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Remaining customer-
centric in an evolving
chemicals landscape
EY Chemical Market Outlook
Frank Jenner
EY Global Chemical Industry Leader
February 2020
Overview
Page 2
The chemical industry, a supplier to all other industries, is transforming like never before.
Globally, digitization and evolving demands from end-user industries have forced chemical
companies to develop new offerings and applications. These businesses must also develop
sustainable options for products, feedstock and automated processes to meet consumer
demand. And to do this, the companies should co-create sustainable solutions with end
customers.
Chemical players are embracing artificial intelligence (AI) and machine learning in R&D to
improve data analytics and digital platforms in high-potential technologies such as soft sensors,
edge computing and 4D printing – with the goal of transforming their operating models.
Industry convergence and technology-driven disruption in today's Transformative Age also
require businesses to rethink their talent priorities. With the right mix of permanent and
contractual employees, chemical companies can develop the culture of innovation and
customer-centricity needed to keep up with constant change.
In this edition of our global Chemical Market Outlook, we explore the trends and drivers that will
shape the chemical industry of tomorrow.
Frank Jenner
EY Global Chemical
Industry Leader
frank.jenner@de.ey.com
February 2020 Remaining customer-centric in an evolving chemicals landscape
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 3
Content
Evolving customer and
end-user needs
A new digital age of chemical
production
The road to sustainable
development
Prioritizing talent and culture to
drive growth
Changing global and regional
regulations
Key trends
Page 4
• A generational shift,
emergence of advanced
technology and
convergence of end-user
industries necessitate
robust solutions that
address customers'
changing expectations.
• The future of energy,
agriculture, mobility and
technology helps chemical
companies shape portfolio
planning.
• New technology is both a
driver of and partner to
innovation in the chemical
industry.
• 3D printing industry
drives an end-user
demand for specialized
inputs for example in
selective laser sintering
(SLS) printers.
• AI facilitates an efficient
innovation process.
• Advanced technologies
such as edge computing
and 4D printing can
further transform
chemical operations.
• The chemical industry
plays a crucial role in the
pursuit of the goals
established in the United
Nations' 2030 Agenda for
Sustainable Development.
• Several of these goals —
zero hunger; good health
and well-being; clean
water and sanitation;
affordable and clean
energy; and climate action
— will drive chemical
companies' focus on
health care and water
treatment chemicals, as
well as on energy
efficiency, recyclability
and use of renewable
feedstock.
• Besides focusing on digital
capabilities, chemical
companies must
encourage and foster
leadership,
communication,
innovation and other soft
skills to develop an agile,
skilled workforce.
• Global preferred
employers can be used as
models for developing a
culture of innovation,
growth and employee
well-being.
February 2020 Remaining customer-centric in an evolving chemicals landscape
Evolving customer and
end-user needs
A new digital age of
chemical production
The road to sustainable
development
Prioritizing talent and
culture to drive growth
Changing global and
regional regulations
• Chemical companies
consider regulatory
uncertainty and volatility
as growth barriers.
• A global sulphur cap
targeting the
petrochemical industry
and tighter environmental
rules in China have
widespread impact.
Evolving customer
and end-user needs
Page 5 February 2020 Remaining customer-centric in an evolving chemicals landscape
Placing the customer at the beginning of the value chain creates real value
Chemical companies must work with customers as a part of their ecosystem to co-create sustainable solutions that meet their needs
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 6
Source: EY Industrial Products Continuous Innovation Survey 2018 (120 chemical-industry respondents surveyed in April 2018).
