Marked Improvement - Economic times are changing for the better, markets have returned to life: Chemical demand is outperforming recovery of the global economy following last year's drop in demand and de-stocking of supply chains. The recently conducted top management panel "Chemical Customer Connectivity Index" (C3X) of the management consultancy A.T. Kearney, CHEManager Europe and the Westfälische Wilhelms-Universität Münster confirms these latest market observations.

The survey showed that 85% of all participating chemical suppliers said demand for their products grew significantly within the last 12 months - for more than every fourth supplier by more than 30%. Prices for chemicals as well have exhibited a clear increase. In addition, 80% of the chemical suppliers reported an increase in production capacity utilization of up to 30% to cope with the demand increase.
Hopes for a brighter future are backed by demand prospects: The vast majority of both chemical suppliers and their customers expect demand for their products to further grow over the next 12 months - and reinforce the cautiously positive trend that began to show last autumn when the crisis was abating. Finally, also raw material prices are expected to benefit from the upward trend.

Lessons From The Crisis

Inventory level forecasts show that chemical suppliers have learned from the crisis: After they had already been reduced during the downturn, they are expected to further decline. This clearly shows that chemical suppliers are trying to reduce their exposure to material price volatility.
This, however, is not the only learning: Chemical suppliers have also reinvigorated their attention to the customer interface in order to better address their requirements - and thereby gain market share. It appears that the improving business climate has recently led suppliers to re-adjust their priorities and turn from their own operations towards the market again.

"In spite of this good news, there is no doubt that the economic crisis has taught chemical suppliers and their customers lasting lessons: Being able to adapt swiftly to any changes in the competitive reality is not only key for a sustainable performance and for growth - when the going gets tough, it can make the decisive difference," said Dr. Tobias Lewe, a partner in A.T. Kearney's chemicals and oil practice. As market conditions will most likely remain volatile, a continuous and tireless focus on improving agility will become increasingly important."

Manifold Agility Levers

For the majority of chemical companies (82%) and their customers (65%), agility mainly translates into an active management of business complexity. This implies both the external complexity e.g. in the form of a broad product assortment, and the internal one, which is basically invisible for the customers and whose added value is not apparent. The importance of an improved complexity management differs by business model in chemicals and becomes all the more important the higher the specialty chemicals character is.

The second important lever consists in faster reaction capabilities (about 60% of respondents of both groups), which are mainly linked to the ambition to standardize internal processes, as well as to find ways to improve standards and practices across a supplier's entire business system.
As a third priority, chemical companies focus on cooperative network models (45%) while their customers work on the variabilization of costs (50%).

Increased Relevance of Agility Confirmed

As a consequence of the economic crisis, all levers to improve business agility have gained in importance. With regard to their implementation, about half of suppliers and customers report that they have conceptually completed actions to improve business system agility and that operational adaptation is now in progress. Roughly one fourth of both groups have, in turn, not yet started at all with the operational implementation.

However, the levers have not become equally important for suppliers and customers. The biggest gap exists for variabilization of costs: Three quarters of all chemical customers attest more variable cost structures an increasing importance since the crisis, while not even half of the chemical suppliers are of this opinion.

"This reveals that obviously an increasing number of customers are considering ceding parts of their value chain to e.g. their suppliers. This in turn raises the question for chemical companies, whether there are possibly parts in the customer value chain that are suited for further integrating downstream and thereby increasing customer proximity," Lewe said.

The ability to react faster to customer needs and market/supply chain requirements has also considerably gained in importance.
"This is attributable to the significant challenges chemical suppliers faced during the crisis when they had to quickly align production to demand cut backs while keeping inventory levels and cash flow under control," said Dr. Marc Vathauer, a senior manager in A.T. Kearney's chemicals and oil practice.

Get a Grip on Complexity

What has most gained in importance for chemical suppliers in light of the crisis, though, is a better management of their business complexity (59%).
In the past years, chemical companies and particularly specialties manufacturers have increasingly tried to differentiate themselves from their competitors by offering their customers ever more tailor-made products and solutions. This inevitably led to increased costs for manufacturing, supply chain, raw materials and logistics.

Vathauer explained: "What we do observe, particularly in the aftermath of the crisis, is an increasing attention to better understanding what is the core value offering to the customer and what can be cut back. Consequently, many companies have already started to approach the issue in a more holistic way, setting up internal processes and responsibilities so that products are steered from the market down to the production line."

The key challenge for chemical companies is now to standardize and tighten those activities whose value-add is not truly perceived (and paid for) by chemical customers - without losing proximity to them. This implies questioning the entire business system. Given an increasing trend towards commoditization this suggests that specialties suppliers are becoming increasingly open-minded about sourcing services. As a consequence, the make-or-buy question will be often raised in the future.

Greener - But Not Yet Green Enough

The current survey also confirms: Sustainability is on the advance and plays an increasingly important role for chemical companies and their customers alike.
While social sustainability and corporate governance are rated nearly equally important by both groups, a gap persists with regard to the relevance of a company's environmental track record: This is clearly considered more important by chemical customers.

"Chemical companies are recommended to catch up - as being committed to getting greener is undoubtedly worth the effort," Lewe said. A recent A.T. Kearney study has shown that companies committed to corporate sustainability practices achieved above-average performance in the financial markets during the last slowdown: Between January 2008 and June 2009, sustainability-focused chemical firms exhibited a stock performance that was on average 7% higher than the performance of their peers. Among others this is attributable to the fact that investors seem to reward companies that focus on long-term health and not only short-term profits.

Questioned about how they help their customers to become more sustainable, 60% of chemical manufacturers stated by securing sustainability in their supply chain. Some suppliers, for example, closely cooperate with their customers regarding required delivery times and segment their supply chain accordingly. Others, in turn, are setting high standards so as to guarantee highest possible safety for the transportation of their products.

About 60% of suppliers are furthermore providing their customers with technical services which help them improve their operational sustainability. One third of all suppliers offers its customers the possibility of product return and re-use and provides them with alternative, renewable raw materials.

Although customers perceive their suppliers very positively in providing them support to become more sustainable, the suppliers themselves feel that there is still more need for action from their end. Unlocking these reserves will become an interesting challenge for chemical companies in the near and mid-term future.

Lewe concluded: "Though the economy has clearly lifted the future needs to be prepared for. Today, we see two main differentiators for chemical companies to improve their competitive edge. First, optimizing the complexity of internal structures and processes without weakening the offering portfolio will be key. Second, a continuous focus on sustainability is awarded by customers and the capital market alike and therefore represents an important milestone to success."



About C3X (Mit C3X logo)
C3X's objective is to analyze the chemical industry from the vantage points of chemical companies and their customers. The panel comprises the senior executives' view of leading European chemical companies and decision-makers in customer industries working at the interface to their suppliers. Participants in the fourth C3X survey, which was conducted during June/July 2010, included executives from 15 European countries, representing chemical firms and client companies, which translates into a total of roughly 110 executives. The customer industries cover 12 different sectors, ranging from the automotive and food industry to the cosmetics sector.