Can U.S. chemical makers still compete?

July 24, 2006
A steady stream of statistics in recent years has pointed to deteriorating competitiveness in the U.S. chemical industry. Domestic producers face global challenges but see opportunities.

A steady stream of statistics in recent years has pointed to deteriorating competitiveness in the U.S. chemical industry. America’s trade surplus in chemicals peaked at $20.4 billion in 1995 but has flipped since 2002 into a deficit that stood at about $9 billion last year, according to the American Chemistry Council (ACC), Arlington, Va.

The industry is being pummeled by various economic forces that not only weaken its direct trade balance but also cause what ACC calls “lost chemistry” — reduced demand for U.S.-made chemicals in manufactured goods when domestic production of these items shrinks due to a loss of exports or a rise in imports.

“Lost chemistry” is useful shorthand for a catalog of challenges that chemical producers are facing and for a range of remedies they are pursuing, such as consolidations, strategic alliances, plant shutdowns or scalebacks, increased process and personnel efficiencies, shifts to alternative fuels and feedstocks, and movement of some production offshore.

But interviews with executives and companies’ announcements about developments and initiatives suggest that the U.S. chemical industry still has a reservoir of optimism and opportunities for growth. Global competitive challenges are spurring innovations in products and processes, blueprints for leveraging the advantages of particular technologies and geographic locations, heightened appreciation of service and customization, and calls for smart synergies among companies, with governments, and between industries around the world.

Together, these observations lead to the conclusion that, although U.S. chemical companies must confront a brave new world of competitive pitfalls, all is not lost.

Upbeat assessment

Joseph Acker, president of the Synthetic Organic Chemical Manufacturers Association (SOCMA), Washington, D.C., acknowledged in a recent speech that “the challenges in gaining and maintaining business for U.S. manufacturers in the next year include the high price of oil and natural gas, competition from emerging markets, and the state of both the U.S. and the world economies.”

Companies in China, India, Eastern Europe and Latin America are estimated to hold, on average, a nearly 25% share of the markets they serve. “Chemical suppliers in these emerging regions are also viewed as developing the ability to provide higher quality products,” he says.

However, Acker reported upbeat forecasts culled from SOCMA’s latest annual business outlook survey, which was completed in September 2005 and includes responses from almost 40% of the group’s approximately 270 member companies. The overall state of the chemical market looks “good or excellent” to 87% of respondents, up from 63% in 2004 and 29% in 2003. Some 74% of companies in the latest survey reported an increase in sales for 2005, and 97% expected sales growth this year.

The companies cited two key approaches that are working for them: introducing new products and services, and making process improvements in their manufacturing operations. They also credited growth through acquisitions and broadening the set of process technologies they offer to the market.

They are confronting the challenge of high-quality imports by “emphasizing reliability, quality, and the importance of relationships,” Acker said.

Success in the U.S. and in Asia can go hand-in-hand, according to JFC Technologies, Bound Brook, N.J., which researches, develops and manufactures pharmaceutical ingredients and applied materials. The company, formerly known as Jame Fine Chemicals, announced the startup of its bulk pharmaceutical ingredient plant in Ningbo, China, early this year.

“It’s about moving to China but then focusing here on more defensible niches or businesses,” saysJamie Schleck, CEO and president. “Having a U.S.-based manufacturing presence is still very much part of our long-term strategy,” he adds, noting that the company is focusing on making cGMP polymeric materials for medical devices  in New Jersey while it maintains research activities in India and two facilities in China — including one for non-pharmaceutical applications.

Proximity to the R&D activities of major pharmaceutical and biotech companies in the U.S. was important for a portion of JFC’s business, Schleck says, but customers who have Asian-based manufacturing have also valued the ability to supply and facilitate their international operations, he adds. “It’s our intent that we’re not going to lose jobs here; we’re going to create more jobs here because of our ability to deal with these other nations.”

The China factor

The company has even created a consultancy division that helps U.S. chemical companies design and implement plans for establishing themselves in China. Such a path can be filled with potholes, Schleck says. JFC’s own move into the Ningbo industrial development district went relatively smoothly, he recalls, thanks partly to a Chinese-American employee who managed arrangements on-site and to China’s own development policies. “They rolled out the red carpet” to ease bureaucratic burdens, he notes.

Dow Chemical President, CEO, and Chairman Andrew Liveris recently referred in a television interview to China’s welcoming of industry as one of the competitive challenges that the U.S. faces.

