Key Takeaways

Contents

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Key Takeaways 1

Introduction. 2

Background and Methodology 2

China’s Chemicals Industry 3

Assessing Chinese Chemicals Industry Innovation. 5

Innovation Data. 7

Company Case Studies 10

Wanhua Chemical Group. 10

Rongsheng Petrochemical Co., Ltd. 12

China’s Chemical Industry Strategy 14

What Should the United States Do? 14

Endnotes 16

Introduction

The global chemicals industry had sales of $4.7 trillion in .[1] While encompassing a wide array of products, the industry can be classified by four segments: basic chemicals, agricultural chemicals, specialty chemicals, and consumer products (e.g., soaps). This report focuses on basic and specialty chemicals. The latter are generally harder to make and see more product innovation.

China leads the world in terms of chemicals industry sales, accounting for over 40 percent of the global market, with much of this in basic chemicals. The United States is still strong in chemicals, especially with companies such as Dow Chemical and Dupont. Chinese companies, however, are making intense efforts to not only gain competitive advantage in fine chemicals (and consumer chemicals), but also invest more in research and development (R&D) and become more innovative, with the government providing significant support.

And as with so many technologies, China has significant cost advantages in chemicals. But can Chinese chemical firms innovate and reach the quality levels of the world leaders? This report assesses this question.

Background and Methodology

The common narrative is that China is a copier and the United States the innovator. That narrative often supports a lackadaisical attitude toward technology and industrial policy: After all, we lead in innovation, so there is little to worry about, with the exception of perhaps making sure we get more STEM (science, technology, engineering, and math) immigration. First, this assumption is misguided because it is possible for innovators to lose leadership to copiers with lower cost structures, as we have seen in many U.S. industries, including consumer electronics, semiconductors, solar panels, telecom equipment, and machine tools. As Clayton Christenson has shown, followers often attack at the lower end of the market through copying and significant cost advantages and work their up toward higher value-added and more innovative segments, all the while weakening the leaders. Second, it’s not clear that China is merely a sluggish copier and always destined to be a follower.

To assess how innovative Chinese industries are, the Smith Richardson Foundation asked the Information Technology and Innovation Foundation (ITIF) conduct research on the question. As part of this research, we are examining specific sectors, including chemicals.

To be sure, it is difficult to assess the innovation capabilities of any country’s industries, and it is especially difficult for Chinese industries. In part, this is because, under President Xi, China discloses much less information to the world than it used to, especially about its industrial and technological capabilities. Notwithstanding this, ITIF relied on three methods to assess Chinese innovation in chemicals: First, we conducted in-depth case study evaluation of two Chinese chemical companies randomly selected from companies listed on the “EU R&D ” list. Second, we held a focus group roundtable with global experts on the Chinese chemicals industry, as well as reviewed the industry and academic literature on the issue. Finally, we assessed global data on chemical innovation, including scientific articles, patents, and innovation awards.

China’s Chemicals Industry

Globally, the chemicals sector has grown more slowly than world gross domestic product (GDP): 149 percent from to in nominal U.S. dollars, compared with 174 percent for global GDP. About 49 percent of the sector’s value added was concentrated in Organization for Economic Cooperation and Development (OECD) countries in , down dramatically from 82 percent in .

According to OECD, China led the world in with 29.1 percent of chemicals industry value-added output—up from 3.8 percent in . The next highest-ranking nations were the United States (18.3 percent in , down from 23.2 percent in ), Japan (5.6 percent, down from 17 percent), and Germany (5 percent, down from 11.1 percent).

China saw the most growth in its global share of the industry from to (up 25.3 percentage points). However, some studies place China’s share of global market sales in at above 40 percent. One study states that China “accounts for about 55% of the global capacity for acetic acid, about 50% of the global carbon black capacity and about 45% of the global capacity for titanium dioxide. For many such commodity chemicals, China started out as a net importer, then built up domestic capacity and ended up being a major exporter.”[2]

One study examining global chemical sales estimates that China’s share in was 44 percent.[3] However, much of its production is in “chemicals which only require a limited level of technology and innovation.”[4]

Nonetheless, companies are investing significantly in China. In , 46 percent of global chemical industry capital investment was located in China, with just 10 percent in the USMCA (United States-Mexico-Canada Agreement) region.[5] Moreover, China had the highest share of capital investment intensity as a share of value added of any nation, 2.8 times more than the United States.[6]

China is not only the world’s largest producer of chemicals, but also the world’s market, something that is expected to increase as Chinese production of cars, batteries, and other chemical-intensive products continues to expand.[7] Like the robotics industry, world-leading demand can ultimately lead to world-leading supply.

However, China still runs a trade deficit in chemicals, suggesting that it is less innovative. In , its chemical trade deficit accounted for 16 percent of the total foreign trade deficit, an increase of about twice that in .[8] As one study from notes, “China’s chemical industry as a whole presents the characteristics of high import dependence and fierce international competition.”[9] It goes on to note that:

China still has the problem of low investment structure and redundant construction, lack of high added value, and have high technical content of chemicals and related products, at the same time full of overproduction of low value-added products market, make domestic demand by the high value-added chemicals mostly rely on foreign imports.[10]

But the Chinese government and industry understand that vulnerability and are seeking to change it, in large part with a push toward more innovative fine chemicals.

