Chemical Manufacturing Industry - Essay Example

INDUSTRY ANALYSIS: This chapter evaluates the performance of chemical and the trends of the global chemical market as well as the three main markets, which are Asia-Pacific, European and American market. This chapter analyzes and identifies the environment and the position of this sector by using the five forces framework as well as industry life cycle. 1) Chemical Manufacturing Industry Performance: 1.1) Market value: The global chemical manufacturing produces many types of chemical products including basic chemicals, pharmaceutical products, specialty and fine chemicals, agrochemicals and fertilizer. These products are demanded in North and South America, Western and Eastern European, Asia-Pacific and MEA. Year $ Million % Growth 2006 2,800,638.6 2007 3,135,869.3 12.0% 2008 3,375,559.5 7.6% 2009 3,170,023.4 (6.1%) 2010 3,519,691.5 11.0% CAGR 2006-2010 5.9% This sector generated $3,519 billion as total revenue in 2010 and showed a compound annual growth of 5.9% in the years between 2006 and 2010 (Datamonitor 2011a). The sector experienced a decline in its revenue in the period between 2008 to 2009, which was in the beginning of financial crisis, but the industry started quickly to recover it self in 2010 with growth of 11% (Datamonitor 2011a). 1.2) Market Segment by Products: The most important segment in chemical manufacturing industry is the basic chemicals, which had market share of 46.4% of all chemical products and with total revenue of 1,634.4 billion in 2010, and then pharmaceutical products came in the second with market share of 24.9% and 877.5 billion as total revenue in 2010. After that, fine/specialty chemicals and (fertilizer and agrochemicals) had market share of 23.3% and 5.3% respectively (Datamonitor 2011a). 1.3) Market Segment by Regions: The global chemical manufacturing industry covers in the major areas around the world, which are American, European, Asia-Pacific and the Middle East & Africa. The biggest market share is owned by Asia-Pacific, which got 42.7% of the total market share in the sector in 2010. American’s region came in the second with market share of 28.2% in 2010 and then European and Middle East account for 26.4% and 2.6% respectively (Datamonitor 2011a). 1.3.1) Asia-Pacific Market: The chemical manufacturing sector in Asia-Pacific is the biggest market in terms of value comparing with other regions with total revenue of $1,504.1 billion in 2010. The (CAGR) showed an annual growth of 11.5% throws the period between 2006 and 2010. In terms to countries, Chine and Japan have the largest market share of 52.1% and 0.9% respectively, however, Chine and South Korea sectors presented the fastest (CAGRs) growth, the former 20.2% to reach value of $783.6 billion and the later 11% to be $131.1 billion in 2010 (Datamonitor 2011b). The product segment, on the other hand, the basic chemical division was the highest revenue in Asia-Pacific of $758.9 billion and account of 50.5% from the total value of the sector in this region, then fine/specialty chemical segment came in the second with 22.4% and had $336.3 billion as revenue in 2010 (Datamonitor 2011b). The sector in this market is forecast to decrease slightly with expected (CAGR) of 11.4% for the next five years starting from 2010 to 2015. This might leads this sector in Asia-Pacific to achieve value of $2,582.1 billion in the end of 2015. The (CAGRs) of both China and South Korea in this industry may increase by 14% and 9.9% respectively and have value of $1,511.1 and $210 billion in 2015 (Datamonitor 2011b). 1.3.2) European Market: The chemical manufacturing sector in European area came in the second after Asia-Pacific with total revenue of $930.6 billion in 2010. The industry in this market showed (CAGR) of 1.5% in the time between 2006 and 2010. Regarding to states, Germany has the biggest market share of 22.7% and had total value of $211 billion then France came next with 17.9% as market share in 2010(Datamonitor 2011c). Nevertheless, products segment in European market presented that basic chemical had the highest revenue of $393.4 billion with market share of 42.3% of the total value in 2010. After that, the pharmaceutical manufactured goods segment generated revenue of $2266.6 billion and has 28.6% of the total value in this sector (Datamonitor 2011c). The chemical manufacturing industry in European region is forecast to have (CAGR) of 4.1% in the time from 2010 to 2015. This will take the sector to reach $1,137 billion in the end of 2015. German industry is estimate to be developed with (CAGR) of 6.3% to achieve value of $286.5 billion, al so the UK might have (CAGR) of 0.8% to reach value of 79.4 billion by the end of 2015 (Datamonitor 2011c). 