The Middle Eastern Petrochemical Industry’s Road to New Value Growth
By Mirko Rubeis, Partner and Managing Director at The Boston Consulting Group Middle East
The petrochemical industry’s patterns of value creation have traditionally hinged on dated models in a bid to maximize Total Shareholder Return (TSR). As a result, TSR of the industry has slumped over the last decade. Despite having recovered 11 places (ranked in terms of TSR) from #28 in 2017 to #17 in 2018, large global chemical firms were previously ranked as the fourth most value creating companies in 2009.
However, individual firm performance within the industry differs significantly, with high performing large chemical companies achieving up to 45% TSR and others showing negative results. Analysis of the past years and best-in-class performers clearly highlights the fact that industry fundamentals remain important. Value is determined by profitable growth, a focused portfolio, and continued investments in capability building across the value chain.
To capture opportunities to increase shareholder returns, chemical companies in the Middle East should focus on:
As identified in previous BCG research, consolidation remains a key topic for the Middle East. Not only through mergers and acquisitions (M&A), but identifying new opportunities that exist to join forces and improve market access in new geographies (e.g. joint marketing), or reduce costs (e.g. shared services). As international experience shows, consolidation needs to be consistent with portfolio and capability coherence. For example, ‘conglomerate’ models do not work well in the chemicals industry, where each product and application requires a tailored go-to-market approach and R&D, management (and capital) attention.
“To achieve sustainable growth, players need to have a sound plan for emerging and high growth markets.”
Expanding geographical footprint in high growth markets
Growth is the single most important driver of value creation, as shown by BCG past research. To achieve sustainable growth, players need to have a sound plan for emerging and high growth markets. For example, analysis shows that star performers in terms of TSR are originating in countries such as India, who are exploiting the booming domestic demand. While Middle Eastern companies are exploring many manufacturing deals in India, few actually have a clear go-to-market strategy to target the booming domestic market, and even fewer have a marketing and sales organization on the ground.
The chemicals industry has been somewhat slow to use digital technologies effectively. Only 17% of chemical companies worldwide fit BCG’s definition of “digital champions”, in comparison to 23% of all companies in all industries. Digital champions use technology to improve core processes (operations and supply chain), marketing and customer interface, and make the support services leaner and more effective. Digital also creates opportunities to create completely new businesses (‘digital ventures’) leveraging company’s assets, clients or core capabilities to generate ‘unfair’ competitive advantages, while maintaining the agility of a startup by managing the new businesses at ‘arm’s length’. While most chemical companies understand the value of digital applications to their core processes and are conducting pilots, few companies have realized the ‘new business build’ opportunity offered by digital. In order to maintain competitiveness and avoid being disrupted by new digital ‘attackers’ (e.g. a digital marketplace dis-intermediating chemical producers from clients) it is important that chemical companies start investing in innovation and in launching a portfolio of new digital businesses before other players (not necessarily originating in the chemical business) pose a threat to their core business.
“Only 17% of chemical companies worldwide fit BCG’s definition of “digital champions”, in comparison to 23% of all companies in all industries.”
A high-performance culture will continue to be a characteristic of high performing chemical companies. In order to achieve that, it is important to define solid recognition and performance management systems. These in turn will drive engagement and desired behaviors, resulting in sustained higher performance. Reinforced by the positive performance outcome and recognition, this will shape the company culture. Successful companies realize that to modify the company culture it is necessary to act on ‘hard’ elements and processes, such as performance management and recognition systems – not just on communication.
Innovating with an eye to sustainability – each and every chemical company needs to integrate social responsibility as a third potential source of business value (in addition to Shareholder value and Corporate longevity) when defining its role and value contribution to the circular economy. Companies should incorporate sustainability and circular economy into their business strategy, rather than having ‘parallel’ frameworks in CSR (‘run the business first, do good in parallel’). This will also ensure a better balance between corporate longevity and shareholder value.
The Middle East’s chemicals producers need to embrace the transformation seen on a global scale. Future strategies for shareholder value creation will embody the key points outlined. Ultimately, the potential is there for Middle East chemical firms to take the lead and be recognized for their success and generating high total shareholder returns.
“The Middle East’s chemicals producers need to embrace the transformation seen on a global scale.”