The development path of Chinese chemical enterprises appears to be like this in the eyes of foreigners.

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From 2009 to 2014, Deloitte’s management consulting chemicals team conducted a 5-year study that tracked the development of 250 publicly listed chemicals companies worldwide (with a threshold of annual revenue of over $1 billion). This study identified several typical characteristics of the global chemicals industry, and provided in-depth analysis and insights regarding changes in raw material sourcing strategies as well as production and operational decisions for these companies. Duane Dickson, Global Partner for the Chemicals Industry at Deloitte, and Yann Cohen, Leader of Deloitte’s Chemicals Industry Consulting practice in Asia and China, gave interviews to journalists, sharing their constructive insights. Core idea: Chinese companies should resolutely shut down production capacities that are unviable and lack competitiveness, while the industry should consider whether it is still necessary to add new production capacity. With an overall return on capital of 19%, most Chinese companies fall below the average level. Dixon said, \"Our research shows that over the past 5 years, the main trend in the global chemical industry has been that most companies have improved their return on capital and profit margins, but not necessarily their scale.\" According to the income statement, the company has increased its return on working capital by an average of 5 percentage points over the past 5 years, reaching 19%. Of course, this result is positive, but the measures taken by the company are not entirely positive. This is because companies often implement cost cuts, including reductions in sales, management, and administrative expenses; some even cut their R&D spending. Although the overall profits of globalized enterprises have increased, their gross profit margin has declined. Companies increase their profit margins by cutting other costs. ” According to this Deloitte study, based on performance in 2009, chemical companies in different regions around the world were engaged in uneven competition. The investment in chemical enterprises and the resulting benefits vary. By examining the finances and performance of different companies, Deloitte found that a company’s position determines how many resources it has at its disposal and what options are available to it. For companies that are already facing difficulties, the risks increase if they fail to make successful improvements. Specifically in China, out of the 250 global listed companies tracked by Deloitte, about 15 are from China. Only one or two of these companies reach the level of global elite enterprises, that is, at a similar level to LyondellBasell, Dow, BASF, SABIC, Shell, Saudi Aramco, ExxonMobil, and others. On one hand, they can achieve a relatively high return on investment; on the other hand, they possess globally leading production capacity for bulk chemicals, thereby maintaining a cost advantage. The main reason for this is that Chinese companies have invested heavily in the past, but the returns on those investments have been insufficient, meaning that asset efficiency has not been fully utilized. Regardless of their own performance, these companies continue to increase their investments. But in fact, some sub-sectors already have overcapacity. Chinese companies should resolutely shut down those production capacities that are unviable and lack competitiveness. At the same time, it is important to consider whether the industry should expand its production capacity further. Ultimately, the operation of chemical enterprises requires greater discipline, not only to ensure the efficient operation of existing production facilities but also to optimize the allocation of available funds. Therefore, Chinese companies need to accelerate their transformation and cannot wait. Core idea: In addition to production, chemical companies must also pay attention to changes in global trade trends. One should not focus only on being competitive in this region, but also consider the factory’s global competitiveness. New pitfalls arise from the diversification of raw materials. As an industry that is highly dependent on resources and energy, the globalized industrial sector is undergoing unprecedented changes in its raw materials. Over the past few decades, oil has played a primary role as a raw material and energy source. But the situation is completely different now; the diversification of raw materials and the associated changes require the petrochemical industry to have a high degree of adaptability and flexibility. Guanyang used a very vivid metaphor: \"In the past, due to their heavy reliance on petroleum raw materials, global chemical companies had few options, just like fish kept in the same pond.\" But now companies are seeking other alternative raw material routes, moving into broader areas. For example, Chinese companies are actively seeking opportunities in coal chemical industry, and the advanced coal chemical sector has seen tremendous development ； Some companies, seeing the cost advantages of shale gas in North America, have followed in its footsteps. But in this process, be wary of new traps! ”For example, the United States has cheap shale gas and natural gas, and its borrowing rates are low. Many companies, including those in China, have ample capital, which drives them to build ethylene cracking units in the United States. Dixon said bluntly, “This is very dangerous!” Through in-depth analysis, a company faces significant risks if it fails to meet the following criteria: first, whether its plant scale has reached a competitive, world-class level ； Second is whether the geographical location offers supply chain advantages, that is, factors such as pipeline infrastructure and distance from ports are taken into consideration ； Third, and most importantly, whether there is a long-term sales contract of at least 15 years to ensure that half of the