Into The Future - Accenture recently embarked on a market study of chemical use in the European Union. The consultancy set out to help chemical producers better determine how to evolve their businesses over the next 20 years.

In the process, Accenture evaluated 29 end markets and linked chemical usage to output forecasts for each market.

Study results showed that the European chemical industry will be a large, high-value market in the year 2030.

Projected Key Markets

Accenture said it believes that projecting the necessary chemical industry structure, products and service requirements in Europe needs to begin with assessing what kinds of customers will be in Europe over the next 20 years. What will the customer base be like in 2030?

The results the study revealed that the key European chemical markets doing well today will be those that continue to thrive in the coming years. These markets will change in share to some degree by 2030, based on projected downstream industry growth, but will nevertheless remain the largest overall. By understanding market trends and the characteristics of the users of chemicals in the year 2030, chemical producers can accordingly align research and development (R&D) efforts, products and services, supply chain and manufacturing assets for today - and for the long term.

By 2030, the top seven European chemical markets and their projected chemical use are:

• Healthcare: €120 billion

• Services: €70 billion. Services such as: wholesale and retail trade for recreational products, sanitation/sewage, hotel/restaurant uses, R&D chemicals, etc.
• Agriculture: €31 billion
• Construction: €30 billion
• Motor vehicles: €28 billion
• Food and beverages: €18 billion
• Industrial equipment: €18 billion

At the opposite end of the market analysis were industries projected to be less rewarding to chemical companies, such as textiles, basic metals, refining and communications equipment. These markets are either internal resource inhibited and/or have high labor costs. However, there may be niche opportunities in some of these segments, such as biofuels or specialty textiles. Also, hydraulic fracturing chemicals used for shale gas development might find high use in gas extraction, especially in Poland, which is estimated to have the highest shale gas potential in the region.

Shift of Manufacturing to China

World chemical markets continue to evolve and shift regionally depending on the relative competitive dynamics of each segment throughout the supply chain. The shift of labor-intensive downstream industrial chemical users to low-labor cost areas, particularly China, has matured, with remaining European chemical-consuming industries now being less dependent on labor costs. This trend will continue in the coming decades as labor costs rise in China and, in addition, are offset by advances in robotics and automation.

Germany's small to mid-scale firms companies are good examples of how domestic manufacturers carefully select products and services that do not compete with China, but offer the value of reliable, well-engineered products, delivered just-in-time. With regard to talent, these companies collaborate with local universities and utilize apprentice systems. They also maintain refined supply chains by clustering around large manufacturers. It has been estimated that this constantly innovating sector of Germany is growing faster than the Chinese economy itself.

This is not to say manufacturing will cease to be built in emerging markets, but rather it will be built with less of an emphasis on export orientation. This is also not to say that all industries will return to European shores, since the entire supply chains of some industries have already relocated to emerging regions and it would be difficult to envision a transition back to developed regions (e.g., textiles and electronics assembly) in the next 20 years.

It is worth noting that China's new Five-Year Plan emphasizes moving to higher-technology industries, including new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, energy conservation and environmental protection, alternative energy and biotechnology. Participating in these innovation-intensive areas requires some heritage of existing development, most of which is lacking in China.

Therefore, European manufacturers will have much to lend in terms of technology and market knowledge, and are likely to be courted as joint venture partners for Chinese state-owned entities focusing on these markets. European chemical companies can follow these downstream companies, as they have done for their basic manufacturing customers over the past two decades. During the next few years, European petrochemical companies are expected spend about €2.7 billion in plant expansions in China.

Positioning for 2030 Markets

Raw materials cost advantages rising in the United States through the development of unconventional gas, are not likely to occur in Europe. Also, the Middle East will maintain a low raw materials cost position.

Both factors will pressure Europe to enhance its competitive position. As in the past, when European chemical companies responded to the U.S. advantages in hydrocarbon availability and scale process technology by focusing on specialty chemicals, European producers will need to continue the focus on new products and services. They must also carefully invest in their supply chains to serve the needs of Europe's high-growth regions, while maintaining the lowest possible costs.

