6 minute read 1 Aug 2018
A scientist

How the chemical industry will look in 2025 and beyond

By

Frank Jenner

EY Global Chemical Industry Leader

Visionary in markets and business development for the chemical industry. Enjoys race boarding in the mountains. Enthusiastic golfer.

6 minute read 1 Aug 2018

With new technologies put to new uses, all industries are being reimagined and blurred. Your strategy today could be a hindrance tomorrow.

The digital revolution will inherently move the chemicals industry toward new business and operating models, driven by the disintegration of classical industries and the formation of digital ecosystems that combine products and services, enabled by technology.

In the new ecosystem world, how you integrate, and which role you play in which ecosystem, will be more crucial than the size of your assets. Also important: how dynamically you will be able to change, react and adapt to new market thinking, and how easy or difficult it will be for your organization to follow, or even lead.

Recent chemical industry trends — such as digital supply chains, vertical and horizontal integration with everybody and everything (such as the Internet of Things), big-scale merger and acquisitions, and the move downstream toward special chemicals — are important.

However, they’re short-term scale-ups and optimizations for the current mode of operation. They will not ensure the long-term success of a chemical company because they stay within their current scope of industry thinking: seeking new competitive advantages by establishing newer, stronger market-entry barriers, be it low costs or unique values or services.

We envision 10 ecosystems, which will combine products and services from today's diverse industries, such as agriculture, health and nutrition, energy and resources, and more. For instance, consider smart health care: clinic and medical professionals identify a problem, and the chemicals industry can provide customized nutrition supply based on the clinical results. Combined with real-time wearable technology tracking the nutrition supply can be adopted. The 10 ecosystems are:

  1. Smart humans
  2. Smart homes
  3. Smart offices and education
  4. Smart retail, wholesale and distribution
  5. Smart health care
  6. Smart urban environments
  7. Smart transportation
  8. Smart vehicles
  9. Smart production and warehouses
  10. Smart worksites

Reimagine chemicals: the chemical world in 2025

In the future, most of today’s chemical industry players will be general-purpose production industrial foundation businesses, serving slavish multiple ecosystems. They will be trapped, just like the telco infrastructure providers that provide the basic infrastructure for today’s hyper-connected world, while other tech giants reap the biggest profits.

Based on the general-purpose production foundation, a plenitude of ecosystem businesses operate within dedicated ecosystems. Both are intertwined by a third business category of platform businesses, which are potentially decentralized, automating most of the work.

Foundation businesses

Foundation businesses include today’s chemical value chain up to the intermediates. Like the banking industry in the 1990s, chemical companies are often still integrated along the process chain (vertical integration). Production flow forces integration up to the end of the intermediary process step at least; as soon the process is started, it will flow, and stopping it or other interactions is hardly possible.

This is also the space where most of the heavy assets are used in production, making it a perfect field of play for economies of scale. However, it is also the area with the least know-how needed for production and where no product or service differentiation is possible, which is why it is currently a commodity business driven by price. Integration beyond this point is generally reasoned with economies of synergies, higher specialization and lower transactions costs.

With today’s technology, these transaction costs, especially between the foundation and the ecosystem businesses, can be lowered by using a market transaction compared with an intra-firm transaction. We are now able to efficiently communicate and settle transactions for commodity goods.

You might ask, why now? As so often seen in other industries, today’s technologies enable new modes of operation and interaction that weren’t technically and/or economically possible in the past.

Ecosystem businesses

Ecosystem businesses will be the integrators into the ecosystems, containing the downstream parts of today’s value chain through to the value-adding ecosystem players from vast industries. They will require not only a new business model but also new ways of management that are more based on complex system management.

When talking about a new business model, we are not referring to discussions about solutions instead of products, or providing services in addition to chemical products. To be able to integrate into an ecosystem, it is necessary to leverage the full potential of diverse players by cooperation and joint engineering of a multisided platform business.

In these setups, different industries join together. By so doing, they will harvest the value add and be the tech giants themselves.

Take smart health, for example. In such an ecosystem, hospitals, doctors, health insurers, pharma companies, fitness and food companies, and nutrition chemicals businesses could be players who jointly provide the value proposition: a healthy life. Nutrition chemicals could provide supplements tailored to the individual based on the latest medical test results and the known records of personal activity and stress (which might be provided by the patient operating a wearable device).

Today, it is unclear which players will initiate an ecosystem and how these ecosystems will be balanced in terms of power. What can be learned from the past is that the monolithic positions of internet and tech giants will be unlikely.

Platform businesses

Bringing both foundation businesses and ecosystem businesses together results in the establishment of a third category: platform businesses. These platform businesses are the glue holding all parts together. Their reason for being is that the glue requires a certain independence from the foundation and the ecosystem businesses to become a trusted partner.

The key role of a platform business will be to ensure a healthy ratio of players on both sides, or else the ecosystem will not prove attractive for the consumer. Players can provide a multitude of services, as in the smart health example. These can also be complementary services, such as transportation or insurance.

This need for multiple different players with different industry backgrounds also explains why a vertical integration approach only for one company is just not feasible. Such a conglomerate would be gigantic and incur skyrocketing transaction or management costs internally, thereby resulting in suboptimal operations in all areas.

On this level, we see primarily basic end-to-end supply chain services, such as integrated planning, supply and demand synchronization, and optimization of production utilization.

The key question: who takes the position of platform owner?

In established industries, multiple players are trying to establish themselves as the platform owner — in addition to their product and service business — in the hope of harmonizing everyone on their platform. This normally is very challenging as everybody else fears getting locked-in and disintermediated from their customer base.

Some industries try to solve this challenge by establishing JVs for operating the platform, which brings a lot of governance issues. With emerging distributed ledger-technologies, there is an opportunity to establish a decentralized platform stack that operates autonomously based on defined rules (e.g., smart contracts). This is owned by nobody, thereby taking the fear out of the game.

This will be a highly possible option for the platform between the general-purpose foundation and the ecosystem business, as the business contracts for these commodity goods are very well defined, which is a foundation for establishing successful smart-contract-based platforms.

Conclusions

The consequence for today’s chemical companies will be that their heavy assets and their diverse conglomerates focused on economies of scale and synergies will not provide them with competitive advantages — or if they do, these will not be strategically important, as the rules of the game have changed.

Therefore, instead of investing in more heavy assets or buying more companies, reimagine slicing your conglomerate into effective operating pieces (connected both vertically and horizontally) and which roles will apply to which pieces in the future. Be open and start cooperating rather than forcing competition. The future will be information- or knowledge-driven; in this world, sharing will be key.

Summary

In the new ecosystem world, how you integrate, and which role you play in which ecosystem, will be more crucial than the size of your assets. Different pieces of your business will have different strengths under this new world order.

About this article

By

Frank Jenner

EY Global Chemical Industry Leader

Visionary in markets and business development for the chemical industry. Enjoys race boarding in the mountains. Enthusiastic golfer.