chemicals industry

Who's Afraid of a Chinese Giant?

China’s ChemCorp in talks to buy into Pirelli – sources
Soon to be part of a big friendly Chinese chemicals giant? Source: Bloomberg [M]

Everything that happens in China sounds powerful and massive – think mega-cities, mega-markets and mega-corporations – and now, a Chinese chemical giant is in the making.

The government’s industrial policy is driven by size, power and the desire to create new national champions. Though officially denied, this year, we will see a mega-merger between China’s two largest chemical groups, Chemchina and Sinochem according to financial and industry circles.

Marrying the two state-controlled producers would make a company with more than €100 billion ($108.7 billion) in sales, which would displace Germany’s BASF as global leader. The colossus would be involved in many sectors of the industry, from oil refineries and basic chemicals to special products. It’s good news for China: No other country consumes as much in chemicals and beyond that, the government hopes many of its major state-owned companies will come to play a leading role on the world market.

Unsurprisingly, some western chemical companies are scared, including in Germany. Together, Chemchina and Sinochem would be a powerful competitor able to shake up the industry.

But German firms shouldn’t worry too much – there’s good news here and the only reason the merger has been hushed up so far is that nobody in China wants to jeopardize Chemchina’s takeover of Swiss agrochemistry group Syngenta for $43 billion. The deal is done but it’s questionable whether US authorities would have approved it, if China was also in the middle of making a chemicals champion around Chemchina.

Merging state-owned Chemchina and Sinochem is a political project; the government wants to prevent the debt-financed acquisition of Syngenta from becoming a total washout. Chemchina is deeply in debt and would be better able to bear the burden if they got together with Sinochem. More importantly, the merger is a perfect fit with China’s industrial policy to pool the strength of China’s state companies for international expansion.

Easier said than done. Chemchina and Sinochem are unwieldy, complex entities created out of hundreds of smaller mergers. They are very inefficient by Western standards, evident from their years of losses. China’s government is open about this weakness and seeks to fix it. That means the new mega-group would be busy for quite some time, especially given that the company cultures are very disparate. It will be a chained giant – meaning big opportunities for the German chemical industry in China.

That’s because this marriage shows the government wants to end the uncontrolled growth in China’s chemical industry which has huge overcapacities. Its solution is mergers, which will curb the drop in prices – good news for German firms.

Plus, any professionalization of China’s core industries will also greatly help western companies. Rivals have so far been irked by the fact that Chemchina and Sinochem have focused on growth – never mind whether they suffer losses in the process. The state can’t put up with that for ever and if companies are managed more and more in line with standards we are used to in the West – meaning efficiency, return on investment, safety, and sustainability – then western competitors will also benefit.

Competition will certainly get tougher with the Chinese, but Germany’s chemical industry can and should rely on its own strengths. Among them are innovation, absolute focus on the customer, and the command of process technology. If German companies play to these strengths, they have nothing to fear from China’s mega-corporations.

 

To contact the author: froendhoff@handelsblatt.com

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