Assessing Chinese Chemicals Industry Innovation

For a long time, China was content to produce commodity chemicals with little focus on either process or product innovation. However, after Made in China , China has focused more on new chemicals for new applications, including in batteries, semiconductors, and solar panels, with strong government support. As professor Seamus Grimes wrote, China’s rapid growth in its chemical industry “has increased China’s ambition to become a world leader in the chemical industry through innovation and trade and through growing its market share internationally.”[11]

Foreign companies still dominate many key areas, but their intellectual property has been eroded over time. Multinationals continue to dominate key parts of the value chain, especially related to high tech and more specialty chemicals. However, the consensus among experts ITIF spoke with is that Chinese companies are beginning to erode the market share of large foreign companies. Part of this has stemmed from Western company complacency and assumptions that the Chinese companies cannot challenge them, and also because of strong Chinese government incentives and support for Chinese chemical companies. And relatively lax chemical industry production regulations provide China with a competitive advantage.

Moreover, unlike biotechnology or software, chemicals is a relatively mature industry with overall rates of innovation lower than that of more advanced, innovation-based industries. There are approximately 300,000 chemicals available but only around 2,000 or so new chemicals developed each year, a rate of around just 6 percent.[12] This means that as a slow-innovation industry, it should be easier for China to catch up to the leaders.

In basic chemicals, China is increasing its position as a net exporter. In very few commodity chemical products is China a net importer. For example, China has overcapacity for polypropylene. However, it runs a trade deficit in specialty chemicals. As a result, China’s Ministry of Industry and Information Technology (MIIT) is focused on boosting China’s capabilities in specialty chemicals, because this will determine global chemical industry leadership. In contrast, the EU-27 runs a trade deficit in basic inorganics and petrochemicals, but a trade surplus in specialty chemicals and consumer chemicals.[13]

One advantage for China is that the chemical sector is connected to specific sectors, such as automobiles, electronics, renewable energy, etc. Because Chinese production of many of these products is so large and growing so fast, local chemical companies have an advantage by being close to their customer. As Seamus Grimes notes, “a number of R&D managers acknowledged that more recently their innovation in China was being driven by innovative Chinese customers.”[14] In addition, because of China’s significant coal reserves and a willingness to keep burning coal, China is leading on coal-derived chemicals. China also leads in polysilicon, a relatively high-end chemical.

However, China is highly dependent on other countries for high-quality chemical products, high-end equipment in the chemicals industry, and leading technology. For example, MIIT stated in that 32 percent of 130 basic chemicals could not yet be produced in China at all, and more than half of all fine chemical products would still have to be imported.[15]

One way China has closed the gap with world leaders, especially in commodity chemicals, is by relying on foreign producers investing in China—a model it has used in multiple industries. For example, of the top 10 coatings companies in China, 4 are local and 6 foreign. Moreover, by one estimate, about one-third to half of the top executives at Chinese chemical companies have had significant experience at multinationals. This skill base clearly helps Chinese companies to catch up.

Experts also pointed to the fact that domestic companies usually have significant price advantages, in part because some are state-owned and don’t have to earn as high a profit as the foreign companies and because multinationals have higher global overhead costs. And many Chinese-owned chemical companies receive government subsidies.

Experts also argued that Western companies are more goal oriented and short term in their orientation. They have specific procedures and slower decision-making models. Chinese companies, in part because they are trying so hard to catch up and because of the encouragement of the state, are more aggressive. For example, if a European chemical company is doing well in China, it may eventually decide to increase capacity by 20 percent. In contrast, a corresponding Chinese company is likely to quickly agree to double its capacity in order to gain market share. Even when times are not good, many Chinese firms will increase capacity, just as they have done in other industries such as solar and steel. And as in steel and solar, this creates overcapacity. Once this happens, some foreign firms divest to private equity because they see it as a cash-draining business that no longer clears their financial hurdles. Indeed, China has killed or shrunk a number of overseas companies by a superior cost position and economies of scale. Chinese companies are not as deterred by short- to medium-term earnings setbacks.

For foreign companies that stay in the business, they are doing more R&D in China, which spills over to domestic Chinese companies. Originally, multinational chemical companies did not perform a lot of R&D in China. But now, with some of their most important customers located in China, more are expanding their R&D spending there. One reason is that, of the top 10 metropolitan areas in the world to locate chemicals industry R&D facilities ranked in terms of quality of the research, three were Chinese (Guangzhou #1, Shanghai #3, and Beijing #6).[16] Strikingly, no Chinese metropolitan areas made the top 10 in terms of cost of operating an R&D facility.

China is also investing significant amounts in chemical research capabilities in universities, which has already paid off in terms of the number of academic papers they have produced. In fact, China has overtaken the United States as the main source of academic papers in the field. However, experts argue that limits on the number of skilled domestic Chinese R&D leadership personnel holds back innovation.

There was a consensus among experts ITIF spoke with: that China will, over time, eventually come to dominate the global chemicals industry and, absent significant market closures by Western nations, there is little that can be done about it.