“The Chinese have an industrial policy that makes it user-friendly for companies like ours to build and market,” he said on CNBC. The relatively low expense of constructing even a highly sophisticated facility in China helps to make it a key global player, added Liveris, noting that the country is now Dow’s third largest market, after the U.S. and Germany. “Ten years ago, it wasn’t even in the top 10.”

For Chemtreat, Glen Allen, Va., the largest independent U.S. firm dedicated to industrial water treatment, China is a market that bears watching, but John Nygren, CEO and president, says the company wants to be where its business model is clearly a good fit. Besides its involvements in Latin America, Chemtreat is still focusing on competitive opportunities in the U.S. by building relationships with customers and suppliers, he notes.

“We don’t need the prospect of growth in China over the next 10 years like our larger competitors do,” Nygren explains. “If they’re going to continue to grow at a substantial rate, they need it. We don’t.” Companies can expend undue amounts of resources trying to grow in places like China while simultaneously defending their share of the U.S. water treatment market, he says.

“It’s a business that requires a knowledge base and experience base on the ground at the user site to really be effective,” adds Nygren. The integration of chemical supplies with “hands on” service, which Chemtreat emphasizes, isn’t necessarily the model that will take root in China. Meanwhile, being committed to the U.S. is an advantage in such areas as cost management since long-term relationships with suppliers can help secure the best pricing even in difficult, volatile times, he asserts. “With a good business model, specialty chemical companies can be quite profitable and competitive in this [U.S.] environment, and we’re not afraid of it.”

Specialist success

The U.S. has been fertile ground for the business model of Ortec Inc., Easley, S.C., says Larry Brotherton, president, who started the business in 1980. Now the custom chemical manufacturing service company has two plants and about 150 employees, offering developmental to full commercial output of materials used in coatings, adhesives, pharmaceuticals and personal-care products.

He says his business model consists of having a core competency and an “application barrier”— a virtually irreplaceable relationship with a customer based on quick response and reliability. “You’re problem-solving, not just producing chemicals,” he explains. The ability to move a sample product quickly through the lab to pilot stage to larger quantities is key for Ortec, he notes. It’s conceivable that he might consider establishing a presence overseas if one of his big customers demanded it, but for now he’s happy with his South Carolina facilities.

Today’s marketplace is more challenging for small U.S. companies than it used to be, he acknowledges, because of globalizing factors like the Internet and the spread of talented scientists around the world, not to mention U.S. energy costs and other discouragements  like tax rules for capital depreciation. But he says small companies like his with specialized niches and an ability to innovate based on core skills can still achieve growth for themselves more easily than giant companies needing to move new products to market rapidly around the world. “It’s awfully easy to take a penny and make two; it’s a lot harder to take $200 million and make it $400 million.”

Nevertheless, big companies are mustering their own strengths to pursue global opportunities, showing the same penchant to innovate as smaller firms but with differing degrees of reliance on their established business models.

Leveraging experience

Arch Chemicals, Norwalk, Conn., for one, is building upon its core biocides businesses. This reflects “our belief that this highly regulated global market sector represents a solid, long-term growth opportunity,” says Paul J. Craney, executive vice president. “Innovative products, toxicological and regulatory expertise, and close technical collaborations with customers still command a premium in the global biocides market.”

Echoing the idea of application barriers, Craney attributes Arch’s market-leading positions partly to experience in a highly regulated environment and partly to “decades-long ‘partnerships’ with leading global players in our market segments — the kind of mutually profitable relationships that can form a bulwark against knock-off, commodity-style competitors.” The company is also finding new applications for some of its core molecules and building a “robust intellectual property portfolio” to protect its products in new end-uses.

“The global nature of Arch’s businesses — with approximately half of our annual revenues and half of our employees located outside North America — is also helping us compete successfully,” Craney says. “For example, we are sourcing certain products and raw materials from nations such as China and India, where pricing is advantageous.”

Air Products, Lehigh Valley, Pa., announced this spring that it is entering the personal-care specialty ingredients industry as part of an overall global strategy to grow its performance materials platform. The company will make ingredients for skin care, hair care, and color cosmetics, drawing initially upon a patented polymer technology license and R&D agreement with Landec Corp., Menlo Park, Calif.