1.3.3) American Market: The chemical manufacturing sector in North America showed in 2010 overall revenue of $825.3 billion, which has (CAGR) of 2.5% for the time between 2006 and 2010 (Datamonitor 2011d). On the other hand, South America has $168.7 billion as revenue in 2010 and (CAGR) of 5.1% during the time of 2006 to 2010 (Datamonitor 2011e). The biggest market share in North America is owned by the United State of 88.1% with value of $727.1 billon in 2010 then Mexico placed in the second with 6.1% of the total value of this industry in 2010 (Datamonitor 2011d). Brazil, However, owned 75.1% of the overall value of the South America to reach value of $126.7 billion in 2010 then Chile came secondly with 13.8% and had value $23.3 billion in 2010 (Datamonitor 2011e). The basic chemical division in North America had the overall revenue of $361.4 billion in 2010 which means that it contributes with 43.8% in the total sector value. The pharmaceutical goods production produces $229.9 billion as revenue in 2010 to get 27.9% of the total industry value (Datamonitor 2011d). Conversely, basic chemical is the highest revenue in South America of $78.4 billion in 2010, which presented 46.5% of the value of the sector in this area after this the fine/specialty chemical product produced revenue of $39.8 billion in 2010, comparing with 23.6% of the overall sector value (Datamonitor 2011e). The chemical manufacturing industry in North America is forecasted to have (CAGR) of 5.2% in the period from 2010 to 2015 to reach $1,046.2 billion in 2015. This will be supported by increase in both Mexican and Canadian (CAGRs) of 7.9% and 3.5% in particular order (Datamonitor 2011d). On the other hand, this industry but in South America is forecasted to have (CAGR) of 9.1% for the period between 2010 to 2015 which will leads the sector to have $260.8 billion as value in the end of 2015. Moreover, Chilean and Argentinean industries might increase with (CAGRS) of 2.4% and 10.8% in that order in 2015 (Datamonitor 2011e). 2) Competition in chemical manufacturing industry: In order to analyze the market competition within the industry of chemical manufacturers, Five Forces framework can be used to identify internal and external factors that could directly or indirectly affect the bargaining power of suppliers and buyers. Furthermore, this particular industry analysis framework make managers easily track down the presence of potential rivalry within a given industry, potential threats of new entrants or new businesses that wish to enter the chemical manufacturing industry aside from identifying threats for product substitution (Johnson, G et al 2008). 2.1) Bargaining Power of Suppliers Major suppliers of chemical manufacturers include: oil and gas companies Even though oil and gas products are homogenous or undifferentiated by nature, we should keep in mind these materials are non-renewable items. As a common knowledge, there is no other product substitute for oil and gas products. Considering the fact that there are only a few numbers of large-scale companies that could supply oil and gas to chemical manufacturers, the bargaining power of suppliers is considered high. Therefore, chemical manufacturers do not have the power to control the market prices of oil and gas products. Due to the fact the number of oil and gas suppliers is relatively few as compared to the number of chemical manufacturers around the world; the cost of switching from one supplier to another and suppliers’ dispensability is moderate. 2.2) Bargaining Power of Buyers Large multinational companies that usually purchase chemicals on a daily basis include manufacturing companies that manufacture the following items: plastic, perfume, pharmaceutical products, soap and detergents, shampoo, and people who are involved in agricultural businesses among others. As a result of globalization and continuous improvements in communications technology, buyers of chemical products could easily search for chemical manufacturers that could offer them better quality products at a much lesser cost. Since buyers of chemical products have the option to purchase their required chemical items from national and global sources, the bargaining power of buyers within the chemical manufacturing industry is very high. By nature, chemicals are undifferentiated products. For this reason, the buyers’ cost of switching from one chemical manufacturer to another and product dispensability is low. Even though establishing a strong business relationship with chemical manufacturers increase customer loyalty, the fact that the cost of switching is low makes the buyers’ tendency to switch from one chemical manufacturer to another moderate. In most cases, potential buyers are sensitive to price. Therefore, the only way for chemical manufacturers to persuade potential buyers to purchase their products is for them to be able to manufacture their products at a lower price when assume the same quality. 