Chinas Chemical Industry.docx

1、Chinas Chemical IndustryChinas Chemical Industry: Flying Blind?For multinational chemical companies working in China, the rules of the game are shifting. Success requires dramatic change in past practices and new strategies to ensure immediate and long-term success.Rosy expectations from headquarter

2、s about growth, profitability, and competition in China clash with the more realistic picture from the ground: New forces are reshaping the chemical industry for multinational companies working there.Chinas 12th Five-Year Plan (approved on March 14, 2011, and effective through 2015) will further cha

3、llenge multinationals once-certain growth and profitability, as policy makers put their stamp on the industry and create an uneven playing field that favors state-owned enterprises (SOEs). The newest plan seeks to increase Chinas self-sufficiency in chemicals, create national champions with more acc

4、ess to Western technology and processes, secure international access to raw materials, and provide SOEs with privileged access to key raw materials and energy(see sidebar: Chinas Deteriorating Access to Labor and Raw Materials). At the same time, the plan is aiming to boost domestic consumption by e

5、xpanding infrastructure and creating housing for about 300 million migrants moving to cities, while dealing with severe environmental degradation and avoiding social unrest.This report, based on our research, our experience in China, and more than 25 interviews with presidents, vice presidents, mana

6、ging directors, and directors working for chemical multinationals operating in China, offers a window into one of the most important industries in China.The Industrys GrowthChemicals are fundamental to almost any economy. In the late 19th and early 20th century, for example, formerly agrarian and ne

7、wly consolidated Germany developed its chemical industry to move past the economy of the United Kingdom, where the Industrial Revolution first took hold. Today in China, the chemical and petrochemical industries are critical to many rapidly growing industrial sectors, including consumer goods, autom

8、otive, and construction. As a result, the chemical industry has high priority within the Chinese government.Chinas chemical industry has grown dramatically in the past 30 years, in line with the countrys overall growth and the fundamentals of key customer industries. China will soon represent one-th

9、ird of the global chemicals demand (see figure 1). The picture remains optimistic for foreign chemical companies in China, as the country continues to depend on foreign producers for many chemicals, particularly advanced specialty chemicals, despite the governments self-sufficiency goals.As Chinas m

10、arket grows, more top multinationals are increasing their exposure to the market as they invest in local Chinese production facilities. Some smaller players have invested so much in China that the market is now one of their core businessesif not their core business. In tandem with foreign multinatio

11、nals increasing investment has been the rise of chemical SOEsthe leading SOEs have increased their investment budgets and have grown impressively since 2008. Overall, chemical revenues in China grew 24 percent year over year between 2005 and 2010.By 2014, Chinas share of the global chemicals market

12、is projected to rise to 29 percent. Strong growth in chemicals comes in large part from growth in customer industries. Chinas automobile industry growth will average 24 percent per year between 2008 and 2012, even though 2011 growth was almost flat. Consumer electronics will grow 23 percent a year b

13、etween 2008 and 2015, and construction will see 24 percent yearly growth over the same period. Chinese consumers are driving the demand in the automotive and construction sectors. Despite a recent economic slowdown, medium- and long-term growth projections are sound.The key issue for chemical multin

14、ationals is that their fate depends on Chinese government policy at the national, provincial, and local levels. Government influence in China is complex and often opaque. It starts with the Five-Year Plan, which includes industrial policy goals, safety and environment regulation, access to feedstock

15、, pricing, licensing, and permissions. The attitudes, beliefs, and pressures of the extra levels of government can also be difficult to assess. Chemical multinationals will benefit by putting more effort into understanding and communicating with all stakeholders and considering how government action

16、s may evolve, with corresponding scenario plans at the ready.The Capital Investment PictureThe chemical industry in China reached a turning point in 2008 when outbound investment from China, equaling 36 percent of the global industrys total foreign direct investment (FDI), became significant for the

