The combination of various factors leads to the insufficient performance of international special chemicals companies. First of all, international companies rely on the Western product mix and fail to fully meet the needs of the Chinese market. They find themselves at a disadvantage in competing with the products of their Chinese competitors, which are offering a more attractive product portfolio of good enough quality at a more competitive price. This usually forces Western players to compete only in paid niche markets.
The root cause is a lack of understanding of the local market. Western chemical companies often find it difficult to reach important potential customers, such as state-owned enterprises and fast-growing private enterprises, especially in the second and third tier cities. This is due to the lack of in-depth market insight, the lack of relationship building ability, and the lack of top Chinese talents with entrepreneurial spirit in key positions of the company.
Second, the market share of multinational chemical companies protected by intellectual property rights is threatened, because Chinese companies acquire technology through acquisition of Western companies and develop new integrated ways to enable them to enter more complex markets. International companies are increasingly finding that Chinese competitors can provide products and compete in high-end markets. Examples range from catalysts to enzymes to lubricant additives sold to automotive OEMs. In these areas, international companies have traditionally been relatively strong, benefiting from formula knowledge, technology and higher entry barriers (due to the need for approval and product certification).
Third, China’s competitors are improving themselves. The most radical group is private entrepreneurs, whose characteristics are fast, hands-on decision-making and good capital project management, so that they can invest with a low capital expenditure rate. They have also deployed efficient entrepreneurial incentive structures that are attractive to executives, including bonuses linked to rapid initial public offerings. There are many successful examples of private special chemicals enterprises in China, whose development speed even exceeds the high growth rate of Chinese market. Meihua, a large monosodium glutamate producer, has hardly left any space for multinational companies in the Chinese market. Wanhua, as a leader in the polyurethane and specialty isocyanate industry, has increased production capacity to meet the growth of local demand, and has shown remarkable financial results in terms of sales and profitability. After years of expansion and integration, Zhejiang Longsheng has become one of the largest and most profitable dye enterprises in China.
Multinational chemical companies are at a strategic crossroads. They found that Chinese enterprises are becoming more and more capable of providing competitive products, while the market areas that originally belonged only to international enterprises are becoming more and more limited. Obviously, the strong momentum of the Chinese market shows that even pursuing niche markets will bring attractive sales growth to international companies. But past experience shows that it is only a matter of time before Chinese competitors can compete in most technologically advanced fields. It makes people wonder how successful this strategy will be in the long run.
