Remaining customer-centric in an evolving chemicals ... · 25/02/2020 · Page 10 February 2020 Remaining customer-centric in an evolving chemicals landscape Source: EY Digitalization

Remaining customer-centric in an evolving chemicals landscape

EY Chemical Market Outlook

Frank Jenner

EY Global Chemical Industry Leader

February 2020

Overview

Page 2

The chemical industry, a supplier to all other industries, is transforming like never before. Globally, digitization and evolving demands from end-user industries have forced chemical companies to develop new offerings and applications. These businesses must also develop sustainable options for products, feedstock and automated processes to meet consumer demand. And to do this, the companies should co-create sustainable solutions with end customers.

Chemical players are embracing artificial intelligence (AI) and machine learning in R&D to improve data analytics and digital platforms in high-potential technologies such as soft sensors, edge computing and 4D printing – with the goal of transforming their operating models.

Industry convergence and technology-driven disruption in today's Transformative Age also require businesses to rethink their talent priorities. With the right mix of permanent andcontractual employees, chemical companies can develop the culture of innovation and customer-centricity needed to keep up with constant change.

In this edition of our global Chemical Market Outlook, we explore the trends and drivers that will shape the chemical industry of tomorrow.

Frank JennerEY Global Chemical Industry Leader

[email protected]

February 2020 Remaining customer-centric in an evolving chemicals landscape

February 2020 Remaining customer-centric in an evolving chemicals landscapePage 3

ContentEvolving customer and end-user needs

A new digital age of chemical production

The road to sustainable development

Prioritizing talent and culture to drive growth

Changing global and regional regulations

Key trends

Page 4

• A generational shift, emergence of advanced technology and convergence of end-user industries necessitate robust solutions that address customers' changing expectations.

• The future of energy, agriculture, mobility and technology helps chemical companies shape portfolio planning.

• New technology is both a driver of and partner to innovation in the chemical industry.

• 3D printing industry drives an end-user demand for specialized inputs for example in selective laser sintering (SLS) printers.

• AI facilitates an efficient innovation process.

• Advanced technologies such as edge computing and 4D printing can further transform chemical operations.

• The chemical industry plays a crucial role in the pursuit of the goals established in the United Nations' 2030 Agenda for Sustainable Development.

• Several of these goals —zero hunger; good health and well-being; clean water and sanitation; affordable and clean energy; and climate action — will drive chemical companies' focus on health care and water treatment chemicals, as well as on energy efficiency, recyclability and use of renewable feedstock.

• Besides focusing on digital capabilities, chemical companies must encourage and foster leadership, communication, innovation and other soft skills to develop an agile, skilled workforce.

• Global preferred employers can be used as models for developing a culture of innovation, growth and employee well-being.


Evolving customer and end-user needs





• Chemical companies consider regulatory uncertainty and volatility as growth barriers.

• A global sulphur cap targeting the petrochemical industry and tighter environmental rules in China have widespread impact.

Evolving customer and end-user needs

Page 5 February 2020 Remaining customer-centric in an evolving chemicals landscape

Placing the customer at the beginning of the value chain creates real valueChemical companies must work with customers as a part of their ecosystem to co-create sustainable solutions that meet their needs


Source: EY Industrial Products Continuous Innovation Survey 2018 (120 chemical-industry respondents surveyed in April 2018).

Chemical companies, which recorded a 10%+ profit margin and 5%+ revenue

growth in recent years, prioritized

Collaborating with customers to redesign or create products

and services

Improving reliability and availability of products and

services

Enhancing the speed of delivery of products and

services

The chemical industry must develop futuristic products driven by dynamic customer preferences and issues impacting end-user sectors


Automotive sector

• Increasing demand for electric and connected vehicles, and ride-sharing and -hailing models

• Emission reduction standards

• Growing market for automated vehicles

• Decarbonization across industries through electrification using renewable resources such as solar, wind and hydro

• Rise of "prosumers" — consumers who both produce and use electricity

Energy sector

• Increased demand for high-capacity lithium-ion batteries

• Reduced ownership and increased focus on utility

• Growing demand for lightweight materials for vehicle bodies

• Need for retroreflective surfaces

• Increased commercial and industrial use of solar energy, leading to greater demand for solar panels and solar cells

• Enhanced demand for energy storage devices involving the use of batteries such as lithium-ion and flow batteries

• Emergence of a supporting industry for the maintenance of solar cells

• Invest in in-house innovation to develop smart materials such as shape-memory alloys and cathodes for fluid batteries