2.3) Rivalry among Existing Firms Competitors within the chemical manufacturing industry include chemical manufacturers of basic chemicals (i.e. petrochemicals and plastic resins), specialty or fine chemicals (i.e. additives, paints, coating, fragrances, soaps, and detergents), pharmaceutical products (i.e. medicinal active ingredients and formulations), fertilizer and agrochemicals (i.e. chemical fertilizers and herbicides, insecticides). Because of the continuously increasing number of chemical manufacturers in the global markets, the market competition within the chemical manufacturing industry is intensely competitive. In fact, there are quite a lot of local and international companies that are continuously competing for the same group of customers. Upon analyzing the chemical manufacturing industry, it is clear that the rivalry among the manufacturers of chemicals is very intense due to the fact that these companies are manufacturing homogenous items or undifferentiated products. For this reason, it is common for chemical manufacturing companies to compete with one another through brand equity, product quality, and price. It means that manufacturing companies with good brand equity that could offer high quality chemicals at a lower price has a higher chance of winning a business contract. Another factor that increases rivalry among the competitors is due to the fact that the barrier to exit is very high. In order to establish a chemical manufacturing company, the business owner has to invest large sum of money on the heavy equipments and other fixed operating expenses. Instead of simply declare bankruptcy (if necessary), business-owners usually tend to compete with other chemical manufacturers by offering good quality products within a competitive market price. 2.4) Potential Threats of New Entrants To be able to earn good profit out of manufacturing chemicals, business owners are required to produce chemical products by bulk. Aside from the tight market competition within the chemical manufacturing industry, managers should be aware that the monetary requirement in the establishment of a high-volume chemical manufacturing plant is high. Within the chemical industry sector, the threat of a new entrant is moderate. Even though a potential new player could easily enter the industry, there are quite a lot of factors that could negatively influence their decision to enter the business. Although basic chemicals are usually not protected by intellectual property rights, the number of existing manufacturers within this sector is already high. Thus, it will lead to higher competition in market. With regards to specialty or fine chemicals, most of these items are protected by intellectual property rights (i.e. patent). Therefore, potential new players are prohibited to manufacture the same product. Aside from the large capital requirements, other factors that could make a potential business player refuse to enter the chemical manufacturing business is because potential new entrant is required to take advantage out of economies of scale. ‘Economies of scale’ is the secret behind a successful chemical manufacturing business. Since it would be very difficult on the part of a new entrant to immediately win the trust of large-scale buyers, economies of scale will not be that easy for new players to achieve. 2.5) Threats for Product Substitution Even though buyers have the option to purchase from one chemical manufacturer to another, one has to be clear that there are really no product substitutes for these items. Since demand for chemical products is high, cheap alternative for these items is very weak. Therefore, threat for product substitution is relatively low. 2.6) Summary Market value between 2006-2010 continuesly increaese interms of percentage growth 12%, 7.6%, 6.1%,11% in 2007,2008,2009,2010 respectively.The result of market segment of products in 2010 leads by basic chemicals follow are the pharamaceutical products and then fine chemicals.Market segments by regions only in 2010 show the lead is taken by Asia-Pacific then Americas(North & South ),Europe and Middle East. & Africa.The leading countries in Asia-Pacific in 2010 is China and Japan, In Europe Germany and France leads, In South American market in 2010 United states and mexico leads where as in North American market Brazil and Chile leads as compare to the rest of the North American countries. Read More