Global Fine/Specialty Chemical industry and its challenges:

Current situation:

Global chemical industry is going through multiple transformations under the current economic environment is not helping either. It needs to address the following.

1. How to react to the current slow down?

2. What are their long-term prospects?

Companies in Europe and US innovated and developed many unique molecules that have improved our quality of life and life style. Products include pharmaceuticals, polymers, additives, flavors and fragrances, fertilizers and list goes on.

Some of the old giants have disappeared. Recent re-factoring of the European companies to rationalize their businesses has caused more turmoil than solved as the companies are still loosing money. Some are trying to find themselves and some have given themselves new names after reorganization. Some of the new entities have not found equilibrium.

Lack of growth (i.e. growth equal to GDP growth is no growth) has been a challenge [some segments have had higher than GDP growth but many are lower]. On the other hand growth better than plan has been exhilarating. These have impacted their profitability.

As the world grapples with the current slow down, more so in the developed countries than the developing countries, the future looks murky. To conserve profits companies have selectively shuttered their plants. This might be prudent for the short-term but mothballing plants might not solve the long-term ills.

Impact of expiration of the pharmaceutical patents and lack of new drugs in the pipeline will reposition the global fine chemical industry. We will begin to see a sea change in the second half of 2010.

What is the recourse for the future?

Current markets for the chemical products can be categorized as follows.

• Slow or no growth [growth equal to or less than GDP]

• Growth [growth greater than GDP]

In the current economic down turn, the human and social impact of shutting down and/or moving R&D and manufacturing from the slow and/no growth countries to the growth countries can have significant negative connotations. However, such moves might be necessary for the multinational companies. In the slowing global economy, due to political sensitivity moving from developed countries and investing in growth markets is a going to take longer than normal time and effort. Lack of rapid decision-making might further complicate strategy development.

Until few years ago growth in the under-developed countries was slow and these markets could be supplied from the developed countries. However, with much higher growth in these under-developed countries, it has become necessary for the multinationals to fulfill the market needs either by opening R&D and manufacturing sites or collaborate with local partners. This poses an interesting dilemma for the multinationals. Should they consolidate their plants and supply the needs of the developed countries, if possible, from the plants in the developing countries and shutter their operations is the developed countries? This option has its own challenges. How to explain to its shareholders including its employees of such moves and how to blend in the local culture and nuances.

Multinationals face another challenge in the developing countries. It comes from the local enterprises that have served the local and global markets. These enterprises might not be technologically strong but is a matter of time when they could become fierce competitors.

More than 50 percent of the global population lives outside the developed countries. In the next few years, growth is going to come from these markets. They might not require the technologies currently used in the developed countries. Technologies to suit the local market preferences and environment might have to be developed. A joint collaboration between the local companies and multinationals can be a fast track option. Go alone could be an option also. However, it would require understanding of the local markets. In addition, multinational companies will have to invest in technologies and capacities that are economic and can meet the market needs from fewer plants. This could be a challenge but is necessary for the survival.

Manufacturing of commodity (slow or no growth) products will move to the lowest wage countries. India and China could benefit from such moves. Only offset to such moves is the development of better manufacturing technologies for commodity products e.g. plastic additives, flame-retardants, corrosion inhibitors, rubber chemicals to name a few. They have to be such that they offset the lower labor cost advantage offered by low cost countries.

The newest technology (growth better than GDP) products will be developed in the labs in the developed countries and could be manufactured anywhere to serve their respective needs.

World is changing faster than we can strategize and implement.