TOP 100
CHEMICAL DISTRIBUTORS
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China
C
distribution
challenge
WILL BEACHAM LONDON
hina is proving a difficult market
for multinational distributors to
enter. With the exception of Brenntag and Univar, which have taken
their first steps, global groups do not play a
large part in the country’s distribution market,
still dominated by domestic players in a highly fragmented market.
Yet there could be more opportunities for players who take the right approach in this challenging market, and the prize – access to one of the
world’s largest and fastest-growing chemical markets – is an attractive one. Joint ventures are seen
as one of the most obvious ways to gain entry.
According to Krishnan Narayanan, senior executive advisor at consultancy Strategy& (formerly Booz and Company), there is significant
market growth of up to 7-9%/year in commodities and specialties for both direct and distribution channels in coastal and inland parts of
China, though distributors have not always captured these rates in the last three to four years.
“Growth should be better for distributors,
given that they have sets of locals customers
emerging as a result of changes to the Chinese
economy, which [has] become much more
driven by domestic demand rather than exports. That’s leading to companies in end-user
industries becoming much more powerful.”
As most of these are medium-sized – and
therefore served by distribution channels –
one would expect the distribution market to
be growing more quickly, but this has not
been the case over the last three to four years.
Growth rates for distribution have been similar or even lower than for direct in China.
Rex Features
Multinational distributors have – so far – failed to
make big inroads into the China market. For those
who succeed, however, the prize could be immense
China’s distribution sector is moving fast
42 | ICIS Chemical Business | 21-27 July 2014
INLAND SOARS
Narayanan says the inland areas of China –
which are still developing compared to places
like Beijing and Shanghai – are growing quickly. This is especially true where they have significant end industries such as automobiles in
Wuhan. These areas can grow at around double the rate of the rest of the country.
“Growth rates from solvents to real specialty
chemicals can be anything from 16-18%. So it is
still a great place for distributors. In the small to
medium-sized enterprise (SME) sector, growth
rates for commodity chemicals are higher than
for higher margin specialties, which are more
difficult for distributors to shift.”
There is a lot of price pressure, which causes margin challenges, especially for those selling commodities. China is, he says, a very difficult market for global distributors to grow in.
The market is incredibly fragmented with the
top 10 distributors having only 15% of the
whole marketplace compared to around 50%
in Europe, according to Strategy& analysis.
The biggest player in China distribution is
SinoChem and all of the big ones are Chinese.
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TOP 100
CHEMICAL DISTRIBUTORS
The largest global distributors such as Univar
and Brenntag are trying to do things in China
but they haven’t been that successful at entering the market on their own, according to
Narayanan, though there have been some limited joint ventures (JVs).
He says it is really important for any Chinese
JV partner to agree to allow their global counterpart to grow with them into new territories.
“Any expansion the local player does in high
value, high growth inland areas; it’s not a fait
accompli that the global partner will go with
them. They would have to invest more and are
sceptical about doing so because they’re not really making very much money in China.”
CHINA JV STRATEGIES
Selling as a distributor in China involves mainly
selling to local players as these still dominate the
market compared to multinationals. So it would
be incredibly difficult for a foreign player to enter
the market on their own and be successful.
“Partnering is an obvious fall back, as is not
entering at all. But given the prize, it’s difficult to
imagine that one would want to stay away too
long. The scope, governance and details of any
JV need to be carefully thought through. I would
advise companies not to sign a JV which is specific to one region, as you won’t benefit from the
organic growth of your
ur local
partner,” he says.
It is important to hightners
light to Chinese partners
the advantage of a relationship with a global
bal,
player. If a large, global,
proven distributorr
“But if you can address the
talent challenge and go
credibly, the prize is enormous”
KRISHNAN NARAYANAN
Senior executive advisor, Strategy&
with a track record in North America and Europe can offer its know-how and some of its processes to a local player that might help distinguish it in this highly fragmented market.
“But they are still selling, as a distributor, to a
set of SMEs which are not after know-how and
technical solutions. On the flip side if you can
say to a local player that they are not differentiating themselves on the market and that adding
solutions provision will allow them to sell value-added products; the question then is whether the demand exists yet from the SMEs.”