The winning chemical companies of Europe in 2030 will have a clear vision of the future market potential and how global industrial activity will evolve. With this understanding, they will carefully align differentiated products and services according to the explicit needs of individual customers, while not diluting resources on extraneous activities. They will have a good understanding of balancing asset utilization with customer cost-to-serve considerations. Specific producer actions should include:

Emphasizing innovation: Innovation in products and services, as well as manufacturing and business processes, will enable chemical companies to serve the well-positioned EU customer industries of 2030 and to enter emerging markets by way of a technology value proposition. Accenture's customer preferences study for chemicals indicated that buyers value innovation more than achieving a better unit price when the innovation helps them reduce their own costs (by improved productivity, reduced supply chain costs, etc.).

Maintaining "know how" and attracting talent: Productivity improvements have reduced "know how" to fewer employees in the EU chemical industry - and it should be remembered that innovation comes from talent, not assets. Chemical companies need to entice technical students early on to consider careers in the chemical industry and develop training and knowledge retention systems.

Other programs may include conducting school partnerships or funding public laboratories; increasing and promoting the "sustainability" contribution of the chemical industry; co-funding education programs; or tapping new talent channels, such as programs to hire science and engineering talent with disabilities or in rehabilitation-a practice successfully conducted, for example, by Swiss insurance companies and Raytheon.

Becoming the solution: As the "polluting pulp" industry turned to the "green alternative," so should the chemical industry become the ideal partner for other industries in developing sustainable solutions, from catalysis to biology to biochemistry to simple chemistry. EU chemical companies have strong technology to lend to the green alternative area.

Concentrating on large, competitive domestic customers: Many industries in larger EU economies have transitioned to "high-end" or "performance" products. These industries will require higher levels of service, support and innovation. Large-volume customers will remain valuable and should not be viewed as a fading market in the assumption that future investment needs to be made in other regions.

Exploiting Europe's backyard: Europe's internal regions have different advantages that should be harnessed through integration measures (supply chains) by 2030. Areas of low labor costs and high long-term industrial growth, such as Spain, Ireland, Czech Republic, Poland, Slovakia and other Eastern European countries, represent local opportunities. Chemical companies must offer lower costs and improved supply chains to serve these regions. Serving regions with varying industrial characteristics also means providing differentiated service levels according to the nature of each region's markets.

Focusing on "safe haven" markets: Some large markets are not subject to high levels of import competition due to structural or import cost reasons. Examples include construction, agriculture, food and some segments of rubber and plastics (e.g., pipe and packaging).
Enhancing customer competitiveness:

Change supply chains to best serve customers. Leading large-scale manufacturing industries, such as automobile production, are growing in developed regions and insisting that parts suppliers manufacture "on site" for instant changes in specifications. Inter-cluster connections and connections to emerging EU regions should be improved.

Supporting policies favoring customers: Besides governmental policies directly impacting chemical manufacture, the chemical industry should investigate and support what is beneficial for domestic downstream industries.

Leveraging technology for overseas expansion: While Accenture emphasizes a needed and logical commitment to the home market, European producers should still continue to leverage current and future expertise to invest in high-growth overseas regions. In fact, this is another reason to continue investing in technology-as a vehicle for new market entry, since it is valuable to potential emerging market alliance/ joint venture partners. Careful capital expansion planning and project management will be necessary to ensure a solid, long-lasting competitive position for greenfield assets.

A Positive, Long-Term Outlook

Despite much talk and speculation that the chemical market in Europe will essentially disappear and move to China or the Middle East, our research indicates the contrary. A European chemical industry will exist in 2030, and it will largely resemble today's landscape.

The chemical industry in Europe, as well as in other developed regions of the world, still holds huge potential and will continue to grow as a high-profit industry-not because producers in developed markets are getting higher sales growth for their products, but rather because customers in developed markets expect and are buying more sophisticated products that deliver higher profit margins.

To lead in tomorrow's markets, however, chemical producers will need to be vigilant in continually shaping their strategic plans, manufacturing and business processes, technologies and talent. Producers will need to be very much focused on developing high-technology products and be continually challenged in their abilities to innovate and develop creative ideas in serving customers.

The good news is that European chemical companies have had a history of leading in innovation, and by continuing to advance in their sectors, they hold the potential to achieve high performance by producing products with high standards and high quality that meet customer demands in 2030.