• Collaborate with research institutes, the automotive industry and start-ups to license the technology around the future of mobility (e.g., retroreflective coatings and dirt-repellent surfaces)

• Invest in the development of low-cost solar technology

• Identify ways to commercialize alternate fuel sources such as flow batteries

• Develop dust-and water-repellent solar cells to reduce maintenance cost

Key priorities for chemical companies

Implications

Disruption in end-user industries will drive the specialized chemical portfolio of the future


Agriculture sector

• Increasing threats to crops

• Trade wars and embargoes that affect commodity prices

• Consumers' preference for healthier, traceable options

• Increasing popularity of new agriculture techniques such as hydroponics and desert farming

• Growing 5G applications include:

• Industrial Internet of Things (IIoT) and robotics

• Mobile broadband

• Connected mobility

• Precision agriculture

• Invest in sustainable technology and products such as seaweed-based plant nutrients

• Integrate blockchain into the supply chain to enhance transparency for the customer

• Develop value-adding products to combat price drops due to commodity price volatility

• Enter markets that are still in the nascent stage of collaboration with niche suppliers and start-ups

• Invest in the development of chemicals for advanced electronics

Telecommunication sector

• Growing demand for health-and environment-friendly pesticides

• Implementation of blockchain in sources that supply chemicals, particularly those catering to the food industry

• Emerging demand for chemicals that enable growth in nonconventional agriculture

• Increased use of touch-screen electronic devices across industries and vehicles

• Increased use of sensor networks across industries

Key priorities for chemical companies

Implications



Digital technology is now a necessity as it aids growth by supporting companies across their segments and functions


Source: EY Digitalization in Chemicals survey (the respondents could select 3 options from a list of 11 digitalization topics), July 2019.

High-potential areas of technology, per key global players

Improved data analysis (e.g., big data, business analytics, AI

and predictive maintenance)

Improvement and integration of data management

(e.g., master data)

Digital marketing platforms (e.g., digital markets)

39% 36% 33%

Chemical companies are leveraging digital technology to develop new business models, explore new markets and increase innovation efficiency


Source: EY Industrial Products Continuous Innovation Survey 2018.

Digital technologies creating area

of demand

AI for innovation

Services enabled by

digital technology

• New technologies such as 3D printing and 5G will drive the demand for enhanced materials to complement their use.

• A major European chemical company has acquired several startups and suppliers that provide inputs (e.g. plastic powders) for SLS printers.

• A US chemicals provider has developed integrated solutions for 5G services.

• Some major chemical and petrochemical companies are using AI to automate scientific work.

• AI and machine learning are being deployed for experimental iterations to reduce R&D time and costs. For example, a US chemicals producer is partnering with a machine learning and computing company to develop quantum computing tools for material science and chemical research.

Digital and innovation

• Several US and Europe coatings players are enabling collaborative innovation through labs where their customers can test and create prototypes.

• Global agrochemical companies are offering more than just products by adding data-analytics services to their portfolios to develop holistic customer solutions.

• Digital technology is facilitating a wide range of innovative services and solutions, and chemical companies are developing new business models to serve the resulting customers.

New technologies can boost operations and open new avenues of growth


Why does chemical

manufacturing need soft sensors1?

Can be used to predict product quality

Helps achieve accurate quantities in R&D and operations

Facilitates the smart factory (more efficiency than hard sensors), maintenance and transportation

How can 4D printing2 help

shape the product portfolio of tomorrow?

Why is edge computing3

relevant to chemical

operations?

Helps in the development of materials whose functionalities can be expanded

Can be used to develop products with self-assembly feature, to skip the middleman

Enhances the effectiveness of cloud and IoT systems for plant management

Reduces equipment failure to minimize maintenance cost

Promotes plant and employee safety

Helps increase efficiency through service flexibility, and lower capital, time-to-market and inventory requirements

1. Soft sensors are inferential models that use easily measured variables to estimate process variables that are otherwise hard to measure because of technological limitations, large measurement delays or high investment costs.

2. 4D printing is the process through which a 3D printed object transforms itself into another structure over the influence of factors such as temperature, light and pressure.

3. Edge computing involves deployment of data-handling activities directly to the individual sources of data, such as laptops, tablets or smartphones, reducing reliance on centralized and always-connected network segments.

Advanced technologies such as soft sensors, 4D printing and edge computing can help chemical companies enhance product quality, develop new business models and accelerate innovation.