17、 first time. In 2009, when Western economies were reeling, Chinas outbound investment dropped somewhat in absolute terms from $53 billion to $44 billion, but grew relatively to 56 percent. The increase will continue, reaching $137 billion in 2015. Inbound FDI in chemicals will plateau in the $160 bi

18、llion to $200 billion range through 2015, as Chinas gross domestic product slows.Most executives we spoke with are confident about future demand. Nearly all surveyed say their return on capital expenditures improved in 2010 and they expect further improvement in 2011. They believe that doing busines

19、s in China will become easier as intellectual property (IP) protection improves and, importantly, as their understanding of local government develops in parallel.Government Policy Goals Have ChangedGiven the enormity of Chinas population, the government sets goals around both economic growth objecti

20、ves, including employment, and constraints such as food supply, water, energy, and oil. The chemical industry is no different. However, government policies and goals have shifted since the economy was opened up in 1978. We see three phases:1978-1990: Reform and opening up.The economy was opened to t

21、he world in 1978, and the government, understanding the importance of the chemical industry, permitted but heavily controlled FDI. More important than FDI is the fact that Chinas domestic consumption boomed. Most companies invested in China to produce for Chinese demand.1990-2000: Foundation buildin

22、g.Multinationals were permitted to enter China to generate export sales, and joint ventures between chemical multinationals and Chinese firms were allowed. Incentives encouraged multinational investment in China, and chemical industrial parks were developed to manage and facilitate land use.2000-201

23、1: A land of opportunities.Growth projections during this phase were limitless. FDI by chemical multinationals boomed as China became more integrated into the world economy and chemicals became a major Chinese export.A new phase, starting in 2012, is likely to be more challenging for multinationals,

24、 with capital investment potentially much riskier. While growth projections remain high, we expect the government to intervene more actively to upgrade and reconfigure the structure of competition. The government is seeking to increase the local value added in the chemical industry by gaining more a

25、ccess to specialty and fine chemicals and improved chemical production processes. In many segments, this has increased competition.Opportunities in China remain impressive, but this new era for the chemical industry is far more complicated than in the past. Multinationals that are better informed an

26、d better connected with government agencies and build more support for their presence in China will have a greater chance of counterweighing SOEs political advantages. Assimilating into the Chinese economyand being perceived as doing so by measuring and communicating the benefits they offeris a stra

27、tegic imperative.Self-SufficiencyUnlike consumer products and other areas of less strategic importance, a large trade deficit in chemicals$54-5 billion in 2009is a major concern for a government that wants self-sufficiency in strategically critical industries.Despite the governments push, the trade

28、deficit offers an opportunity for multinationals. For example, domestic demand for many chemicals used in plastics outpaces capacity and will continue to do so through 2020representing a potential investment opportunity for multinationals (see figure 2). The trade imbalance is more dramatic in oil a

29、nd gas, as China has almost no oil reserves and few anticipated discoveries.Multinationals Increasing Exposure to Chinas MarketChinas growth and past capital investment mean that China represents a greater percentage of total revenues for chemical multinationals. Between 7.5 and 50 percent of the to

30、tal sales for the top 15 multinationals in China come from China, and smaller firms have often invested even more aggressively.The larger international chemical multinationals are not sitting still. Chinas growth is leading to additional investment in petrochemicals, basic chemicals, polymers, and s

31、pecialty chemicals including Dows $8 billion to $10 billion coal-to-chemicals project with partner Shenhua Group and DuPonts joint venture with Chenguang Chemical Research Institute to produce fluoroelastomers.Chinese companies are also growing stronger and making significant capital investments dom

32、estically and internationally. SOEs Sinopec, PetroChina, CNOOC, ChemChina, and Sinochem all saw year-over-year revenue increases of more than 30 percent in 2010. Because of government support, these SOEs have almost unlimited budgets to pursue their strategies and international expansion and to increase their competencies. Multinationals competitive position is growing more difficult, not just in China, but potentially globally.The Rules Have ChangedWith the chemical industrys increased prominence in China, the rules of the game have changedmore suddenly than many in global headquarters