M&A ENVIRONMENT
None of the local distributors have a global
profile at all, making it difficult to track M&A.
Narayanan says that over the last couple of
years, he has seen almost no consolidation.
“One good reason for this is that they’re not
making tonnes of cash to go out and buy other
players. They are small and have thin margins; also they can’t leverage cash from overseas operations as they are mainly domestic. I
can’t see this changing in the short term.”
It is also important to realise that many Chinese distributors are part of larger state-controlled chemical producers.
Narayanan says there is no reason why
global distributors cannot be successful in a
market where global manufacturers are present. It is very difficult for a global player
without a local team talking to local customers to build a business better than the local
players themselves.
“A lot of these distributors are still small
and family-owned and therefore the talent in
distribution here is not significant. But if you
can address the talent challenge and go credibly, especially Chinese to Chinese to your
customers, then the prize is enormous.”
DISTRIBUTION CASE STUDY
Strategy& did a piece of work for a multinational producer that was not seeing the growth
JAPAN
SHOSHAS WIN IN CHINA
SHOSHAS ARE trading companies set up in Japan as buying
agents for raw materials for
the emerging auto industry. In
southeast Asia almost 100%
of sales to auto manufacturers
go through shoshas – there is
almost no direct procurement
at all. They are like distributors
except they represent buyers
rather than sellers, according
to Strategy&.
Narayanan believes that
over the last couple of years,
shoshas have moved into
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non-auto businesses and are
trying to grow by becoming
distributors in China because
of slow growth in Japan. They
have had a lot of success,
since they are big and impressive organisations to work for
and have been good at hiring
local staff.
“I see these as a threat to
local distributors. They may well
have the desire to gobble up
some smaller distributors in
China. These shoshas are
showing that it is possible to be
successful as a foreign player
in this market. They are sourcing and selling within China.”
Shoshas have been selling
to Japanese customers in
China, so are already well established there. And they are
much more familiar with the
Asian market than, say, a
German distributor would be.
They have also set up some
fully-owned subsidiaries in
China such as Inabata, which
has a subsidiary called
Inabata Guangzhou. ■
it expected from its distribution channel in
China. According to Tong Zhang, senior consultant for Strategy&, one of the primary reasons for the lack of growth was a lack of cooperation between the direct and distributor
channels. The direct team had a lot of small
customers but without the resources to win
new business. Distributors
had larger customers,
which required a more
sophisticated service
they could not offer.
“Also they had been
using the same distributors for 20 years.
“If you’re using a partner who
can’t support your business,
you won’t grow your revenue”
TONG ZHANG
Senior consultant, Strategy&
If you compare the distribution landscape
now to 20 years ago, it has changed completely, with some not growing. If you’re using a
channel partner who can’t support your business, you won’t grow your revenue.”
Zhang says management systems need to
be in place to allow growth through, for example, a pricing strategy. If you have a tough
internal transfer price for your distributor,
they will add their margin, and the final price
will be uncompetitive.
“Twenty years ago this was OK because the
US companies had the technological advantage. But now pricing is going down and local
competitors are emerging.”
He says you also need incentives for the
distributor to grow the business. If a producer
wants its distributor to expand into fast-growing inland China it will need to invest in supply chain capabilities, especially wide warehousing coverage.
CHINA PRICE PRESSURE
One reason for price pressure in China is increased supply. In the past multinational
chemical companies like BASF, DuPont and
Dow dominated in specialty chemicals. But
now, according to Zhang, we cannot ignore
the local, emerging chemical companies that
are trying to catch up with the multinationals.
Another issue is that producers often steal
a distributor’s customers when they become
big. In China this happens all the time, and it
is a difficult dynamic to deal with. Distributors struggle because they build a customer’s
size, then they lose it.
According to Narayanan, China is the most
sophisticated market in emerging Asia. In the
performance polymers market, at least 30% of
sales are premium and specialty products. ■
21-27 July 2014 | ICIS Chemical Business | 43