Emerging markets are no longer an elixir for publicly traded chemical companies.
Chemical companies in Asia-Pacific and Latin America have had a rough ride over the past few years in terms of stock market returns. Even North American and European chemical companies that do a lot of business in those markets have paid a price. The economic slowdown in emerging markets, overcapacity, and a profusion of me-too strategies have made it harder for chemical companies to stand out from the pack and turn a profit.
The challenges are evident in the latest analysis of the chemical industry’s five-year total shareholder returns (TSRs). Whereas chemical companies as a whole earned a median annual TSR of 13% from 2010 through 2014, those based in emerging markets had a median TSR of just 3% during that period. Among all chemical companies with a high exposure to emerging markets, the return was 8%.
Poor TSR results are not a reason to reduce activity in emerging markets. Rather, chemical companies should look to fine-tune their tactics and strategies so that they will be positioned to take advantage of the growth that will inevitably re-emerge. Winning chemical companies are transforming their business models and adopting lean principles to ensure that, even in a challenging market, revenue growth leads to higher returns.
Multinational chemical companies must continue to treat China as a priority. Emerging markets are the future for these companies, and no country is more critical to that future than China. To be absent from that country is to relinquish scale and to risk being cut off from innovation. China is the equation that every multinational chemical company must solve.