Chemical companies, which recorded a
10%+ profit margin and 5%+ revenue
growth in recent years, prioritized
Collaborating with customers to
redesign or create products
and services
Improving reliability and
availability of products and
services
Enhancing the speed of
delivery of products and
services
The chemical industry must develop futuristic products driven by dynamic
customer preferences and issues impacting end-user sectors
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 7
Automotive sector
• Increasing demand for electric and
connected vehicles, and
ride-sharing and -hailing models
• Emission reduction standards
• Growing market for automated
vehicles
• Decarbonization across industries
through electrification using
renewable resources such as solar,
wind and hydro
• Rise of "prosumers" — consumers
who both produce and use
electricity
Energy sector
• Increased demand for high-capacity
lithium-ion batteries
• Reduced ownership and increased
focus on utility
• Growing demand for lightweight
materials for vehicle bodies
• Need for retroreflective surfaces
• Increased commercial and industrial
use of solar energy, leading to
greater demand for solar panels
and solar cells
• Enhanced demand for energy
storage devices involving the use
of batteries such as lithium-ion
and flow batteries
• Emergence of a supporting industry
for the maintenance of solar cells
• Invest in in-house innovation to
develop smart materials such as
shape-memory alloys and cathodes
for fluid batteries
• Collaborate with research
institutes, the automotive industry
and start-ups to license the
technology around the future of
mobility
(e.g., retroreflective coatings and
dirt-repellent surfaces)
• Invest in the development of low-
cost solar technology
• Identify ways to commercialize
alternate fuel sources such as flow
batteries
• Develop dust-and water-repellent
solar cells to reduce maintenance
cost
Key priorities
for chemical
companies
Implications
Disruption in end-user industries will drive the specialized chemical portfolio of
the future
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 8
Agriculture sector
• Increasing threats to crops
• Trade wars and embargoes that
affect commodity prices
• Consumers' preference for
healthier, traceable options
• Increasing popularity of new
agriculture techniques such as
hydroponics and desert farming
• Growing 5G applications include:
• Industrial Internet of Things
(IIoT) and robotics
• Mobile broadband
• Connected mobility
• Precision agriculture
• Invest in sustainable technology
and products such as seaweed-
based plant nutrients
• Integrate blockchain into the supply
chain to enhance transparency for
the customer
• Develop value-adding products to
combat price drops due to
commodity price volatility
• Enter markets that are still in the
nascent stage of collaboration with
niche suppliers and start-ups
• Invest in the development of
chemicals for advanced electronics
Telecommunication sector
• Growing demand for health-and
environment-friendly pesticides
• Implementation of blockchain in
sources that supply chemicals,
particularly those catering to the
food industry
• Emerging demand for chemicals
that enable growth in
nonconventional agriculture
• Increased use of touch-screen
electronic devices across industries
and vehicles
• Increased use of sensor networks
across industries
Key priorities
for chemical
companies
Implications
A new digital age of
chemical production
Page 9 February 2020 Remaining customer-centric in an evolving chemicals landscape
Digital technology is now a necessity as it aids growth by supporting companies
across their segments and functions
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 10
Source: EY Digitalization in Chemicals survey (the respondents could select 3 options from a list of 11 digitalization topics), July 2019.
High-potential areas of technology,
per key global players
Improved data analysis (e.g.,
big data, business analytics, AI
and predictive maintenance)
Improvement and integration
of data management
(e.g., master data)
Digital marketing platforms
(e.g., digital markets)
39% 36% 33%
Chemical companies are leveraging digital technology to develop new business
models, explore new markets and increase innovation efficiency
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 11
Source: EY Industrial Products Continuous Innovation Survey 2018.
Digital technologies
creating area
of demand
AI for
innovation
Services
enabled by
digital
technology
• New technologies such as
3D printing and 5G will drive
the demand for enhanced
materials to complement
their use.
• A major European chemical
company has acquired
several startups and
suppliers that provide inputs
(e.g. plastic powders) for
SLS printers.
• A US chemicals provider has
developed integrated
solutions for 5G services.
• Some major chemical and petrochemical companies are using AI to
automate scientific work.
• AI and machine learning are being deployed for experimental
iterations to reduce R&D time and costs. For example, a US
chemicals producer is partnering with a machine learning and
computing company to develop quantum computing tools for
material science and chemical research.
Digital and
innovation
• Several US and Europe
coatings players are enabling
collaborative innovation
through labs where their
customers can test and
create prototypes.
• Global agrochemical
companies are offering more
than just products by adding
data-analytics services to
their portfolios to develop
holistic customer solutions.
• Digital technology is
facilitating a wide range of
innovative services and
solutions, and chemical
companies are developing
new business models to serve
the resulting customers.
New technologies can boost operations and open new avenues of growth
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 12
Why does
chemical
manufacturing
need soft
sensors1?
Can be used to predict
product quality
Helps achieve
accurate quantities in
R&D and operations
Facilitates the smart
factory (more efficiency
than hard sensors),
maintenance
and transportation
How can 4D
printing2 help
shape the product
portfolio of
tomorrow?
Why is edge
computing3
relevant to
chemical
operations?
Helps in the development of
materials whose functionalities
can be expanded
Can be used to develop products
with self-assembly feature, to skip
the middleman
Enhances the effectiveness of
cloud and IoT systems for plant
management
Reduces equipment
failure to minimize
maintenance cost
Promotes plant
and employee
safety
Helps increase efficiency
through service flexibility,
and lower capital, time-to-
market and inventory
requirements
1. Soft sensors are inferential models that use easily measured variables to estimate process variables that are otherwise hard to measure because of technological limitations, large measurement delays or high investment costs.
2. 4D printing is the process through which a 3D printed object transforms itself into another structure over the influence of factors such as temperature, light and pressure.
3. Edge computing involves deployment of data-handling activities directly to the individual sources of data, such as laptops, tablets or smartphones, reducing reliance on centralized and always-connected network segments.
Advanced technologies
such as soft sensors,
4D printing and edge
computing can help
chemical companies
enhance product
quality, develop new
business models and
accelerate innovation.