In many areas, such as lithium battery chemistry, initial advances were made in the United States. But U.S. companies didn’t follow up on them and instead Chinese firms have innovated in ways to manufacturer these batteries and materials at scale and lower cost. And, as in solar panels, China has shown effectiveness at process innovation.

China may be able to make significant strides for innovation, as the industry is facing a global inflection point as it goes through a “greening” process. The Chinese government is focused on helping firms develop chemicals that meet green requirements and are more environmentally friendly. This includes coating materials for transportation equipment, biodegradable materials, and materials in batteries.

Finally, China historically has been a copier of process technology. However, as one article states, “For the past two decades, China has invested heavily in R&D. The research was initially aimed at developing new products, but process development has more recently turned into a major focus.”[17] The article goes on to state that “foreign chemical companies start to see China as a source of manufacturing expertise.”[18]

A good summary of the Chinese position and trends is from Chinese chemical industry expert Kai Pflug, who wrote:

In the past, Chinese pressure on the Western chemical industry came from below—China captured more and more of the market segments with limited innovation and complexity. What is new about the current wave of Chinese domestic investments in chemicals is that these now target precisely the chemical segments that are the most innovative, which tend to also be the fastest growing ones. So far, Western chemical companies survived by out-innovating the Chinese—the latest developments show that this approach is far from certain to work in the future. In a worst-case scenario, this would only leave Western companies with smaller-volume chemicals, in which the scale-oriented Chinese players typically are less interested.[19]

Innovation Data

Various data and metrics on chemicals industry innovation tell the same story: China’s chemical industry is not at the leading edge, but is rapidly catching up.

Chemicals industry R&D performed in China (by domestic or foreign firms) went from 22 percent of the global total in to 34 percent in .[20] Over the same period, Chinese R&D went from 8 percent greater than U.S. to 72 percent greater. However, its specialization in R&D is still less than the leaders. In terms of global shares, China’s share of research and innovation to industry sales was 0.77, up from 0.70 in . In , the EU’s R&D specialization ratio was 1.2, America’s was 1.79, and Japan’s 3.3.

And an increasing amount of R&D spending in China is by Chinese companies (in China or elsewhere). Using data from the EU 2,500 R&D spenders list, in , the U.S. share of global chemicals industry R&D spending was 29.8 percent, while China’s was a miniscule 0.8 percent.[21] However, by , Chinese chemical companies grew to 16.8 percent of global industry R&D, with the U.S. share falling to 18.6 percent. And China was ahead of Germany by 2.2 percentage points. However, at the current rate of Chinese firm growth and American decline in chemical firm R&D, it is expected that the data will show China ahead of the United States in total R&D, and by or , to move ahead of global leader Japan.

Moreover, when controlling for the size of the two nations’ economies, by , China was 27 percent more specialized in Chinese chemical firm R&D as a share of GDP than the United States was. In addition, China’s R&D is more diversified from a firm perspective, with just 28 percent of its chemicals industry R&D represented by the top four Chinese firms, in contrast to 61 percent in the United States.

Yet, this R&D has not translated into significant performance in innovation awards. Of the finalists in the ICIS chemical innovation awards, 50 percent of the winners were American companies, and just 8 percent went to Chinese companies (Wanhua Chemical Group Co., Ltd (WC) won two awards).[22] In and , China did not win in any category: 0/6 in ; 0/5 in .[23]

However, this spending has had impacts on patents. The share of U.S. firm patents granted in chemistry in the U.S. Patent Office (USPTO) fell from 54 percent in to 45 percent in . Over the same period, Chinese patents increased from almost nothing to 7 percent. (See figure 3.)

China’s progress in patent cooperation treaty applications (more countries than just the United States) was stronger, increasing from around 0 percent in to 17 percent in , while the U.S. share fell from 44 percent to 27 percent.[25] (See figure 4.)

When it comes to scholarly articles in chemistry, China’s performance is quite strong. In the most cited continuous flow chemical synthesis papers, China outperformed the United States by 60 percent. (See figure 5.)

In coatings research, the Chinese advantage over the United States was even greater, at 83 percent. (See figure 6.)

Company Case Studies

ITIF randomly selected two Chinese chemical companies on the EU 2,500 R&D list for in-depth case study analysis: WC and Rongsheng Petrochemical.

Wanhua Chemical Group

WC was established as the state-owned Yantai Synthetic Leather Factory in . Initially, to support its synthetic leather production line, the company imported a 10,000-ton/year MDI (Methylene diphenyl diisocyanate) production unit, designed in by a Japanese company. However, due to a lack of knowledge in how to operate the line’s hardware and software and core MDI production technology, this line remained mostly inoperative for nearly 15 years.

In , WC developed its own MDI production technology, establishing a research department and collaborating with domestic universities. In , the company launched its first self-developed MDI production line. By , WC’s MDI production capacity reached 15,000 tons. The company underwent corporate and shareholding reforms in and , respectively, and was listed on the Shanghai Stock Exchange in . In , with an MDI capacity of 160,000 tons, the company expanded its product line to include thermoplastic polyurethane (TPU) and methylenebis (MDBA) production.

