The chemical industry—once a top value creator in BCG’s annual Value Creators ranking—is, today, one of the more challenged. Yet some chemical companies are performing very well. Indeed, BCG has identified enormous disparity between the best and the worst performers of the 189 chemical companies in our global sample—a TSR spread larger than that in any other industry we studied.
The median TSR from 2011 through 2015, the period BCG considered in this year’s Value Creators study, was 9.5% for the chemical industry—considerably below the 12% median of the 28 industries we tracked.
BCG upholds that the primary factor in individual company performance in the chemical industry today is the choice of business model. There are several distinct options. We find that the top TSR performers tend to develop highly differentiated business models, and these models tend to be market-based, rather than asset- or technology-based. The top performers also tend to practice serial M&A; embrace complexity as a source of differentiation and, hence, competitive advantage; and deviate from industry best practices, instead developing opportunities outside of industry trends.
The so-called shale gas revolution—the rapid expansion of natural gas and oil capacity due to advances in production technology—has improved the competitive position of many chemical manufacturing sites in North America. Simultaneously, regions such as the Middle East and Southeast Asia have lost some of the competitive advantage that was based on feedstock cost.
At the same time, the cooldown of Chinese GDP growth, the extensive buildup of manufacturing overcapacity in China, and the move of chemical companies in this region from commodities toward higher-value-added specialty chemicals have also had a tremendous impact.
Companies headquartered in North America, one of the five regions in our study, had the strongest performance, generating a median five-year TSR of 12%. Those headquartered in emerging markets (excluding Greater China, which in our analysis includes People’s Republic of China, Hong Kong, and Taiwan) had the worst, 2%, despite a powerful TSR of 24.1% for South Asia.
While global expansion by individual companies has had little effect in itself, exposure to emerging markets (including Greater China) has affected regional performance more than any other factor.
Of the industry’s five subsectors—base chemicals and basic plastics, multispecialty, focused specialties, industrial gases, and agrochemicals and fertilizers—focused specialties was a clear outperformer, with a median TSR of 17.7% over the past five years. Within this subsector, three clusters—paints and coatings, food ingredients, and personal care and hygiene—were the top performers.
The most challenged subsector was base chemicals and basic plastics, with a median five-year TSR of 0.1%. All clusters in the subsector—the vinyl chloride chain, petrochemicals, fibers and intermediates, and synthetic rubber—had a TSR below the industry median.
Focused specialties had a global average ROCE of 12.3% over the past ten years, the highest of all subsectors. This outperformance held across regions, including Greater China and other emerging markets. In contrast, the base chemicals and basic plastics subsector underperformed, earning a global average ROCE of only 6.3%.
By region, ten-year ROCE varied from 11.7% for companies headquartered in emerging markets to 11.1% for those headquartered in North America, 9.2% for those in Europe, and just 6.2% and 5.5%, respectively, for those headquartered in Greater China and Northeast Asia.
Chemical industry business models tend to be asset-based, involving large sites and other assets that offer a scale advantage; technology-based, with differentiated manufacturing processes; or market-based, involving, for instance, a technical sales force.
In this year’s sample, companies with market-based business models outperformed the industry, earning a median TSR of 18%. We believe that the market-based model offers important lessons about value creation.
In a world where proprietary knowledge is less protected than it once was, large, forward-looking chemical companies need to ensure the resilience of their core business by embracing complex businesses as a source of competitive differentiation.
At the same time, broadly diversified companies whose portfolios are not coherent often have processes and systems, an organization design, and a management philosophy that do not serve all businesses.
Achieving portfolio coherence requires ensuring that all businesses and functions in the portfolio share processes, standards, and capabilities. It requires adjusting and transforming existing businesses and functions so that they benefit equally from being part of the same company.
Chemical companies must develop an “always on” transformation mindset, continually rethinking and adjusting their business models. This mindset is, and increasingly will be, the best approach to balancing the need for resilience and coherence and the need for superior value creation.