals industry.

In recent years, the UK chemicals and manufacturing industries have migrated away from bulk materials and labour intensive production towards knowledge driven materials and lean processing. The upshot is that our chemicals industry has developed specialised capabilities that do not exist elsewhere. So how can UK chemical manufacturers capitalise on demand?

The competitive landscape

It is vital that companies understand the nuances of the region, and recognise the economic diversity across the Far East.  Growth may be driven by China, but there are economies with sophisticated chemical industries, such as Malaysia and Singapore, that are very well placed to meet some of China’s needs for speciality chemicals.

The sophistication of chemical production within China itself has remained comparatively low.  This is caused, in part, by the low level of intellectual property protection in China, which has prompted large companies to relocate their facilities to countries such as South Korea that offer far better protection.

As such, the technologically-advanced economies that neighbour China represent the competition for UK chemical manufacturers, who need to find niche areas to overcome their significant logistical disadvantages.

Opportunities do exist, and manufacturers need to focus on these gaps in the market. One way is to contribute to the manufacturing industries that supply China, such as South Korea, Singapore and Malaysia, and they can do this by supplying specialist materials that these countries cannot produce themselves, or by providing knowledge about the materials to these markets.

Another is to supply materials that add performance functions, such as oil-product additives, which can be manufactured in low volumes in the UK and formulated locally to add extra functionality to mass-produced products.  Fuel additives, for example, reduce damage to engines and can amount to less than 0.1% of the final product volume.  Final product formulation can be performed at plants much closer to end users in countries such as China and, by only producing and exporting the specialised additives, UK manufacturers can control their transportation costs.  Export agencies, such as UKTI, are an excellent resource for opening up these partnerships.

Managing operations

In terms of developing their offering, UK companies need to be mindful of the scale of their operations. China’s wealthy elite has a healthy appetite for high-end Western products that use specialist chemicals and materials, but it’s currently a small segment of the population, albeit one that is growing exponentially.

Rather than develop plants and facilities that can cater for the anticipated demand of a fully-fledged and nationwide middle class in China, companies should limit their current offering to match the existing demand, while retaining the ability to expand their operations and production capacity as the market grows. It is an approach that mitigates risk but maintains the potential to grow production and sales as demand increases.

In preparing for growing demand, companies also need to consider differences in scale between familiar economies and countries such as China. Because it has such a large population, it is worth considering tighter margins to secure a higher market share. Although this approach could be constraining at first, it becomes more and more viable as the market expands.

Capitalising on opportunities

There are clearly opportunities throughout the Far East. The scale of the potential market in China, for one, is an acute reason for developing ties with the region. For UK chemical manufacturers, the key will be to focus on the aspects of their business that are not currently on offer in China or the developed economies that surround it.  Only by doing so can they capitalise on this vibrant market.