In , WC expanded internationally, establishing branches and research centers in the United States, Japan, the Netherlands, and other countries. In , it fully acquired Hungary’s BorsodChem, gaining patents and technical support and entering the field of fine chemicals and new materials. The company continued to expand its capital expenditure in , venturing into C2, C3, and C4 petrochemical businesses, thereby diversifying its products and becoming a global platform chemical enterprise. In , WC acquired 100 percent of the shares of Sweden’s International Chemicals from Cornell and Europa-Energy.

The same year, it established an R&D center in Yantai, integrating the research operations of several subsidiaries. Currently, the company has 3 integrated chemical industrial parks, 6 production bases, 3 R&D centers, and 10 sales organizations worldwide. As of November , its annual MDI and TDI production capacities reached 3.1 million tons and 1.03 million tons, respectively, leading globally with a market share exceeding 30 percent.

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WC, still a partially state-owned company, actively develops various high-value specialty chemicals, with a presence in aliphatic diisocyanates (ADI) polyurethane materials, engineering plastics, superabsorbent polymer (SAP) resins, semiconductors, and new energy materials. Its Functional Chemicals Division offers a range of products, including aliphatic isocyanates, special amines, flavors, and special chemicals. The New Materials Division’s main products include TPU elastomers, polymethyl methacrylate (PMMA), water treatment membrane materials, modified polypropylene (PP), and polyolefin elastomers (POE). These products are widely used in clothing and shoes, automotive, home appliances, photovoltaics, optical displays, consumer electronics, etc. The Surface Materials Division focuses on eco-friendly surface materials, SAP, and silicone adhesives. The High-Performance Polymers Division’s business includes polycarbonate, special nylon (PA12), biodegradable materials, other high-end polymers, and related chemicals. These products are widely used in automotive, 5G communications, health care, electronics, high-end optics, green packaging, polymer products, and professional technical services. Its battery technology business mainly includes ternary cathode materials, lithium-ion phosphate cathode materials, anode materials, electrolyte solvents, etc. Finally, its electronic materials business produces chemicals related to the semiconductor, electronic, and electrical fields. The company has also expanded its product line into high-end medical and optical fields.

In , WC signed strategic cooperation agreements with Peking University, East China University of Science and Technology, and Beijing University of Chemical Technology. These partnerships leveraged both parties’ talents and technological platforms, fostering collaboration in new energy and functional materials.

Prior to , WC frequently imported production lines from Japan, South Korea, Germany, and the United States. Wanhua’s primary goal was not to acquire technology but to rapidly increase production capacity. After , WC firmly established its monopoly in the MDI market in China and entered the first tier in the global market. With the revenue from its MDI business, WC was able to maintain high capital expenditures over the following years, including the acquisition of overseas enterprises in upstream and downstream fields and the introduction of production lines. In , the company made a significant acquisition of Hungary’s BorsodChem.

In , WC completed the full acquisition of a domestic petrochemical enterprise and independently developed C2 and C3 petrochemical production processes, officially entering the petrochemical sector. WC is generally considered to have joined the world’s first tier of chemical enterprises by .

In , WC received government subsidies totaling 610 million renminbi (RMB), or $91.5 million. The company’s accounts still hold a balance of 1.68 billion RMB ($252 million) from government subsidies accumulated over previous years.[29]

WC has implemented a three-tiered R&D organizational structure comprising headquarters, regional centers, and production bases, creating an innovative R&D system that integrates basic research, process development, engineering development, and product application R&D.

The Technical Development Center at Wanhua’s Beijing Research Institute conducts basic research. The Technical Development Center and the Pilot Plant Center at the Yantai Research Institute are responsible for process development. Engineering research is carried out by the Process Development Center at the Research Institute in Hungary, in collaboration with the Chemical Design Institute at the Yantai Research Institute. The technical departments at the production bases conduct industrialization and device optimization research.

The Surface Materials Research Center and the High-Performance Materials Research Center at the Beijing Research Institute are engaged in product application R&D. Additionally, WC collaborates with universities and scientific research institutions in industry-education-research partnerships and has established Wanhua Magnetic Mountain University in the Cishan district of Yantai to directly supply the enterprise with professional talent.

WC employs over 4,000 research personnel, accounting for 16.4 percent of its workforce. Among these, more than 210 hold doctoral degrees and over 2,300 possess master’s degrees. Its main R&D institutions include the Wanhua Chemical Global R&D Center, Institute of High-Performance Materials, Polyurethane Application Research Institute, Chemical Design Institute, North American Technical Center, and the Goodrich Technology Center in Europe. Additionally, WC has established multiple high-level innovation platforms, including the National Polyurethane Engineering Technology Research Center, the National Engineering Laboratory for Polymer Surface Material Preparation Technology, the National Enterprise Technology Center, postdoctoral workstations, five nationally accredited analytical laboratories, and seven provincial and industry engineering (technology) centers and key laboratories. It is also diversifying, planning to invest 3.34 billion RMB ($461 million) in battery material projects. It also developed production capacity for beta ionone, a fragrance ingredient, and for polyamide 12 (PA, nylon), a high-end engineering plastic with a variety of industrial applications.[30]

While the company lists innovation prizes it has won in China, we could find no mention of foreign awards.[31] WC has filed 4,718 patents within China and 399 patents overseas. In , R&D expenditures were 3.42 billion yuan ($472 million), a 55 percent increase year over year, with a cumulative five-year scientific research investment totaling 11.94 billion yuan ($1.65 billion). The company’s R&D-to-sales ratio has been maintained at around 2.5 percent since . Following a substantial increase in operating income after , the R&D expense ratio decreased to 2.17 percent in . In comparison, global leader BASF (headquartered in Germany) had an R&D-to-sales ratio of 2.6 percent. However, because of the lower cost of R&D personnel in China, WC has a higher ratio of R&D personnel to total employees (16.5 percent vs. 8.9 percent). In , Wanhua’s revenue was 13.7 billion yuan, about $2.05 billion, which was only 2.2 percent of BASF’s; by , WC’s revenue had risen to 165.5 billion yuan, approximately $24.83 billion, reaching 24.2 percent of BASF’s.

