Slide chemistry 1
October 31, 2019

Investment Banking: Digital Transformation in the Chemicals Industry

Slide chemistry 1

The chemicals industry is an essential part of the world economy, directly contributing US$ 1.1 trillion and employing over 15 million people. In recent years, chemical companies are facing more challenges due to industry-inherent cycles, the impact of global trade imbalances, increased government regulation, and intensified competition. Companies are looking for new sources of growth to satisfy stakeholders.

In the past, chemical companies focused on improving their operational and financial metrics through various means such as optimising asset utilisation, improving operational efficiency, or tailoring pricing, among others. However, today's chemical companies are not only focused on improving their core business, but also seeking other means of growing their business. One way is through digital transformation.

A recent report from McKinsey (1), dives deeper into the impact of digital transformation, citing three areas where it would largely impact the chemicals industry; namely its value chains, its channels to the end markets and its business models. Furthermore, we believe M&A activities of chemical firms accelerate the digital transformation process and, in turn, the firms’ growth, especially in the latter two instances; the demand in end markets and the impact on business models. In the article below, we explore how M&A is the catalyst for firms in their digital transformation journey in these two areas.

M&A as A Catalyst for Digital Transformation in End Markets

Digital transformation is causing disruption in end markets for chemicals by shifting demand for current chemical materials and creating demand for new materials.

For example, on the one hand, there has been a significant reduction in the number of road accidents due to better digital technology installed in cars (sensors, IoT, safety tech, etc.). This, in turn, has reduced the need for fixing and repairing cars, lowering the need for refinish coatings and decreasing the market size for chemical suppliers (1).

On the other hand, the rise of digital-enabled 3-D printing with applications in additive manufacturing technology, has opened up a new market for new polymers and chemicals used in additive manufacturing. The market of polymers and additive manufacturing-related chemicals is forecasted to grow 30% annually from US$ 0.7 billion in 2015 to US$ 2.5 billion in 2020 (1).

Again, acquisitions have proven to be a catalyst in opening up new markets for chemical firms through digital transformation.

Monsanto acquired The Climate Corporation, a technology platform provider which focuses on precision agriculture and data-driven farming, for US$ 930 million in 2013. The Climate Corporation developed an application that allows easy access to real-time data and predictive analytics on geo-location, weather, soil and other factors. Farmers leveraged the big data to make more informed decisions on how and when to plant, irrigate and harvest in order to optimize crop yields. This allowed Monsanto to target specific areas with crop-protection chemicals with the combination of the transparent and informative data.

To take the digital transformation further, Monsanto could develop the tool even more by integrating it backwards into its various value chains. The acquisition could help other areas of the sales channel drive business based on data-driven analytics with clients using more and even other agrochemical products of Monsanto. In this instance, The Climate Corporate acquisition accelerated the digital transformation within the Group.

More broadly, supported by PwC’s analysis (2), the M&A landscape in the chemicals industry has changed from megadeals to more focused and technology-driven deals. Digital transformation has become more than merely boosting productivity and turned into becoming a strategic business consideration. Firms such as BASF and Evonik have all made dedicated efforts to develop solutions, either in-house or via external acquisitions, with the impact seen not only on the value chain but also on their business models.

Digital Transformation Changing Business Models

In BASF’s case, the firm has created a single digitalisation and IT division in January 2019, headed by a newly appointed Chief Digital Officer (CDO). Since 2015, they have been exploring “the intelligent use of data and digital technologies” but now have decided to group all initiatives together into a single, separate functional division in order to accelerate the digital transformation within the firm.

The company has, in effect, changed its business model through the creation of this new division. The signal from BASF is that digital transformation is so important that it needs a group-level coordination effort led by a single C-suite executive. Similar to integrating a new acquisition, incumbent divisions shall need to work with the new entity which has a different mindset and value proposition. Pursuing new acquisitions could also be complementary for BASF to bolster the division.

In a similar attempt to go digital, according to a report by Transformation Beats (3), Evonik has launched a digital startup called Digital and have also appointed a new CDO. The firm is using a similar structure to BASF by creating a separate division where they can “pull together specific competencies to develop and test digital ideas”. By Evonik’s own admission, “it is tremendously difficult for divisions to roll out totally new activities alongside their usual business”.

Other firms, however, may not have such luxury in time and will set out to accelerate their own change in business model by acquiring Digital and IT firms capable of accelerating change within the business, or investing into start-ups which will lead the way.

Conclusion: Acquisitions Compel Chemical Firms to Deal with Their Digital Transformation Journey More Effectively and Concretely

In conclusion, digital transformation is having a large impact on the chemicals industry’s end markets and business models. In both cases, we believe that M&A activities can significantly assist firms in accelerating their transformation, such as in The Climate Corporate example, impacting not only the end markets but also the value chain of Monsanto itself.

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(1) Digital in chemicals: From technology to impact, July 2017, McKinsey & Company

(2) Chemicals Trends 2018: Realizing value from technology-driven M&A, PwC

(3) Why a specialty chemicals company also needs to go digital, January 2018, Transformation Beats