Only Giants Survive?

 

Facing the increasingly intensified competition of supplying market, growing quality requirement of customers and frequent regulation adjustment coming from national policy, the chemical industry environment is undergoing a dramatic change.

Given the doomed future of those small companies which don’t possess the core ability to compete and sustainably develop, the total number of the chemical corporation will significantly decrease in the coming five years. Consequently, those giant chemical groups will become even bigger due to the concentration of productive ability. They would make use of their position as well as their control of the whole market to seize the profit that they believe to be reasonable.

This kind of situation had already happened in the field of fundamental chemicals. Under the current circumstance, even if a very valuable product is developed, it should be impossible to start up an independent company that turns the prototypes to saleable products. We never know whether the Chinese chemical companies will survive by out-sourcing the prototypes in the future.

Unprecedentedly large gap on cost of holding funds

Nowadays, corporations whose output values are less than RMB100 million cannot even get loans from major banks with a normal interest rate. Nevertheless, public-listed and national-funded companies could easily get loans with even discounted interests. Therefore, the difference on cost of holding funds directly determines the competitive strength of those price-oriented products.

Less support offered by upstream suppliers

It is an open secret that most of the small companies purchase raw materials via deposit or cash. Requiring credits from suppliers, especially major supplier, is nearly illusion for small companies. In fact, the situation could be worse. Even if you pay cash in advance, there is no guarantee that you can get materials you want when the supply becomes tight. Moreover, the price offered to small companies is even higher than that of the large companies, who usually offer open account term only.

 Limited R&D Ability

The truth is that most of the small Chinese chemical companies only follow the general trends. Whenever they notice a best-selling product of those giant corporations, they immediately start to duplicate it. However, such a strategy is limited due to the inferior brand rank and unstable product qualities. Therefore, the only way that enables them to survive in the market is to decrease the price in the situation where they have higher costs.

Environmental Policy------ Suffocating

Since 2017, the increasingly harsh environmental inspection had frightened the local governments.

It is without doubt that Chinese chemical industry is heavily overproducing. Almost every chemical company, except state-owned enterprises and giant international companies which have their exclusive production zones, must relocate to the chemical zones established by government in the future 5 years. However, it is impossible to move every single chemical company into the industrial district since it is inconsistent with the “alleviating capacity” policy. The so called “alleviating capacity” should be interpreted as discarding the outdated technique, which is harmful to environment.

Since large state-owned enterprises and international companies have better administration, higher product value and greater contribution on tax, local government will support them instead of restricting them. In that case, small companies will become major targets of the local government and therefore are highly possible to be shut down.

What About Phosphorous acid Manufacturers?

As new processing format emerges, the manufacturers of phosphorous acid are more and more defined as small but indispensable partners by the chemical colossuses. Unless the giants decide to pick up the last ears on the wheat field, the phosphorous acid manufacturers will live a profitable life. The geographic distance and raw material supplier’s disapproval make it nearly impossible for the smaller phosphorous acid producers to merge into a larger company which has greater bargaining power.

 

---Written by QZ. Copy Right Reserved. 2018/05/10