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 13
The road to sustainable
development
As suppliers to all industries, chemical companies will need to be part of the
circular economy long before other sectors.
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 14
of chemical companies
surveyed currently have, or
plan to develop, metrics for
measuring social value in the
next 12 months.
82%
20+
chemical companies, along with
consumer products companies,
cofounded the Alliance to End
Plastic Waste.
Source: EY Global Capital Confidence Barometer survey, October 2019. EY Advanced Manufacturing Global Capital Confidence Barometer highlights, November 2019.
The UN Sustainable Development Goals are expected to reshape demand across
industries …
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 15
UN
Sustainable
Development
Goals1
Subsequent
impact on
product
demand
for different
industries
Agriculture
• Focus on higher yield for the
rapidly increasing population
• Need for sustainable agriculture
Energy
• Focus on renewable sources of
energy
Life sciences
• Demand for nutrition supplements
• Need for easy availability of
lifesaving drugs
• Customized food for fighting
diseases caused by lifestyle
factors
Manufacturing (including industrial and consumer products)
• Demand for eco-friendly raw materials
• Focus on maximum product recyclability
(e.g., a global food and beverages producer
has taken steps to shift all of it products to
paper packaging by 2025)
• Demand for personal and home care products
that contain bio-based products
• Focus on reducing industries’ carbon footprint
(e.g., a global fast-moving consumer goods
company plans to halve its consumption of
new plastic by 2025)
• Responsible wastewater management
Government and public services
• Affordable health care
• Pollution control across air, water and land
• Regulatory enforcement focused on the "three R's" – reduce,
reuse and recycle
• Regulations to boost use of renewable energy sources for
commercial and residential purposes
• Encouragement of initiatives focused on water-source clean-
up and environmental preservation
Zero
hunger
Good health
and well-being
Affordable and
clean energy
Climate
action
Sustainable cities
and communities
Responsible
consumption
and production
Clean water
and sanitation
Life
below water
Source: “UN Sustainable Development Goals”, UN Sustainable Goals Knowledge Platform, UN Sustainable Development website, accessed 16 October 2019.
… which, in turn, would drive chemical companies to rethink their focus areas in
strategy and innovation
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 16
UN
Sustainable
Development
Goals
Key priorities
for
chemical
companies
Zero
hunger
Good health
and well-being
Affordable and
clean energy
Climate
action
Sustainable cities
and communities
Responsible
consumption
and production
Clean water
and sanitation
Life
below water
• Investing in R&D to
develop high-yield
fertilizers and growth
enablers
• Developing agrochemicals
with minimal effect on
the environment and
consumers’ health
• Expanding portfolios in
nutrition and bioscience
segments
• Investing in development
of innovative application
programming interfaces
(APIs) to respond to
increasing demand for
pharmaceuticals
• Investing in the
development of low-cost
solar cells and fuel
batteries
• Collaborating with the
energy sector for the
development of
sustainable fuel
• Developing lightweight
materials for the mobility
sector to reduce carbon
footprint
• Developing chemicals
with minimal ecological
impact
• Investing in R&D for the
development of bio-based
feedstock
• Upgrading the supply
chain to support a
circular economy by:
• Reusing carbon
emissions
• Reusing waste
chemicals and plastics
• Strategizing to
gradually increase
recyclable and bio-
based materials as
part of the company’s
portfolio
• Enhancing water
treatment and
purification technologies
• Collaborating actively
with recycling and waste
management firms for
reuse or treatment of
waste effluents
Source: “UN Sustainable Development Goals”, UN Sustainable Goals Knowledge Platform, UN Sustainable Development website, accessed 16 October 2019.
Prioritizing talent
and culture to drive
growth
Page 17 February 2020 Remaining customer-centric in an evolving chemicals landscape
Chemical leaders believe their company culture somewhat helps them address
key business priorities
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 18
Source: EY Industrial Products Continuous Innovation Survey 2018.
Note: The survey included 121 chemical respondents, and the above data is for chemical respondents with positive profit margins for the preceding three years. Respondents could choose more than one option.
70%
Producing
high-quality products
67%
Reducing costs
65%
Customer experience
How effective is your culture in serving the following business needs?
In this Transformative Age, chemical companies are focusing on skills beyond their
technical know-how to develop an agile workforce
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 19
86% 85% 85%
Leadership InnovationCollaboration and
communication
Key skills at chemical companies
Source: EY Industrial Products Continuous Innovation Survey 2018.
Chemical employers are focused on developing and nurturing their employees'
sector expertise and digital skills to facilitate the deployment of the latest
technology in their operations.
Chemical employers can gain insights from leading industries to model
themselves as the preferred employer
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 20
What can chemical companies learn from
employers in other sectors?
What do the top rankers of Forbes1 best places to work have
in common?
