Extracts from a key note speech made by Andrew Milton-Thompson at the ICFG (International Corporate Finance Group www.icfg.net ) Global Partners’ conference in 2015
The chemical industry has a long and sometimes glorious history of producing the technologies and materials that have enabled the dramatic advances in standard of living and quality of life that we saw in the twentieth century. Without the chemical industry, the ‘developed world’ would not be developed.
Demand for the industry’s products was driven by the desire for more and better housing, and for the new consumer goods that used its products, especially cars. Paul Hodges1 points out that the population blip that is the baby boomer generation born in the years following the end of World War II has been a major engine of this growth.
The most innovative companies in the US and Europe became rich and powerful, attracting smart scientists and ambitious young people with the best salaries, promotion prospects, international opportunities, and job security.
However the industry had its problems. It tended to suffer from poor strategic management, notably over-investment in times of boom and underinvestment in times of bust. This led to poor financial returns, which were rather masked by the long term growth trajectory. In 1962 Rachel Carson’s “Silent Spring” was published, galvanising concern for the impact chemicals were having on the environment. Then in 1984 the tragedy of Bhopal brought into stark relief the corporate responsibilities that had been ignored in the dash for growth. More recently, the tightening of legislation, especially the introduction of REACH in the EC, has added to the constraints the industry faces.
In recent decades the industry has been massively re-shaped as economic growth has moved to the east, as competitive pressures have given the advantage to oil producing geographies, as investors have called for better returns, and as new market entrants have emerged in developing countries.
As recently as 1999 the top twenty global chemical companies were all headquartered in the USA, Western Europe or Japan. By 2013 the list included companies in China, Saudi Arabia, Taiwan, Korea, and India.
And all those western baby-boomers are now heading for retirement. So long term demand for cars, for housing improvements, even for the new goods produced by the developing world is at risk. So far there is no emerging middle class in the developing economies with the spending power to take up the slack1.
On top of this, the chemical industry has been engaging in another over-investment cycle, especially in the USA, on the strength of the exploitation of shale gas deposits 2.
As the chemical industry has matured, the key technologies have become refined, patent-expired, and more widely available. Old plants have been written off or decommissioned. New, more efficient plants have been brought into service. Many chemical products have thus become commoditised. Companies have to look ever deeper into customer application needs to develop products that can command a price premium. The key is helping customers save cost or build uniqueness in their own businesses.
At the same time customer industries have themselves come under huge competitive cost pressure.
An interesting financial analysis I have seen suggests that speciality industries like coatings formulation are, comparatively speaking, oases of healthy financial return, sandwiched between commodity suppliers of petrochemical and other raw materials, and customer industries such as automotive, retail and packaging which have recently suffered low rates of return. It is interesting that these companies are succeeding in spite of being sometimes orders of magnitude smaller than their suppliers and customers.
The chemical industry has offered attractive and secure careers for many years. It is clear now that the industry’s population reflects the population at large, with a high proportion of baby-boomers coming up for retirement. What is worse, the tightening economic environment in recent decades led companies to reduce their youth intake. This is another, perhaps even more damaging, aspect of the ‘boom and bust’ investment mentality. It takes much longer to train and develop skilled people than it does to build a new chemical plant.
Young people with technical backgrounds do show more interest now in industry than they did in previous years when the smokestack, post industrial image led them to aim for high tech or service jobs. However the industry is no longer in a position to offer secure long term career paths, and is unsure how to develop and protect the knowledge base represented by its key people. The younger generation is more aware of the need to manage their own careers and be mobile. This is a tension that has grown in recent years, with companies finding it hard to strike a balance between maintaining the right size of workforce, and holding on to a critical base of knowledge and expertise.
Companies have been driving for more flexible employment laws to reduce severance costs involved in the restructuring exercises which have become essential to retaining competitiveness in western markets. At the same time they have become acutely aware of the danger of the drain of knowledge and expertise during these exercises and with the retirement of skilled people in their fifties and early sixties.
One might imagine that consolidation and down-sizing lead to an employment market rich with talent. However just as special and unique products and services are key to a company’s profits, so are the people with the ability to create and deliver them. Those few talented and brave individuals who have taken ownership of building their own experience base, and along the way demonstrated the ability to create and deliver business opportunity, are very much in demand. Especially those in the generation following the baby-boomers.
The powerful forces which have played on the industry in recent years will continue to make this a challenging business to be in. The competitive environment remains brutal and investment returns unpredictable in a world with uncertain geopolitics and wildly fluctuating oil prices. Regulation will continue to provide a major constraint on innovation. The argument that having a strong regulatory environment in the EU provides companies in the region with a competitive advantage has never convinced investors or business leaders. But the industry is learning to live with it.
Corporate restructuring and re-alignment will continue in western economies in the search for viable strategies for existing businesses and opportunities for new ones.
Chemicals has always been at heart a knowledge industry. In the past important technology breakthroughs enabled the creation of businesses with global reach. Today those technical and business opportunities are harder to find. However creative and capable people remain central to its future.