Rongsheng Petrochemical Co., Ltd.

Established in , Rongsheng Petrochemical Co. is the largest privately owned petrochemical corporation in China. It has established a comprehensive industry chain that spans refining and chemical integration to the production of downstream products such as purified terephthalic acid (PTA), monoethylene glycol (MEG), polyester (PET), and polyester filament (POY, FDY, DTY). In , Rongsheng had revenue of 289.1 billion RMB ($43.4 billion), with a net profit attributable to the parent company of 33.4 billion RMB, or around $5.01 billion.[32]

In , Saudi Aramco, through its subsidiary AOC, acquired a 10 percent stake in Rongsheng Petrochemical and agreed to engage in collaborations encompassing raw materials, technology, and chemicals. The Technology Sharing Framework Agreement facilitates the exchange of relevant information and technology (including but not limited to refining and petrochemical technologies) between Rongsheng and Saudi Aramco. This technology complementarity aims to jointly develop new technologies, processes, and equipment that meet market demands.

Rongsheng has extensively utilized foreign technology and products in the construction of its refining and chemical facilities. Notably, Honeywell UOP and Honeywell Process Solutions have provided a range of process technologies, engineering designs, equipment, and advanced automation control for its newly built 40 million tons/year integrated refining and petrochemical complex in Zhejiang Province. This collaboration includes the provision of technologies for two series of aromatics complexes, a residue fluid catalytic cracking (RFCC) complex, a propane dehydrogenation unit, and a pressure swing adsorption (PSA) unit. DuPont Clean Technologies has been responsible for designing the Sulfuric Acid Regeneration (SAR) unit.

Rongsheng received governmental subsidies of around 2.36 billion RMB ($330 million) in . Moreover, Zhoushan Green Petrochemical Base Management Committee and Xiaoshan District Headquarters Economy Special Class contributed to Rongsheng’s fiscal incentives through granted financial rewards throughout .

Rongsheng says it has established many world-class R&D platforms, including a high-tech R&D center, a workstation for academics and experts, an enterprise technology center, and a post-doctoral science and research workstation. Moreover, it engages in technology exchanges and discussions promoting industry-university research collaboration to benefit resource sharing between universities and the community.

Rongsheng’s main manufacturing subsidiaries are all national high-tech enterprises with strong R&D strength and rich process operation experience accumulated during long-term production management. For example, it has selected a new technical route for Zhongjin’s petrochemical project, using fuel oil (cheaper than naphtha) to produce certain aromatic products. Rongsheng says it has finalized the application of large-scale melt direct spinning polyester and spinning technology in the early projects for further development and improvement in the later projects.[33]

Rongsheng invested around 4.4 billion RMB ($600 million) in its R&D activities in , which accounted for 1.5 percent of operating income, a relatively low level. Rongsheng’s R&D team consists of 2,731 employees, which accounts for 14 percent of its personnel. Among the R&D personnel, almost half (1,377) have bachelor’s degrees, 98 have master’s degrees, and just 5 possesses doctorates.[34]

Rongsheng has filed 30 patents with the World Intellectual Property Organization (WIPO).[35] As of , Rongsheng had a total of 479 patents globally. According to Insights by GreyB, a market analysis company, from to , 473 of Rongsheng’s patents were filed in China, while only 4 patents were filed in the United States, Japan, Canada, and the United Kingdom.[36] This suggests the company is still a copier, not an innovator.[37]

China’s Chemical Industry Strategy

China has long and successfully sought to grow its chemical industry. That success has been mostly in basic, commodity chemicals. However, it is now seeking to achieve the same success in more innovation-based specialty chemicals.

One way it is attempting to do this is by encouraging industry consolidation. The Chinese government knows that without its firms having more scale it will be harder for them to marshal the necessary resources for the needed R&D and to be able to provide the breadth of product catalogs the global leaders have. One way to achieve this is to use stricter regulatory requirements to weed out the smaller and weaker firms. However, according to experts, while there is some consolidation, the pace is still slow.

In addition, the government is making a push to move chemical refineries inland to the heartland where land is cheaper and population densities less. For example, a number of chemical factories have moved from Jansui province to inner Mongolia and Xingang, where there are large supplies of coal. This is a reason for the coal-chemical push in coal regions.

