The Fate of the Chemical Industry - How to Bridge the Material - Product Gap and Survive a Seemingly Bleak Future | April 11 Matt Wagner, Ph.D ...
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The Fate of the Chemical Industry How to Bridge the Material – Product Gap and Survive a Seemingly Bleak Future | April 11 Matt Wagner, Ph.D. Senior Analyst, Lux Research
Agenda
1 The Nature of Fate
2 The Nature of the Chemical Industry: Past, Present, and Future
3 Opportunities
2
The Nature of Fate
”
Lachesis singing the things that
were, Clotho the things that are, and
Atropos the things that are to be.
- Plato, 380 BCE
”
3
Fate is
the landscape you inherit
”
A better translation of moira
might be ‘lot.’
Lot, like moira, describes both
a parcel of land and the
destiny that an individual has
been given.
- PARABOLA, 2000
4
”
Agenda
1 The Nature of Fate
2 The Nature of the Chemical Industry: Past, Present, and Future
3 Opportunities
5
What the chemical industry used to be
Turned science into profit by mass
producing chemicals
Huge financial rewards for inventing a
new molecule or a new low cost Solvay Haber
production process
No material – product gap; the material
was the product
Carothers Kwolek
6
“
The chemicals industry has
lost its future…It has more to do with
financial engineering than
chemical engineering.
- John Gapper, Financial Times, May 2017
”
7
“
The industry has not developed
any new multi-billion dollar materials
because the necessary technologies
are still in development.
- John Abbink, Seeking Alpha, June 2017
”
8
AUDIENCE QUESTION: Which of these fates is more likely? Is the chemical industry doomed to mere financial engineering? Will the chemical industry be saved by new multi-billion dollar materials? 9
My answers may surprise you 10
My answers may surprise you
Is the chemical industry doomed
to financial engineering?
11My answers may surprise you
Is the chemical industry doomed
to financial engineering?
Yes
The industry will be dominated by
deal making (M&A, spin-outs,
consolidation) for years to come
12My answers may surprise you
Is the chemical industry doomed Will the chemical industry be saved
to financial engineering? by new multi-billion dollar materials?
Yes
The industry will be dominated by
deal making (M&A, spin-outs,
consolidation) for years to come
13My answers may surprise you
Is the chemical industry doomed Will the chemical industry be saved
to financial engineering? by new multi-billion dollar materials?
Yes No
The industry will be dominated by There will be some opportunities
deal making (M&A, spin-outs, for new materials/applications to
consolidation) for years to come have a large financial impact, but
they will be few and far between
14Industry deal making is alive and well
”
All we are doing is trading
the same 52 cards back-
and-forth trying to come up
with the best hand.
-Major Chemical Producer
(and Lux client)
”
15INDUSTRY DEAL MAKING IS ALIVE AND WELL
Consolidation in industrial gases
16INDUSTRY DEAL MAKING IS ALIVE AND WELL
Consolidation in industrial gases
1990
Air Products
Taiyo Nippon Sanso
Liquid Carbonic
Praxair
AGA
BOC
Linde
Messer Griesheim
Airgas
Air Liquide
17INDUSTRY DEAL MAKING IS ALIVE AND WELL
Consolidation in industrial gases
1990
Air Products
Taiyo Nippon Sanso
Liquid Carbonic
Praxair
AGA
BOC
Linde
Messer Griesheim
Airgas
Air Liquide
18INDUSTRY DEAL MAKING IS ALIVE AND WELL
Consolidation in industrial gases
1990 2019
Air Products Air Products
Taiyo Nippon Sanso Taiyo Nippon Sanso
Liquid Carbonic
Praxair
AGA Praxair-Linde
BOC
Linde
Messer Griesheim
Airgas Air Liquide
Air Liquide
19INDUSTRY DEAL MAKING IS ALIVE AND WELL
Consolidation in the chemical industry
1990 2019
Risks
Air Products Air Products
• Over payment
Taiyo Nippon Sanso Taiyo Nippon Sanso
• Liquid Carboniccosts
Integration
Praxair
• Activist
AGA
investors Praxair-Linde
• Nationalism
BOC
• Linde
Knowledge management
• Messerof
Loss Griesheim
personal networks
Airgas Air Liquide
Air Liquide
20New multi-billion dollar materials are few and far between
DEVELOPED DEVELOPING FUTURE
Carbon 3D Printing
Composites Materials ?
M&A Examples:
Toray – TenCate
($1.2 billion, 2018)
Solvay – Cytec
($5.5 billion, 2015)
Toray – Zoltek
($0.6 billion, 2014)
21New multi-billion dollar materials are few and far between
DEVELOPED DEVELOPING FUTURE
Carbon 3D Printing
Composites Materials ?
