INDUSTRY INSIGHT

THE ROAD TO INNOVATION IS DIFFICULT AND LONG

GCC chemical producers are keen to invest in R&D and digitalization to improve their competitiveness, but it will take time and may not deliver all that advocates promise, says leading academic David Hounshell

Digitalization could completely change the way the petrochemical industry operates. But, until now, the sector has been unable to grasp the opportunities, causing certain disdain for yet another promised “industrial revolution”.

The way petrochemical plants operate has come a long way since their inception, but some analysts argue that the next big shift will come from artificial intelligence (AI) and remote control of operations.

Middle East chemical majors are making large investments in digitalization, and “big data” has become the new mantra for corporate boards anxious to catch the train of, potentially, more efficient and leaner operations.

However, chemical companies in the GCC region – the center of the Middle East petrochemical industry – may only reap the fruits of their higher investments in R&D in a few decades, as their starting point lags behind peers in Europe or the US.

Blockchain to make markets safer?

The latest buzzword is blockchain, which promoters believe could revolutionize trade, making the marketplace a more transparent, safer space.

However, corporates’ intrinsic reluctance to full transparency – trades being the sacrosanct secret – as well as problems of security may dampen blockchain’s prospects, for now.

“In blockchain there is the problem of security and, as of now, that is not guaranteed because these systems are still hackable,” says Hounshell.

“Here in the US, DARPA [the country’s publicly funded Defense Advanced

Research Projects Agency] is investing a lot of money on this and, of course, there is private investment as well, such as from IBM, which has staked a good deal of its future on blockchain-based systems development.”

That is the opinion of a US professor who has been studying industrial R&D for decades. David Hounshell, Professor of Technology and Social Change at Pittsburgh’s Carnegie Mellon University, is the co-author of a well-read book among chemical industry watchers: ‘Science and Corporate Strategy. DuPont R&D, 1902–1980’, an essay published in 1988 analyzing the US chemical major’s industrial research policies.

He is also the author of ‘From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the US’, published in 1984.

GCC investing in innovation

“In terms of R&D, the Middle East is relatively new. Middle East firms have made important investments and have targeted especially two areas regarding research: basic process development and delivering more specialty products. And they have seen some success even though R&D spending in the Middle East is comparatively modest,” says Hounshell.

“There has been great competition among specialized engineering firms to grasp the opportunities of basic process development targeted for the Middle East.  Process-oriented R&D has, of course, been a constant among chemical firms globally, as has the perceived need among producers to move downstream to diversify their business.”

However, R&D needs both private and public infrastructure to thrive and the Middle East may be lacking the latter. And, while companies can attract talent with high salaries and good employment packages, the lack of well-established academic institutions weakens their purpose, prompting them to try another strategy – going global.

“Some Middle East firms have tried to globalize their R&D so as to tap into more long-standing and renowned academic research centres, and that is a complex process,” says Hounshell.

However, despite the big investments in digitalization, the pace of change has so far been slow. Petrochemical plants operate and look pretty much like they did decades ago.

Digitalization remains a buzzword which can adorn an investor presentation, but implementing a coherent strategy remains a territory many companies struggle with.

In a report titled ‘Why digital strategies fail’, analysts at McKinsey recently pointed to five digital-related pitfalls which are daunting most economic sectors. The analysts described the “fuzzy definitions” surrounding digitalization and how a good number of board members still describe digital as synonymous of IT functions.

Misunderstanding the economics of digital by applying modern industry’s parameters; overlooking both digitizing incumbents and the upcoming interconnected ecosystems; as well as misreading the “duality of digital” and how current corporate structures would fare better by embracing digitalization rather than fighting it completed the list of pitfalls.

The truth may lie somewhere in the middle. While AI, as it has been promised, could potentially change how most things in industry work, the change will not be sudden and its advent will need to defeat scepticism from those who, still, understand R&D as it was conceived in the 20th century.

Opposite to the European CEO would be those who actually think he is the one who is not getting it, and would easily classify him as a corporate leader who is failing to grasp the imminent big shift.

“Companies’ board members and managers have a very high level of awareness about digitalization and its possibilities. In many economic sectors, digitalization is actually being pushed by customers who are asking for more transparency, better service, and more reliable deliveries.

“Consumers’ requirements then move up the supply chain,” says Ann Vereecke, Professor of Operations and Supply Chain Management at the Vlerick Business School in Belgium.

“Companies’ board members and managers have a very high level of awareness about digitalization and its possibilities. In many economic sectors, digitalization is actually being pushed by customers who are asking for more transparency, better service, and more reliable deliveries.

Ann Vereecke, Professor of Operations and Supply Chain Management, Vlerick Business School, Belgium

“Change caused by big data will probably occur more slowly and less completely than its prophets have promised.”

David Hounshell, Professor of Technology and Social Change at Pittsburgh’s Carnegie Mellon University

Slow pace of digitalization

“What explains why the petrochemical industry is not too advanced in digitalizing their supply chain activities? This sector is pretty much upstream, it’s not close to the final customers. Therefore, it takes a bit of time for digitalization to move up to producers.”

However, managing an AI-type cultural shift within a large manufacturing company – and the chemical industry is dominated by global players – would also present problems related to insiders’ commitment or even awareness about the supposedly big shift.

Furthermore, humans well adapted to an environment tend to be resentful of steep change and may resist it, a problem that Carnegie Mellon University’s Hounshell has observed among corporates during the many decades he has spent studying their R&D policies.

The prospects of remotely controlled petrochemical plants and leaner operations might be music to the ears’ of corporate leaders who hope for safer, more efficient and cheaper operations.

Hounshell is, however, more sceptical about the potential big shift industry would be about to experience because of AI. While investments in R&D have started to rocket, both from the private sector but especially from public institutions, he shares with the European CEO the fear that, despite the prospect of dominating the science of data gathering, goods will at the end have to be moved from the plant to the customer.

I am sceptical about whether those investments will bring the promised revolutionary changes, simply because there is a lot of mass out there. Be it in chemicals or automobiles, stuff doesn’t move at the rate that information moves,” says Hounshell. “Change caused by big data will probably occur more slowly and less completely than its prophets have promised.”

Vereecke says that some companies are actually changing the paradigm completely and embracing digital innovation as a key, across-the-board strategy which touches everyone and everything from top to bottom.

“In interviews, some chemical producers told me that the logistics service providers are actually the ones bringing innovation into their supply chain. I saw quite a few companies that are really working on changing the culture to embrace digital innovation, and some are even building ‘innovation cells’ or digital offices: a part of the organization that has a mandate to experiment and has incentives to innovate,” she says.

While sceptical about steep changes due to AI which are yet to materialize, Hounshell conceded that big data, AI and machine learning could actually help the chemical industry overcome one of its chronic problems: overcapacities. However, this will depend on the availability, quality, and verity of the data, because companies do not share all the information they generate, “even on an intra-firm basis.” Transparency is again the key word to make things work.