As suppliers to all industries, chemical companies will need to be part of the circular economy long before other sectors.


of chemical companies surveyed currently have, or plan to develop, metrics for measuring social value in the next 12 months.

82%

20+ chemical companies, along with consumer products companies, cofounded the Alliance to End Plastic Waste.

Source: EY Global Capital Confidence Barometer survey, October 2019. EY Advanced Manufacturing Global Capital Confidence Barometer highlights, November 2019.

ey.com/en_gl/ccb

ey.com/en_gl/ccb/21/advanced-manufacturing-mergers-acquisitions

The UN Sustainable Development Goals are expected to reshape demand across industries …


UN Sustainable

Development Goals1

Subsequent impact on product demand

for different industries

Agriculture

• Focus on higher yield for the rapidly increasing population

• Need for sustainable agriculture

Energy

• Focus on renewable sources of energy

Life sciences

• Demand for nutrition supplements

• Need for easy availability of lifesaving drugs

• Customized food for fighting diseases caused by lifestyle factors

Manufacturing (including industrial and consumer products)

• Demand for eco-friendly raw materials• Focus on maximum product recyclability

(e.g., a global food and beverages producer has taken steps to shift all of it products to paper packaging by 2025)

• Demand for personal and home care products that contain bio-based products

• Focus on reducing industries’ carbon footprint (e.g., a global fast-moving consumer goods company plans to halve its consumption of new plastic by 2025)

• Responsible wastewater management

Government and public services

• Affordable health care• Pollution control across air, water and land• Regulatory enforcement focused on the "three R's" – reduce,

reuse and recycle

• Regulations to boost use of renewable energy sources for commercial and residential purposes

• Encouragement of initiatives focused on water-source clean-up and environmental preservation

Zerohunger

Good health and well-being

Affordable and clean energy

Climateaction

Sustainable cities and communities

Responsibleconsumption and production

Clean waterand sanitation

Lifebelow water

Source: “UN Sustainable Development Goals”, UN Sustainable Goals Knowledge Platform, UN Sustainable Development website, accessed 16 October 2019.

https://sustainabledevelopment.un.org/?menu=1300

… which, in turn, would drive chemical companies to rethink their focus areas in strategy and innovation


UN Sustainable

Development Goals

Key priorities for

chemical companies

Zerohunger

Good health and well-being

Affordable and clean energy

Climateaction

Sustainable cities and communities

Responsibleconsumption and production

Clean waterand sanitation

Lifebelow water

• Investing in R&D to develop high-yield fertilizers and growth enablers

• Developing agrochemicals with minimal effect on the environment and consumers’ health

• Expanding portfolios in nutrition and bioscience segments

• Investing in development of innovative application programming interfaces (APIs) to respond to increasing demand for pharmaceuticals

• Investing in the development of low-cost solar cells and fuel batteries

• Collaborating with the energy sector for the development of sustainable fuel

• Developing lightweight materials for the mobility sector to reduce carbon footprint

• Developing chemicals with minimal ecological impact

• Investing in R&D for the development of bio-based feedstock

• Upgrading the supply chain to support a circular economy by:

• Reusing carbon emissions

• Reusing waste chemicals and plastics

• Strategizing to gradually increase recyclable and bio-based materials as part of the company’s portfolio

• Enhancing water treatment and purification technologies

• Collaborating actively with recycling and waste management firms for reuse or treatment of waste effluents

Source: “UN Sustainable Development Goals”, UN Sustainable Goals Knowledge Platform, UN Sustainable Development website, accessed 16 October 2019.

https://sustainabledevelopment.un.org/?menu=1300



Chemical leaders believe their company culture somewhat helps them address key business priorities



Note: The survey included 121 chemical respondents, and the above data is for chemical respondents with positive profit margins for the preceding three years. Respondents could choose more than one option.

70%

Producing high-quality products

67%

Reducing costs

65%

Customer experience

How effective is your culture in serving the following business needs?

In this Transformative Age, chemical companies are focusing on skills beyond their technical know-how to develop an agile workforce


86% 85% 85%

Leadership InnovationCollaboration and communication

Key skills at chemical companies


Chemical employers are focused on developing and nurturing their employees' sector expertise and digital skills to facilitate the deployment of the latest technology in their operations.

Chemical employers can gain insights from leading industries to model themselves as the preferred employer


What can chemical companies learn from employers in other sectors?