M&A Examples:
Toray – TenCate Hexcel – OPM A&D
($1.2 billion, 2018) (December, 2017)
Solvay – Cytec BASF – Innofil3D
($5.5 billion, 2015) (August, 2017)
Toray – Zoltek GE – Concept Laser
($0.6 billion, 2014) ($0.6 billion, 2016)
GE – Arcam
($0.5 billion, 2016, 2018)
22New multi-billion dollar materials are few and far between
DEVELOPED DEVELOPING FUTURE
Carbon 3D Printing Polyethylene
Composites Materials Furanoate (PEF)
M&A Examples:
Toray – TenCate Hexcel – OPM A&D
($1.2 billion, 2018) (December, 2017)
Solvay – Cytec BASF – Innofil3D
($5.5 billion, 2015) (August, 2017)
Toray – Zoltek GE – Concept Laser
($0.6 billion, 2014) ($0.6 billion, 2016)
GE – Arcam
($0.5 billion, 2016, 2018)
23NEW MULTI-BILLION DOLLAR MATERIALS ARE FEW AND FAR BETWEEN
PEF as a replacement for polyethylene terephthalate (PET)
Bio-based polyester with improved 100
properties over incumbent PET 90
Polyethylene furanoate 80
Support from customers like Coca-Cola, Y-axis: Summary of trends in 70
LEGO, and Nestle patents, papers, funding, and more. 60
(100 = highest possible score.)
Commercial-scale plant for 2,5- 50
furandicarboxylic acid (FDCA) monomer 40
online by 2024 by BASF/Avantium JV +87% 30
20
10
0
24The nature of the
chemical industry
defines its fate
25THE NATURE OF THE CHEMICAL INDUSTRY
Defining features
Organizational
Technical
26THE NATURE OF THE CHEMICAL INDUSTRY
Defining features
Organizational Operates at large scale
Technical
27THE NATURE OF THE CHEMICAL INDUSTRY
Defining features
Organizational
Operates at large scale
Technical Mature and high entry barrier
28THE NATURE OF THE CHEMICAL INDUSTRY
Challenges
Two Challenges for Each Feature
Product Focused Transaction Focused
Organizational
Operates at large scale
Technical
Mature and high
entry barrier
29THE NATURE OF THE CHEMICAL INDUSTRY
Organizational challenges
A new business must There are high transaction
(eventually) sell a lot of material costs between large
to be financially interesting suppliers and small buyers
~$1
billion
30THE NATURE OF THE CHEMICAL INDUSTRY
Technical challenges
Difficult to carve out a sustainable
product and/or process differentiation
Industry players and transaction
networks are well established
31THE NATURE OF THE CHEMICAL INDUSTRY
Defining features and challenges
Challenges
Product Focused Transaction Focused
Organizational Need for large High transaction
Operates at large scale markets costs
Technical Hard to Established
Mature and high differentiate relationships
entry barrier
32Agenda
1 The Nature of Fate
2 The Nature of the Chemical Industry: Past, Present, and Future
3 Opportunities
33Opportunities ”
You have power over your mind - not
outside events.
Realize this, and you will find strength.
- Marcus Aurelius, ca 170
”
34Opportunities for tech innovation in the chemical industry come
from meeting its challenges
Challenges
Product Focused Transaction Focused
Organizational Need for large High transaction
Operates at large scale markets costs
Technical Hard to Established
Mature and high differentiate relationships
entry barrier
35Opportunities for tech innovation in the chemical industry come
from meeting its challenges
Challenges
Product Focused Transaction Focused
Organizational Need for large High transaction
Operates at large scale markets costs
Technical Hard to Established
Mature and high differentiate relationships
entry barrier
36EFFICIENTLY ROLL UP SMALL BUSINESSES
KMG Chemicals rolling up small businesses
32 years 17 acquisitions 3 divestments
As an explicit strategy, focuses on market sectors of a size that larger
industry players find too small to be attractive
Entered 4 new market sectors, exited from 3 of them
Grew revenue from $20 million in 1996 to $333 million in 2017
37EFFICIENTLY ROLL UP SMALL BUSINESSES
KMG Chemicals rolling up small businesses
32 years 17 acquisitions 3 divestments
Transformed from a regional penta distributor to a global leader in
semiconductor process chemicals
Starting in 2007, used 4 acquisitions to develop a ~20% global market share
Grew sales from from $61 million in 2008 to $277 million in 2017
38EFFICIENTLY ROLL UP SMALL BUSINESSES
KMG Chemicals rolling up small businesses
32 years 17 acquisitions 3 divestments
Can digitally-enabled transactions make it economical for large chemical
companies to roll up and manage similar “small” businesses?