The central government has targeted chemical innovation. The “Guiding Catalog for Industrial Structure Adjustment” advocates for the development of a number of new materials related to the chemical industry, including low-VOC (volatile organic compound) adhesives, water treatment agents, catalysts, electronic chemicals, silicone materials, and fluorine materials.[38]

Chinese governments provide significant direct and indirect subsidies to chemical firms.[39] In addition, Chinese governments are also upgrading chemical parks. Under this plan, 10 or so leading companies are to be “cultivated” as “national champions.” In addition, as noted, Chinese governments provide a range of financial incentives, including low-interest loans.

The government has also set a goal for the share of fine chemicals in total chemical production in China to be at least 50 percent. China also continues to use foreign investment as a means of technology transfer. As Grimes wrote:

As China become increasingly independent of importing various chemicals, it becomes increasingly selective about encouraging foreign investment only in those segments where it continues to require transfer of technology, and in which international companies can become trusted partners for China’s indigenous innovation.[40]

What Should the United States Do?

While the United States continues to lose global market share in chemicals, it retains significant strengths elsewhere, including in innovation. To ensure that we don’t lose that leadership, Congress should expand funding for chemistry and chemical engineering research through the National Science Foundation, particularly through the establishment of new Engineering Research Centers.[41] Congress should also significantly expand the R&D credit and restore first-year expensing of capital equipment investments. Finally, while environmental regulations are important in the chemical industry, legislators and regulators should ensure that regulations are designed and implemented in ways that limit compliance costs while still achieving legislative goals.

Acknowledgment

ITIF wishes to thank the Smith Richardson Foundation for supporting research on the question, “Can China Innovate?” Future reports in this series will cover artificial intelligence, quantum computing, semiconductors, biopharmaceuticals, consumer electronics, nuclear power, and motor vehicles. (Search #ChinaInnovationSeries on itif.org.)

Any errors or omissions are the author’s responsibility alone.

About the Author

Dr. Robert D. Atkinson (@RobAtkinsonITIF) is the founder and president of ITIF. His books include Technology Fears and Scapegoats: 40 Myths About Privacy, Jobs, AI and Today’s Innovation Economy (Palgrave McMillian, ),Big Is Beautiful: Debunking the Myth of Small Business (MIT, ), Innovation Economics: The Race for Global Advantage (Yale, ), Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics Is the Answer (Rowman Littlefield, ), and The Past and Future of America’s Economy: Long Waves of Innovation That Power Cycles of Growth (Edward Elgar, ). He holds a Ph.D. in city and regional planning from the University of North Carolina, Chapel Hill.

About ITIF

The Information Technology and Innovation Foundation (ITIF) is an independent 501(c)(3) nonprofit, nonpartisan research and educational institute that has been recognized repeatedly as the world’s leading think tank for science and technology policy. Its mission is to formulate, evaluate, and promote policy solutions that accelerate innovation and boost productivity to spur growth, opportunity, and progress. For more information, visit itif.org/about.

Endnotes

Looking ahead, moderate growth is expected to continue in the chemical industry in . The American Chemistry Council (ACC) projects global chemical production to rise by 3.4% in and 3.5% in , after increasing just 0.3% in .5 However, even with chemical production improving and margins reverting to average levels, the industry still faces challenges and uncertainty. In the next year, chemical companies will navigate many of the same challenges as other industries: evolving macroeconomic conditions, shifts in policy and regulations across regions, changing customer preferences, and advances in technology. To help improve their positions in the face of these uncertainties, chemical companies could consider adopting strategies that help them weather uncertainty while positioning themselves competitively in the low-carbon, high-tech future.

To plan for the future, companies should consider developing an understanding of where they stand in the current scenario. This can provide them with a foundation for examining the emerging trends that may shape the industry’s trajectory in the coming years. Our Chemical Industry Outlook explores some of these trends and highlights the signposts leaders should consider while developing strategies.

• Cost efficiency: Improving operational efficiency through cost-reduction programs and asset rationalization
• End markets: Navigating uneven growth by focusing on high-growth areas and customer needs
• Innovation: Enhancing performance and sustainability through a multidimensional approach
• Sustainability: Accelerating decarbonization through enhanced clean-energy access, policy levers, and ecosystem value capture
• Supply chain: Building value chain resilience to navigate evolving regional dynamics

What our ‘multiverse’ analysis can tell chemical companies about their current position

This year, Deloitte updated its chemical multiverse analysis with data through to take a closer look at how the track record of global chemical companies through recent turbulence may shape trends in and beyond (see “Methodology” below for more information on this tool). This longitudinal study tracks multiple financial variables across more than 300 global chemical companies over the past 25 years and, through a segmentation approach, assesses the current standing of each company. The chemical companies were measured on two dimensions—the financial resources at their disposal and their ability to generate returns using those financial resources—and plotted on a two-dimensional plane. Plotting the chemical companies on this plane can provide insight into their competitive positioning and could help them decide on a future course of action.

This analysis gave rise to four distinct strategic groups, which we termed: strategic leaders, strong options, middle ground, and limited options. Each group has its own unique characteristics, but overall, strategic leaders exhibit the highest financial strength, while strong options demonstrate relatively higher business performance compared to middle ground and limited options.

Due in part to the turbulence spurred by pandemic-related shutdowns, the number of companies in the middle ground group has declined, with more companies moving into stronger (“strong options”) or weaker (“limited options”) positions in terms of business performance (figure 2). Additionally, the following two notable observations also emerged from this analysis.