What do the top rankers of Forbes1 best places to work have in common?

1 ”Top 10 reasons to work at Google,” investopedia.com, https://www.investopedia.com/articles/investing/060315/top-10-reasons-work-google.asp, July 2019

9

7

6

2

1

Technology giant

• Lifestyle and health benefits

• Growth opportunities within the firm

• Creative and innovative work environment

Oil and gas company

• Supportive work culture

• Learning and development opportunities

Life science company

• Collaborative work culture

• Investment in employees’ health and well-being

• Focus on developing a safe and environmentally responsible workplace

Leading hotel chain

• Employee-focused workplace culture

• Investment in employees’ comfort

• Additional benefits, such as adoption assistance

Automotive company

• Strong corporate culture

• Widely recognized brand

• Investment in futuristic solutions

Develop an employee-focused culture

Provide holistic reimbursements beyond monetary benefits

Foster an innovation-focused culture

Develop a corporate brand

Offer adequate growth opportunities

https://www.investopedia.com/articles/investing/060315/top-10-reasons-work-google.asp



A changing regulatory landscape also presents challenges to the chemical industry

Page 22

67%

of chemical companies consider the following to be barriers to the growth of their businesses:• Regulatory uncertainty

• Geopolitical or local political uncertainty

• Supply chain disruption due to trade disputes

• New environment-related policies

The impact of the tighter International Maritime Organization (IMO) on the global petrochemical industry

• The IMO’s limit on sulfur content in fuel oil for the shipping industry is expected to have a dual impact on chemical suppliers:

• Freight costs for chemical imports will likely increase as shipping companies' capital expenditures are impacted.

• Production of light crude oil will increase the global supply of naphtha which may benefit the naphtha-dependent petrochemical producers.

Environmental regulations affecting the chemicals industry

• As the Chinese Government tightens environmental regulations, chemical companies may be facing plant closures and overall operations cost increases.

• On the upside, some segments have seen demand grow. For many companies that have passed costs onto the consumer, revenues and profits have grown.


The sulphur limit will have mixed effects on the petrochemical industry

Page 23

• Effective 1 January 2020, the IMO is imposing a limit on sulphur in marine fuels to 0.5% from 3.5%.

• Under new regulations, shipping companies would need to either shift to low-sulphur fuel oils (LSFOs) or gas oil.

• LSFOs are generally more expensive than high-sulphur fuel oils; hence, navigation costs for shipping companies may increase.

• Gas oil is less expensive, can be blended into diesel and may provide greater value for oil and gas companies.

• Shifts in the types of fuel used may lead to higher freight charges for chemical buyers that rely heavily on imports.

• The European polyethylene terephthalate and purified terephthalic acid industry, which heavily depends on imports from South Korea and China, is expected to face increased freight charges.

• Production of sweet crude or light crude is expected to increase alongside demand for low-sulphur fuels. As a result, the global supply of naphtha will likely grow (sweet crude's production is associated with a high quantity of naphtha).

• Petrochemical producers using naphtha crackers will likely benefit.


China’s tightened environmental regulations have mixed effects on chemical suppliers


• Most chemical companies in China have been impacted.

• As a result of the regulations, some companies have faced heavy penalties, mandatory plant upgrades for effective waste treatment, shutdowns of manufacturing plants responsible for heavy pollution and relocations of plants to an industrial zone away from human inhabitants.

Threefold impact on revenue and profits

Regulatory costs are increasing overall chemical and material production costs in the country. Certain Chinese specialty-chemical producers that cannot pass these costs onto the customer have seen their margins take a hit.

2As several plants with unsustainable operations have been shut down, China has become an importer of chemicals such as naphthalene, which may benefit other economies, such as South Africa and Nigeria.

1Product prices have increased in segments where chemical companies can pass the costs onto the customer. As competitor facilities close, some producers are seeing greater demand; coupled with price increases, this is leading to higher profits.

3

For more on how global trade impacts the chemical industry.

https://www.linkedin.com/pulse/de-escalation-us-china-trade-dispute-good-news-chemicals-jenner/


Key contacts

Frank JennerEY Global Chemical Industry Leader

+49 621 4208 18000

[email protected]

Jade RodysillEY Americas Advisory Chemical Leader

+1 214 969 8650

[email protected]

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Remaining customer-centric in an evolving chemicals ... · 25/02/2020 · Page 10 February 2020 Remaining customer-centric in an evolving chemicals landscape Source: EY Digitalization