39Opportunities for tech innovation in the chemical industry come
from meeting its challenges
Challenges
Product Focused Transaction Focused
Organizational Need for large High transaction
Operates at large scale markets costs
Technical Hard to Established
Mature and high differentiate relationships
entry barrier
40DIGITALLY-ENABLED CUSTOMIZATION
Use Material Informatics to efficiently make custom formulations
30%
Formulations tend to be lower margin
products 25%
EBITDA Margin
20%
15%
10%
5%
0%
$0 $1 $2 $4 $5 $6 $7 $9 $10 $11 $12
Revenue ($B)
Advanced Materials Performance Chemicals
Advanced Formulations 0
41DIGITALLY-ENABLED CUSTOMIZATION
Use Material Informatics to efficiently make custom formulations
30%
Formulations tend to be lower margin
products 25%
EBITDA Margin
Use Material Informatics to reduce 20%
development time and costs and, 15%
perhaps, improve performance
10%
5%
0%
$0 $1 $2 $4 $5 $6 $7 $9 $10 $11 $12
Revenue ($B)
Advanced Materials Performance Chemicals
Advanced Formulations 0
42DIGITALLY-ENABLED CUSTOMIZATION
Use Material Informatics to efficiently make custom formulations
Formulations tend to be lower margin Examples:
products
Polyolefin resin formulations (Japan’s
Use Material Informatics to reduce National Institute for Materials Science)
development time and costs and,
perhaps, improve performance Formulation development using AI
(Uncountable / CooperStandard)
There’s activity in this area, but not a lot
of success demonstrated today Machine learning and materials relational
database applied to formulations (Citrine)
43DIGITALLY-ENABLED CUSTOMIZATION
Use Material Informatics to efficiently make custom formulations
Formulations tend to be lower margin Examples:
products
Polyolefin resin formulations (Japan’s
Use Material Informatics to reduce National Institute for Materials Science)
development time and costs and,
perhaps, improve performance Formulation development using AI
(Uncountable / CooperStandard)
There’s activity in this area, but not a lot
of success demonstrated today Machine learning and materials relational
database applied to formulations (Citrine)
But could continuing improvements in AI, machine learning, and quantum
computing change this?
44Opportunities for tech innovation in the chemical industry come
from meeting its challenges
Challenges
Product Focused Transaction Focused
Organizational Need for large High transaction
Operates at large scale markets costs
Technical Hard to Established
Mature and high differentiate relationships
entry barrier
45MOVE WITHIN YOUR VALUE CHAIN
3D printing-enabled manufacturing
Arconic Ti Airframe Component A310 Safety Belt Holders
46Opportunities for tech innovation in the chemical industry come
from meeting its challenges
Challenges
Product Focused Transaction Focused
Organizational Need for large High transaction
Operates at large scale markets costs
Technical Hard to Established
Mature and high differentiate relationships
entry barrier
47PRODUCT DIFFERENATION BY MAKING END-USE PARTS
Make semi-finished / finished goods like 3M
40% Safety &
3M has higher margins than most
Graphics Health
large material companies 35%
Care
30% Electron.
For >50% of its products, the last
EBITDA Margin
&Energy
manufacturing step is the 25% Consumer
Industrial
conversion of a material to a 20%
specific shape and size for
15%
customer use
10%
5%
0%
$0 $3 $7 $10 $13 $16 $20 $23 $26 $29 $33
Revenue ($B)
48PRODUCT DIFFERENATION BY MAKING END-USE PARTS
Make semi-finished / finished goods like 3M
40% Safety &
3M has higher margins than most
Graphics Health
large material companies 35%
Care
30% Electron.
For >50% of its products, the last
EBITDA Margin
&Energy
manufacturing step is the 25% Consumer
Industrial
conversion of a material to a 20%
specific shape and size for
15%
customer use
10%
Can digital manufacturing 5%
technologies help enable 0%
this for other firms? $0 $3 $7 $10 $13 $16 $20 $23 $26 $29 $33
Revenue ($B)
49The Fate of the Chemical Industry 50
The Fate of the Chemical Industry
Continued consolidation and large company M&A
51The Fate of the Chemical Industry
Continued consolidation and large company M&A
No one miracle molecule that will save the chemical industry
52The Fate of the Chemical Industry
Continued consolidation and large company M&A
No one miracle molecule that will save the chemical industry
Many opportunities to use new technologies to create real
value for chemical suppliers and their customers
53The Fate of the Chemical Industry
Continued consolidation and large company M&A
No one miracle molecule that will save the chemical industry
Many opportunities to use new technologies to create real
value for chemical suppliers and their customers
Wise investment in technical innovation will be a significant
competitive advantage
54Thank you for joining us.
Matt Wagner www.luxresearchinc.com Blog + Free Webinars
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Office: +1 (917) 484-4877 | Mobile: +1 (716) 861-6979 info@luxresearchinc.com
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