1. Between and , cash and securities rose across every group, even as earnings before interest, tax, depreciation, and amortization (EBITDA) fell for nearly every group. In fact, cash and securities rose 27% for multiverse companies, while EBITDA rose just 2.6% over the same period. It appears that all groups are focusing on holding liquidity to weather economic uncertainty and increase flexibility for future investments.6
2. Companies in the strong-options group increased their investments in research and development and their net fixed assets more than any other group.7

1. Cost efficiency: Improving operational efficiency through cost-reduction programs and asset rationalization

Many companies announced cost-reduction programs in and , after facing challenges with higher operating costs and lower operating rates stemming from lower demand, high inventories, and overcapacity of some chemicals.8 These programs included measures for increasing efficiency in plant and back-office operations, redesigning processes, aligning spending levels with the macroeconomy, and undertaking workforce reductions and plant closures.9 In fact, in an ACC survey of its members, more than 18% of respondents said that the motivation behind their capital investments in was geared toward operating efficiencies (figure 3).10 Another 26% of respondents cited replacing existing plant and equipment as a key motivation, likely indicating that some companies took advantage of the low operating rates to conduct maintenance and upgrades.11 While many of these programs began in , several announced that rollouts will continue through or .12

There is a regional component to how much pressure these assets are under. Plants in Europe have encountered challenges with inflation and high energy prices in and , reducing demand and putting pressure on chemical margins. In the European Union, inflation reached a high of 11.5% in October , compared to the US peak of 10.1% in June .13 And with most Europe-based chemical plants facing natural gas prices 70% higher than pre-crisis levels, the region continues to be cost-disadvantaged.14 Further, many of these companies also faced losses due to lower-than-expected demand from China.15 Asian companies were similarly affected by lower demand from China and volatile LNG prices.16 Moreover, while the industry fared better in the United States and Middle East where energy and feedstock prices are relatively lower, US-based companies still faced lower earnings, which they likely compensated with efforts toward efficiency.17

In the petrochemical sector, excess production capacity, in combination with lower-than-expected demand, has contributed to low operating rates. In Europe, ethylene operating rates were still averaging at 70% to 75% in early , lower than the industry expectation of 80% to 90%.18 This overcapacity has contributed to the industry’s return on capital falling from an average of 17.9% between and to just 13% between and (figure 4).19 Partly, as a result of this, chemical companies began asset rationalization in , which continued through , with several companies announcing plant closures or job cuts across the Netherlands, Germany, and France.20 The impact of these closures are expected to reverberate through trade flows, with exports from the United States or the Middle East likely serving increased European demand in the future.

Asset rationalization is expected to continue through as companies acknowledge that a large near-term rebound in demand is unlikely and take the opportunity to reconfigure toward more cost-competitive supply- and growth-oriented markets. For companies in the limited-options or middle-ground categories, these types of measures could support improved performance and a move into the strong options category. Additionally, following the last few years of limited transaction activity, more merger and acquisition deals are expected to be announced in as interest rates moderate and companies search for growth and continue to reexamine their portfolios.

2. End markets: Navigating uneven growth by focusing on high-growth areas and customer needs

Global chemical production is projected to grow 3.5% in .21 However, demand has remained soft in some markets, so far in . In the United States, overall industrial production rose just 0.2% in and is estimated to stay mostly flat in before it’s estimated to rise to 1.7% in .22 Amid this uneven growth landscape across chemical end markets, many companies are focusing on driving efficiencies in their core business while doubling down in high-growth areas. Companies are also focusing their efforts on increasing customer centricity, building customer loyalty, and tailoring solutions for customers.

Capitalizing on high-growth areas

Chemical companies are investing in high-tech, clean energy—and other high-growth areas. So far in , data from the Federal Reserve Board indicates that semiconductors and electronic components, oil and gas extraction, architectural and structural metals, and plastics and rubber industries have experienced the most growth.23 Moving into , ACC forecasts that semiconductors will continue driving demand, followed by computers, iron and steel, aircraft and parts, motor vehicles and parts, and construction supplies (figure 5).24

Access to low-carbon electricity

Despite the substantial growth of renewable energy in the global generation mix, some companies have cited limited access to renewable electricity as an impediment to meeting their emissions goals.43 To meet net-zero emissions targets, a significant increase in renewable electricity capacity is required, tripling global installed renewable energy capacity to 11,008 GW by .44 These requirements may rise further if the demand for electricity grows more quickly than expected. For instance, the expansion of data centers, driven by new AI applications, is leading to higher-than-expected demand in the United States. In fact, the Electric Power Research Institute estimates that, by , data centers could consume up to 9% of US electricity annually—up from 4% in .45 Some chemical companies have begun building onsite clean-energy electricity generation.46 However, this requires capital investment and sometimes has a lengthy permitting process.

Changes to policy

The policy and regulatory environment can influence chemical companies’ investments in R&D and capex, including those necessary to lower emissions and innovate new, sustainable products and processes. In the United States, permitting processes and policies related to circular solutions and renewable feedstocks can impact these investments. Similarly, global regulations in Europe or other measures in Asia are expected to continue to impact investment decisions in those regions.