Wayne Mitchell, vice president and general manager of the performance materials division, calls the move “an example of Air Products utilizing its skills and competencies in areas such as surface science, applied technologies and product lifecycle management to tap into adjacent markets that are of a substantial size and are driven by global trends and demographics.” Noting that his remarks reflect perspectives on the performance materials growth platform, not all of Air Products, he adds that “our advanced materials initiative is operating in a similar vein, but is looking further out at emerging technologies to identify future positions in growth areas.” The company now is leveraging its nanoparticle-dispersion knowhow.

Innovation is crucial

Many U.S. companies and industries are looking at emerging technologies as keys to solving their competitive challenges. The important role of innovation in the plastics sector has drawn the attention of the Society of the Plastics Industry (SPI), Washington, D.C., where Jane Austin, global business director for DuPont Performance Elastomers’ chloroelastomers business, Wilmington, Del., serves as SPI board chairperson.

The need is highlighted by ACC’s “Lost Chemistry” report, which, in scanning U.S. manufacturing sectors where imports have risen and exports have declined, specifically cites plastics. “The deterioration in the trade balance for plastic and rubber products in particular has been pronounced,” says ACC chief economist Kevin Swift. The report notes a trade deficit — or “lost chemistry” position — of $3.1 billion in 2005. The sector is the largest direct purchaser of the goods and services of the chemical industry.

Austin says the U.S. plastics industry has lost more than 200,000 jobs over the past five years, “mostly because the cost of natural gas in this country has soared 700%.” Manufacturers of all sorts are facing competitive challenges from emerging nations and are adopting a variety of responses, including Six Sigma quality management techniques and “lean manufacturing” to maximize process flows and eliminate wasteful activities, she adds.

The plastics industry is poised to benefit from a number of innovations, she says, including nanotechnology, “which will tremendously expand the performance range of plastics,” as well as bioplastics and recycling developments that will extend the useful life of polymer materials.

Konarka Technologies, Lowell, Mass., is bringing such innovation to the marketplace, with its development of polymer photovoltaics, trademarked Power Plastic, for converting light to energy. The technology includes “nano-engineered materials that can be coated or printed onto a surface in a process similar to how photographic film is made,” according to Konarka. The company’s corporate partners include DuPont, Wilmington, Del., and Eastman Chemical, Kingsport, Tenn.

Government support

Eastman, like many chemical companies, is investing in innovative products as one way of bolstering its competitiveness. In May, the company fought the competitiveness battle on a different front, testifying to a Senate committee to urge more robust support from the federal government. The issue at hand was clarification of the Energy Policy Act of 2005, which potentially could yield tax credits and loan guarantees for chemical companies’ industrial-scale coal gasification projects.
Such projects, along with other alternative energy initiatives like the use of biofuels, are seen as major means to overcome the competitive challenges that U.S. companies face from high natural gas and oil prices. The vision of large-scale gasification includes not only a money-saving process change but actually a possible new  role for chemical companies. “We could be making electricity and putting it on the grid,” just like electric utilities, says Lee Schlosser, Eastman’s manager of federal government relations.

“There’s been a great development in the understanding of the industrial stake and role in deployment of gasification technology in the U.S. in the last three years,” says Schlosser. The discussions now go beyond maxims about globalization and free-market dynamics to include matters of national security — energy supplies, environmental preservation, food production (because the fertilizer industry would gain from natural gas substitutes), and incremental steps toward the “hydrogen economy” of the future, he notes.

The issue of support for gasification, in some ways a narrow debate about procedures at the Internal Revenue Service and the Department of Energy, is part of a broader set of questions about the government’s role in enhancing U.S. industry’s competitiveness. The chemical industry may be raising such questions more vociferously amid the growing awareness of China’s “user-friendly” industrial policy and calls for comprehensive strategies to improve America’s trade balance and enlarge the ranks of scientists and engineers who will develop tomorrow’s home-grown technology.
Thus, reactions to reports that the U.S. is “losing chemistry” are taking many forms these days.

Prescriptions for sustained competitiveness may be as small-scale as the building of relationships between companies or as large-scale as holistic, futuristic perspectives among governments.

But perhaps Larry Brotherton of Ortec best sums up the bottom line about U.S. competitiveness when he reminisces about his South Carolina company’s rise from humble beginnings: “It’s still a great country. There’s lots of opportunity. But I’ve not seen it come without some sacrifice and hard work.” Or when he speaks about core competencies and reliable performance as marketplace essentials: “If you don’t do something very well, then you really are lost.”

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