Each year Booz & Company’s industry teams write perspectives for their clients, reflecting on the previous year and considering what may come in the year ahead — and how to respond to it. Not surprisingly, the perspectives for 2010 (12 in all) were dominated by gloomy pronouncements of the damage left by the global recession: The US$2 trillion chemicals industry is attempting to “rebound from its worst year ever”; in financial services, more than 120 banks failed and a “doomsday scenario was [narrowly] averted”; in technology, Microsoft suffered its first revenue decline ever in 2009, while semiconductor sales fell 11 percent; the engineered products and services (EPS) team wrote that “Wall Street cast doubt on the future of many U.S. companies as their valuations plummeted.” (Only six of the 30 companies that make up the Dow Jones Industrial Average still come from the EPS sector.)
But in addition to the long shadow cast by the economic crisis, this year’s industry outlooks also contain a collective note of warning that deserves even more attention: A handful of underlying structural changes — in demographics and consumer economics, globalization, and sustainability — are having a more irrevocable, dislocating effect on virtually every industry than the financial meltdown ever could. Worse yet, although most companies recognize that they must transform to survive and succeed in the future, they are ill equipped to do so. Many lack the capabilities they will need; most are not properly structured to respond to these changes as they unfold.
The impact of these trends varies by industry. Oil and gas is more affected than retail banking by sustainability; globalization is reshaping chemicals more than, say, utilities. Yet no company will fully escape the reach of these trends. A quick glance at six industries — chemicals, retail banking, consumer packaged goods, engineered products and services, oil and gas, and technology — illuminates their overlapping challenges and the range of strategic responses that are taking shape.
— Karen Henrie, Senior Editor
Commoditization and other effects of globalization will characterize the chemicals industry for years to come. But the chemicals industry is experiencing a mix of denial and excess optimism that has led to paralysis. As a result, strategies and operating models have been slow to evolve.
The drop-off in demand for chemicals appears to have bottomed out, but the harm has been done. Demand is now rising on average, but only from severely depressed levels — in some cases, demand had declined by 40 percent. Most new growth is in Asia; Middle East producers continue to enjoy competitive advantages, and many assets in North America and Europe are severely impaired.
Simply put, there is far too much capacity in chemicals to support viable margins, and new supply from cost-advantaged companies around the world continues to come on line. The obvious response would be to initiate consolidation and dramatic cuts in capacity. But although North American and European chemicals producers have made modest attempts to whittle back output, given the enormous gap between supply and demand, these efforts fall far short of what is necessary to restore the industry to economic health. Among other misperceptions, incumbent producers have a false hope that the rising costs of labor and other inputs will erode the pricing power of producers in the Middle East and Asia.
Makers of specialty chemicals continue to provide elegant, high-value solutions to a number of niche segments, but no single specialty market exists on a mass manufacturing scale. And there is a pervasive trend toward the commoditization of products that were once specialties. Furthermore, specialty niches are becoming increasingly scarce as more competitors chase a smaller market.