production capacity for ethylene and its downstream products is sold in the United States. Additionally, it should be taken into account that it takes 20–30 years for a plant to recoup its investment; therefore, raw material stability must also be ensured. In fact, these points apply equally to Chinese companies going global, that is, setting up factories anywhere outside China. ” Raw materials and the market are the two ends of a business. In addition to production, chemical companies must also pay attention to changes in global trade trends, and in an era of economic globalization, this has an increasingly significant impact on these companies. Chinese chemical companies need to have a clearer understanding of the supply and demand balance in different regions around the world. For example, the United States was once a major importer of nitrogen fertilizers; after gaining access to cheap shale gas, many nitrogen fertilizer plants have been built in North America. North America quickly became self-sufficient. Although the United States currently imports a small proportion of nitrogen fertilizers from China, it seems to have little impact on China’s nitrogen fertilizer industry. But once self-sufficient, the United States will reduce its imports from the Middle East. The excess nitrogen fertilizer in the Middle East will be sold to other major agricultural countries, such as India and Southeast Asia. But these places are the export destinations for nitrogen fertilizers in China. As a result, U.S. shale gas will pose risks to the operations of Chinese fertilizer companies. “Therefore, when building a factory in a certain location, one should not focus only on being competitive in that region, but also consider the factory’s global competitiveness. ”Dixon said. Core idea: In the traditional chemical industry, bulk chemical companies need to continuously benchmark themselves against those with the largest scale and lowest costs ； Specialty chemical companies that produce niche products and provide services need to pay close attention to the replacement and updating of their products. In the non-traditional chemical industry, bio-based raw material approaches hold great business opportunities. Companies at various stages of the chemical industry’s value chain need to improve their level of cooperation. How can breaking away from traditional models to seize new opportunities help chemical companies overcome constraints such as raw materials and achieve more flexible production and operations? Dickson suggested that among the Chinese companies studied by Deloitte, those leading in the production of bulk chemicals in China should pay attention to maintaining an advantage in terms of raw materials in any global market, including advantages in raw material sourcing and costs. For other Chinese companies, there are several other options: one is to enter the market for products with low production volumes among bulk commodities (including intermediates), while keeping costs under control. This mainly refers to products that are produced and consumed in China, with little international competition; there are not many manufacturers, and the production volume is low, such as ethylene glycol. Second, focus on products for which one has expertise advantages and can provide value-added services. Such chemical enterprises have greater bargaining power. Because customers prefer to choose partners who have specialized expertise in a particular field, can provide high-quality services, and are willing to pay a slightly higher price. But these are all the approaches of the traditional chemical industry, and they cannot avoid the cyclical nature of the industry nor the increasing risk of bulk production of products. Bulk chemical companies need to continuously benchmark themselves against those with the largest scale and lowest costs. Specialty chemical companies that produce niche products and provide services, on the other hand, need to pay close attention to the replacement and updates of their products. Companies need to maintain a very high level of vigilance. Furthermore, the trend toward industry consolidation will continue, with some of the unprecedented large-scale mergers and acquisitions that have already taken place persisting. Moving away from traditional chemical pathways, the use of bio-based raw materials in chemical production represents significant business opportunities. The two biggest advantages of bioengineering are its controllability (operable and programmable) and low cost of investment. For example, a company has built a production facility that utilizes a biological route to produce benzene; in the future, it can be adjusted to produce toluene as needed. The raw materials may differ, but it remains a process of biological fermentation; it can be achieved simply by making adjustments through bioengineering, without any need to modify the equipment itself. This can save a great deal of investment. Specifically, the promising areas for the bio-based raw material route are mainly C4, aromatics, C13–C15, etc. “A way to make chemical companies competitive is by providing solutions to specific problems. For example, products and services that address resource shortages and water quality issues, increase food supply, and improve urban living ； Identify unmet demands in downstream industries, such as vehicle lightweighting, and provide comprehensive advanced material solutions ； Collaborating with partners upstream and downstream in the value chain, as well as with competing companies, also includes trying out different business models. ”Dixon said. Guan Yang added, “There are many new opportunities in the market, but it’s quite difficult to seize them.” For many companies, marketing actually involves building customer relationships; it is important to be able to identify and seize opportunities, especially in certain specific areas. Ultimately, companies at various stages of the chemical industry’s value chain need to engage in a higher level of cooperation. ”