Looking Up -The global economy is still recovering from the worst economic crisis in 75 years, as many countries grapple with the aftermath of the recession. So PricewaterhouseCoopers (PwC) set out to uncover how CEOs are approaching growth during a time when sustainable economic growth is far from certain. PwC surveyed 1,201 business leaders in 69 countries around the globe in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

Chemicals CEOs see a particularly bright future for their sector: Almost 30 % are somewhat confident, and 66 % are very confident, of revenue growth over the next three years. All this in a sector that was one of the hardest hit during the downturn. Why such an optimistic outlook? One reason is greater efficiency. Many chemicals companies aggressively cut costs during the slump in demand: 85 % of chemicals CEOs report that they have implemented a cost-reduction initiative in the past 12 months. Their companies are emerging leaner and meaner. They've changed strategies, too. A full 82 % of chemicals CEOs say they've altered course in the past two years - and 29 % believe the change has been "fundamental."

Uncertainty about economic growth is the predominant reason for steering in a different direction. Demand for chemicals industry products generally follows GDP levels and, though the global economy has improved, nearly three-quarters of chemicals CEOs are still worried about uncertain or volatile economic growth hurting their businesses. But many chemicals CEOs are also adopting new strategies in response to shifts in customer demand and industry dynamics - and all these factors are ultimately leading them towards emerging markets.

Targeting Emerging Markets The International Monetary Fund predicts that growth rates for 2011 will still be sluggish for developed economies. But emerging markets are booming - and providing huge opportunities for chemical producers. Most chemical companies have already set up shop in key emerging markets; a higher percentage of chemicals CEOs say they already have operations in Asia and Eastern Europe than in the survey population as a whole. And 69 % of chemicals CEOs agree or strongly agree that emerging markets are more important to their company's future than developed markets, compared to 59 % of CEOs in the total sample.

The majority of CEOs, regardless of the sector in which they operate, have high expectations of Latin America and Asia - particularly China. Thirty-nine percent of CEOs in the full sample named China one of the three foreign countries most important to their company's growth. But chemicals CEOs accord China even greater weight: 58 % rate it among their top three countries for growth. Its significance is equally striking from a production perspective. Forty-nine percent of chemicals CEOs see China as one of the most important countries for their future sourcing needs, compared to 37 % of the entire sample.

Global Strategies for Dealing with Macro Risks

It's clear that with so many chemicals CEOs - and, indeed, those in all industries - turning to emerging markets for growth, the competition is likely to be fierce. In China, for example, revenues are rising steadily - but margins are falling. So chemical CEOs will need to ensure their  companies have efficient operating models and processes. They'll also need to make sure they have access to raw materials, and the energy to process them, reliably and at a reasonable cost - and dealing with these global risks is no easy feat. A full 66 % of chemicals CEOs (vs. just 34 % of the total sample) told PwC they're concerned that scarcity of natural resources could put the brakes on growth. Most are already responding: Two-thirds of chemicals CEOs intend to invest more effort in securing natural resources over the next three years.
And about half now include natural resource-related factors explicitly in strategic planning and risk management scenarios.

Chemicals CEOs are also much more concerned than other CEOs about energy costs - which is not surprising, given the energy-intensive nature of chemicals production (fig. 1). That's why they are more likely to have plans in place to mitigate related risks than are CEOs across the sample as a whole. And many are focusing their companies' research efforts on energy reduction, too.

Putting Customers at the Centre of Innovation

The chemicals industry, which is sometimes called the world's first science-based industry, has long been at the forefront of innovation. Nonetheless, in past years, chemicals CEOs have typically concentrated on better penetration of existing markets as the key way to drive growth. Now they're more likely to be focusing on stimulating the innovations needed for new products and services. This trend is common to CEOs in many industries, but it's even more pronounced in the chemicals sector.

Most chemicals CEOs are confident their innovations will succeed: 85 % believe new products and services will produce significant new revenue streams (fig. 2). But that will mean getting to know the customers of key markets very well.

Making Innovation Local

Companies operating globally will need to innovate to ensure they can meet the needs of local markets. But to get closer to customers, some CEOs are shifting the development process closer to customers - literally. Chemicals CEOs are particularly likely to think the majority of the innovations their companies make will originate in markets other than the countries in which they themselves are based.

Helping Customers Operate More Sustainably

Sixty-four percent of all CEOs think that developing environmentally-friendly products or services is an "important part" of their companies' innovation strategies. The numbers are even higher in the chemicals sector (fig. 3). Many chemicals CEOs believe their companies can play a major role in fighting climate change by researching and developing products that help their customers reduce their carbon footprint.
As one example, chemical products are critical in reducing the carbon footprint of buildings, through the use of insulation and a wide range of other applications. 4 The industry is also starting to use life cycle analysis (LCA) - a process which looks at the emissions generated during the entire life cycle of a product, from extraction to manufacture, transportation, usage and finally recycling or disposal - to document the positive impact its products can make on the carbon footprint of customers.

Opening Innovation to Supply Chain Partners and Beyond

The chemicals industry already has a history of working with supply chain partners in the search for innovation: 36 % of chemicals CEOs this year expect that the majority of their innovations will be co-developed with external partners. The recent appointment of Paul-Joël Derian, group vice-president for research and development at Rhodia, as the chairman of SusChem (the European Technology Platform for Sustainable Chemistry) is another sign of this trend. In a press release, SusChem described his appointment as a marker of its "increasing determination to accelerate the adoption of innovation along the chemical value chain by enhanced collaboration with partners." SusChem aims to lead large innovation programs with downstream industries in the European Union, and similar programs are happening in other parts of the world as well.

Innovation communities are also gaining momentum on the chemical manufacturing scene. Chemelot, an open innovation community in the Netherlands, is one of the largest chemicals industry parks in Europe. It combines factories and a research campus at one location. Seventy companies, from start-ups to service providers, take advantage of access to raw materials and peripheral services - and the community uses Twitter and Facebook to maintain connectivity.

Globalization Reimagined

CEOs' shift towards a targeted strategy signals the advance of globalization - but it may diverge from how it's looked in the past. Companies are not only affected by globalization; the actions they take will shape it. That 73 % of chemicals CEOs support "good growth" is recognition that they would like to see globalization evolve in a way that links economic growth and social development. Good growth is a longterm path towards value creation that creates lasting prosperity for both shareholders and society.

Many CEOs understand that such efforts help attract and retain a strong workforce. And employees who believe their efforts are helping society as well as their company are likely to be more committed to the research efforts that drive innovation. For chemicals CEOs innovation is hands-down the best way to achieve sustainable growth.

Chemicals CEOs are optimistic about the outlook: a higher percentage than in the total sample believe that business and government partnerships will be more effective at mitigating key global risks like climate change, terrorism and financial crises in the future.