Capturing value across ecosystems

Chemical companies upstream in the value chain continue to decarbonize their products and processes; however, they still face the problem of tracking carbon emissions across their product value chains. As a result, companies upstream that need to make significant capital investments to reduce emissions can struggle to capture a premium that customers may be willing to pay for environmentally sustainable solutions toward the end of the value chain or aggregate the downstream demand to rationalize upstream investments. This problem is exemplified by the fact that while scope 3 emissions account for about 75% of the average chemical company’s total emissions (with 50% coming from upstream activities), only around 30% of chemical companies currently report their scope 3 emissions because of the challenge of tracking emissions across their value chains.47

While many standards have been created to help companies across industries track their value chain emissions, there are still gaps that need to be clarified for the chemical industry. Consequently, companies are left to navigate this complex landscape by exploring innovative strategies to capture value, such as long-term contracts with buyers, product carbon-footprint assessments, and book-and-claim agreements. Some companies are using digital platforms that utilize blockchain, digital twins, and AI to monitor low-carbon products throughout the supply chain in a transparent and efficient manner.48 These technologies can facilitate real-time tracking, traceability, and compliance with environmental standards.

There has been some slowdown in decarbonization investment announcements in , likely in part due to high interest rates, uncertainty in global markets, and a hesitancy to increase investments before better understanding the return on investment from previous projects.49 However, chemical companies should work to continue to make progress as demand for more sustainable products grows. The innovative ways that companies find to navigate these three challenges could contribute to their future success.

5. Supply chain: Building value chain resilience to navigate evolving regional dynamics

In the dynamic landscape of global supply chains, chemical companies are encountering both significant challenges and new opportunities. Geopolitical disruptions, climate disruptions, and regional changes in policies and regulations, in addition to shifts in supply and demand, have made supply chain resilience, including visibility, agility, and flexibility, increasingly imperative for chemical companies. At the same time, the chemical trade has increased over the past six years.50 And this trend will likely continue over the next decade, with the International Energy Agency projecting continued growth in chemical production and trade through .51 Currently, China and the United States are leading the charge in this growth (figure 9), but other regions could emerge as major producers, such as India, Southeast Asia, or the Middle East.52 Similarly, other countries could begin to drive demand for chemicals. These shifts in consumption and production are expected to continue to be influenced by factors such as geopolitical and climate risks and regulatory differences.

Geopolitical and climate risks: Geopolitical and climate events impact chemical companies all around the world. For instance, the reduction of Russian natural gas supplies to Europe increased natural gas prices in the region, compelling firms to reassess their sourcing strategies.53 Conversely, disruptions in the Red Sea have rendered certain European chemicals economically viable once more, which also underscores the importance of agility in supply chains.54 Beyond geopolitics, drought conditions caused a reduction in traffic through the Panama Canal in and , impacting trade routes and shipping costs.55

Policy and regulatory differences: Regional policies and regulations are also impacting global competitiveness and trade flows. Whether it’s import tariffs, emissions regulations, or tax incentives, these policies continue to impact company decisions on investments and supply chains. For instance, companies are still understanding and preparing for the impacts of Europe’s Corporate Sustainability Reporting Directive and the Carbon Border Adjustment Mechanism on the chemical industry.56 Compliance with these regulations requires flexibility in supply chain management to adapt to changing policies.

Regional shifts in supply and demand: The sources of supply and demand will continue to shift. For instance, while China’s economic growth is projected to slow, other areas such as Southeast Asia and parts of Africa are experiencing an acceleration in growth.57 On the production side, plant closures in Europe58 could lead to increased imports from the United States or Middle East for certain products. Additionally, there has been some regionalization of the manufacturing of some products. For instance, although China has been leading battery manufacturing, policy incentives in the United States may increase production in the country over time.59

The importance of supply chain visibility, agility, and flexibility

As approaches, the chemical industry will likely continue to grapple with challenges stemming from geopolitical tensions, climate risks, and regulatory and policy changes. While the chemical logistics sector has not fully rebounded to pre-pandemic levels, demand is expected to grow considerably over the next decade. To capitalize on this growth, companies likely need to enhance the flexibility and agility of their supply chains by leveraging digital technologies and strategic partnerships. The benefits of these measures would span all chemical company categories, strengthening their ability to weather future disruptions or shifts in geographical supply and demand fundamentals.

Digital transformation: Companies are increasingly adopting AI and analytics to enhance visibility and streamline operations. This digital shift can help enable better demand forecasting, real-time tracking, and more informed decision-making.60 For example, one company has implemented a digital supply chain platform that integrates data from various sources to provide real-time visibility and improve decision-making.61

Decentralization and diversification: The pandemic has highlighted the risks associated with centralized supply chains. Firms are now focusing on diversifying their supplier base and decentralizing operations to build resilience against future disruptions.62

Collaborative planning: Collaborative planning with suppliers and customers can help foster transparency and alignment, reduce uncertainty, and enhance overall supply chain performance.63

Monitoring supply chain resilience: Utilizing metrics that measure the adaptability of inter-firm relationships can provide insights into how firms can better navigate regional market dynamics.64 Research indicates that firms with a balanced approach to flexibility and stability are more likely to thrive in turbulent markets.65

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