Report Summary

Asia’s robust economic outlook—coupled with diminished growth prospects in many other parts of the world—has attracted new investment into the market both from regional players and Western multinationals (MNCs). As a result, competition in the region is expected to intensify. Given the darkening global economic outlook, and the expected impact on some economies and sectors in the region, growth and profitability look uncertain in the near term. But over the medium to longer term, Asia’s strong economic fundamentals will ensure consistent growth across a range of industries. How are companies positioning themselves to capitalise on Asia’s growth opportunities over the next few years?

The Asia Competition Barometer assesses the intensity of competition and changing market dynamics in several key sectors. This report examines the petrochemicals and chemicals manufacturing (PeC) sector, which includes: basic chemicals, fertilisers and nitrogen compounds, plastics and synthetic rubber in primary forms, pesticides and other agrochemical products, paints, varnishes and similar coatings, printing ink and mastics, soap and detergents, cleaning and polishing preparations, perfumes and toilet preparations, explosives, other chemical products and man-made fibres.

Among the key findings of this report are the following:

Asia’s PeC sector has been expanding rapidly, in line with the region’s stellar economic growth. Several broad macroeconomic trends, including Asia’s emergence as a global manufacturing powerhouse, have boosted demand for PeC products and services in the region, and will continue to do so. In particular, demand from the consumer goods, agriculture, automotive and construction sectors will drive the region’s PeC sector. Meanwhile, the increasing global and regional emphasis on sustainable development and alternative energy sources will create new potential markets for PeC firms. The industry is expected to grow at a compound annual growth rate of 10.5% between 2010 and 2015, by when it will be worth some US$2.6trn, according to Datamonitor, a research firm.

The number of players in Asia’s PeC sector has risen since 2004, though recent consolidation suggests that this growth may be moderating. The number and size of publicly-listed firms in the PeC sector in Asia has increased dramatically, from 376 firms in 2004 to 549 in 2009. Total combined revenues more than doubled from US$113.2bn to US$256.3bn during the period. However, with ongoing consolidation the growth in the number of firms may be moderating—from 2008 to 2009, the number of publicly-listed PeC companies in Asia actually declined from 559 to 549. Meanwhile, in recognition of Asia’s increasing importance to the global PeC sector, foreign MNCs have been building up their presence in the region. The latter are increasingly viewing Asia not only as a key market but also a vital source of production.

Competition has decreased marginally, and large players are growing stronger. Competition in the PeC industry grew slightly between the years 2004 and 2007, largely due to an influx of new players into the sector. However, between 2007 and 2009 the largest firms in the industry began to steadily increase their market share, partly by exploiting economies of scale. With ongoing consolidation in the industry it seems likely that the bigger firms, with resources to invest in research and development, and seek out lower-cost sources of feedstock and energy, will continue to grow in dominance.

Despite a slight overall decline, profitability in the sector has remained relatively resilient. Profit margins for the PeC industry in 2009 have fallen slightly relative to 2004, and have generally fluctuated broadly in tandem with global economic growth. The average gross margin of publicly-listed Asian firms declined from 21.5% in 2007 to 18.4% in 2008. This was largely due to a slowdown in demand amid the global economic downturn, and a spike in the cost of raw materials, such as oil, that year. The average gross margin then bounced back to reach 21.4% by 2009. This was partly because of industry consolidation— when revenue growth slowed as a result of the crisis, the smaller players could not keep pace with large MNCs and state-owned companies, who were able to further exploit economies of scale and grow their market share. In the coming years, profitability will be largely dependent on innovation, the ability to tap into markets that are relatively underpenetrated, and access to resources.

Access to resources has displaced low labour costs as the key driver of competitive advantage, disrupting traditional industry supply chains. In a sector with little product differentiation, one of the biggest profitability drivers is preferential access to low-cost energy and raw materials such as oil, natural gas, water, metals and minerals. Industry supply chains are hence being reworked to tap resources in places such as the Middle East. As a result, the sector is also seeing an increasing number of partnerships between MNCs with global networks and technological know-how, and local players, including state-owned firms, with access to resources. Following steep rises in 2010-11, the EIU expects the prices of oil and non-oil commodities to moderate somewhat in 2012-16. Nevertheless, PeC firms will continue to compete fiercely for access to these resources, particularly given the supply constraints in many commodity markets.