Internationalisation: the strategic challenge for Western fine chemicals company Bayer Chemicals arising from the growth of China.

Table of contents

Table of figures

1 Introduction

2 Review of Fine Chemicals Industry Environment
2.1 Definition of Fine Chemicals Industry and Market
2.2 Market Structure
2.3 Global Market Volumes
2.4 Trends and Developments

3 Trade And Investment Theories for Fine Chemicals in China
3.1 How well do Trade and Investment Theories explain growth
3.2 Investment Theories

4 Market Entry Strategies of Western Fine Chemical Companies in China

5 Strategy and Structure of BCH
5.1 Organisation
5.2 Strategic Options
5.3 Strategic Perspective

6 Conclusion And Summary

Table of figures

Figure 1: Current Trends and Developments

Figure 2: Diamond of national competitive advantage of BCH in China

Figure 3: Overview of entry strategies in relation to chemical industry

Figure 4: Advantages and Disadvantages of entry modes into China

Figure 5: Organisation chart Bayer Chemicals

Figure 6: Organisation chart SBU Textile Chemicals

Figure 7: Positioning of Bayer Chemicals Strategy, adapted from Hill

Figure 8: Strategic Options for BCH

Figure 9: Shift in the Portfolio of Bayer Chemicals

Figure 10: Change in value creation process

1 Introduction

The chemical industry is truly a global industry. It has major strongholds throughout the world, in particular Western Europe and the United States of America. Large chemical sectors have also been created in Saudi Arabia and India, Russia is a major producer in Eastern Europe, whilst in the Far East, China, South Korea and Taiwan are important producers (Business Ratios, 2001).

The main focus of the industry is the processing and manufacturing of raw materials and the supply of semi-processed raw materials to other industries. Marketing therefore concentrates on the business-to-business sale of commodity products, with demand being dependent on global economic factors and the level of consumer expenditure - particularly in developed countries (Keynotes, 2000).

Due to its vast geographic spread, the industry is relentlessly impacted by the internationalisation of business and its players operate under vastly differing socio-economic climates. Chemical producers in the West are coming under increasing pressure to match the costs of their global rivals, particularly China, but with substantial differences in environmental protection, government intervention, labour costs and health and safety issues, this is a major challenge.

Therefore the objectives of this assignment will be to:

1. Review the trends and developments in the fine chemicals industry.
2. Evaluate the trade and investment theories for the Fine Chemicals Industry in China.
3. Investigate the possible forms of market entry strategies.
4. Consider the strategy and structure of a typical Western company and how it should react. (As Bayer Chemicals (BCH) can be regarded as a major player in the global chemicals business it will be used to illustrate this)
5. Make recommendations, based on the findings of the assignment.

2 Review of Fine Chemicals Industry Environment

The first objective of this assignment was to evaluate the trends and developments in the fine chemicals industry.

2.1 Definition of Fine Chemicals Industry and Market

Fine chemicals are a distinct sector in the chemical industry. The products are sold to other businesses for further use in the manufacturing of chemical products such as flavours and essences, agro-chemicals, detergents, and pharmaceuticals, with growth in the latter sector being especially strong.

They are distinguished from commodity chemical products by their medium to low sales volumes and higher prices. The critical success factors are keeping costs under control, providing excellent technical assistance and maintaining close links with clients.

2.2 Market Structure

The international fine chemical industry is dominated by large groups such as DOW, DSM, Bayer and BASF. These groups are growing through mergers and acquisitions and this is being driven by high costs, competition and general uncertainty regarding return on investment. This uncertainty is derived from the fluctuations in demand for chemical intermediates which in turn are affected by the general upturns and downturns in business-activity. However, paradoxically, the areas of greatest return to fine chemicals such as pharmaceuticals and agro-chemicals have seen sustained periods of growth.

Whilst commodity chemicals are particularly vulnerable to changes in consumer demand, because they are made and delivered in bulk, fine chemicals are made for specific applications and are produced in lower volumes – and hence have a higher added-value.

2.3 Global Market Volumes

The robustness of the chemical industry is vital to the major economies of the world. Latest figures on the total value of world output estimate revenue to be $1,700bn at manufacturers’ selling prices (Keynotes, 2000). Presently, Western Europe and North America respectively account for 30% and 40% of this output, whilst Japan with 8% and the rest of the world with 22% account for the remainder.

The chemical industry in Europe is particularly vital. It is Europe's second-biggest exporter in its own right and a vast range of chemicals supply almost every manufacturing industry (Financial Times, 27th October 2003). Germany alone has an estimated 8% world market share, followed by France with 6% and the UK, Belgium and Netherlands with approximately 3% each.

2.4 Trends and Developments

There are significant trends and developments affecting the competitiveness of Western Chemical Companies in the fine chemicals markets.

The following issues are currently affecting the industry to a high degree:

- Buyers tendency towards in-house production
- Rise of developing nations
- Industry overcapacity
- Regulation and bureaucracy
- Internet and e-commerce

These issues are discussed in figure 1.

illustration not visible in this excerpt

Figure 1: Current Trends and Developments

3 Trade and Investment Theories for Fine Chemicals in China

In this section, the second objective will be addressed by focussing on trade and investment theories and explanations for growth and development of the fine chemical industry in China.

3.1 How well do Trade and Investment Theories explain Growth

There are several theories which try to explain why growth and development of an industry takes place in a particular country.

The absolute advantage trade theory gives a simple explanation as to why a specific industry can be found in one country instead of another (Smith 1776). It focuses on the differences between nations in terms of productivity and the use of labour and concludes that international free trade is beneficial. Therefore, in every country, industries with an absolute advantage should dominate the economy. It could be argued that in China, as factor costs such as labour, raw material and land are relatively low, it has an absolute advantage.

A subsequent theory goes further and argues that relative advantages are sufficient to ensure nations gains from international trade (Ricardo 1819). It is argued that if every country specialised in what it can produce best, i.e. relative advantage in productivity, it would still be worth trading internationally. Whilst the theory is intuitive, if it is applied to the chemicals industry in China, it would advocate China producing basic-chemicals, as these chemicals are produced in large volumes for relatively low cost, and China is arguably more efficient in making these.

Another theory expressed the idea that the combination of national factor endowments, such as land, labour, capital and technology, would determine the industries dominating an economy (Heckscher 1919; Ohlin 1933). Consequently it is argued that every country tends to dominate in the kind of industry in which it has best resources.

Whilst this is an accepted theory of trade and takes into account the wide range of factor endowments a country can have, it has been shown that in reality contradictory results are often found (Leontief 1953). For example, in China oil and raw material are not major resources and therefore according to the theory, it should not necessarily have risen to become a major player in the global chemicals markets.

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