1 ”Top 10 reasons to work at Google,” investopedia.com, https://www.investopedia.com/articles/investing/060315/top-10-reasons-work-google.asp, July 2019
9
7
6
2
1
Technology giant
• Lifestyle and health benefits
• Growth opportunities within the
firm
• Creative and innovative work
environment
Oil and gas company
• Supportive work culture
• Learning and development
opportunities
Life science company
• Collaborative work culture
• Investment in employees’ health
and well-being
• Focus on developing a safe and
environmentally responsible
workplace
Leading hotel chain
• Employee-focused workplace
culture
• Investment in employees’
comfort
• Additional benefits, such as
adoption assistance
Automotive company
• Strong corporate culture
• Widely recognized brand
• Investment in futuristic
solutions
Develop an employee-focused culture
Provide holistic reimbursements
beyond monetary benefits
Foster an innovation-focused culture
Develop a corporate brand
Offer adequate growth opportunities
Changing global and
regional regulations
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 21
A changing regulatory landscape also presents challenges to the chemical
industry
Page 22
67%
of chemical companies consider the following to be barriers to the growth
of their businesses:
• Regulatory uncertainty
• Geopolitical or local political uncertainty
• Supply chain disruption due to trade disputes
• New environment-related policies
The impact of the tighter International Maritime
Organization (IMO) on the global petrochemical industry
• The IMO’s limit on sulfur content in fuel oil for the
shipping industry is expected to have a dual impact on
chemical suppliers:
• Freight costs for chemical imports will likely increase
as shipping companies' capital expenditures are
impacted.
• Production of light crude oil will increase the global
supply of naphtha which may benefit the naphtha-
dependent petrochemical producers.
Environmental regulations affecting the chemicals
industry
• As the Chinese Government tightens environmental
regulations, chemical companies may be facing plant
closures and overall operations cost increases.
• On the upside, some segments have seen demand grow.
For many companies that have passed costs onto the
consumer, revenues and profits have grown.
February 2020 Remaining customer-centric in an evolving chemicals landscape
The sulphur limit will have mixed effects on the
petrochemical industry
Page 23
• Effective 1 January 2020, the IMO is imposing a limit on sulphur in marine fuels to 0.5%
from 3.5%.
• Under new regulations, shipping companies would need to either shift to low-sulphur fuel
oils (LSFOs) or gas oil.
• LSFOs are generally more expensive than high-sulphur fuel oils; hence, navigation costs
for shipping companies may increase.
• Gas oil is less expensive, can be blended into diesel and may provide greater value for oil
and gas companies.
• Shifts in the types of fuel used may lead to higher freight charges for chemical buyers
that rely heavily on imports.
• The European polyethylene terephthalate and purified terephthalic acid industry, which
heavily depends on imports from South Korea and China, is expected to face increased
freight charges.
• Production of sweet crude or light crude is expected to increase alongside demand for
low-sulphur fuels. As a result, the global supply of naphtha will likely grow (sweet crude's
production is associated with a high quantity of naphtha).
• Petrochemical producers using naphtha crackers will likely benefit.
February 2020 Remaining customer-centric in an evolving chemicals landscape
China’s tightened environmental regulations have mixed effects on chemical
suppliers
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 24
• Most chemical companies in China have been impacted.
• As a result of the regulations, some companies have faced heavy penalties, mandatory plant upgrades for effective waste
treatment, shutdowns of manufacturing plants responsible for heavy pollution and relocations of plants to an industrial
zone away from human inhabitants.
Threefold impact on revenue and profits
Regulatory costs are increasing
overall chemical and material
production costs in the country.
Certain Chinese specialty-chemical
producers that cannot pass these
costs onto the customer have seen
their margins take a hit.
2
As several plants with
unsustainable operations have
been shut down, China has
become an importer of chemicals
such as naphthalene, which may
benefit other economies, such as
South Africa and Nigeria.
1
Product prices have increased in
segments where chemical
companies can pass the costs onto
the customer. As competitor
facilities close, some producers are
seeing greater demand; coupled
with price increases, this is leading
to higher profits.
3
For more on how global trade impacts the chemical industry.
February 2020 Remaining customer-centric in an evolving chemicals landscapePage 25
Key
contacts
Frank Jenner
EY Global Chemical
Industry Leader
+49 621 4208 18000
frank.jenner@de.ey.com
Jade Rodysill
EY Americas Advisory
Chemical Leader
+1 214 969 8650
jade.rodysill@ey.com
Our latest thinking
Link
How 3DP is moving from hype to
game changer
Link
Where the next wave of consolidation
in the chemicals sector could occur
How additive manufacturing is becoming
a core process and value driver
Link
How chemical companies respond to
changing trends
Link
Visit ey.com/chemicals and follow us @EYManufacturing for the latest updates to learn how EY is helping chemical companies to transform.
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory services. The
insights and quality services we deliver help build trust and confidence in the
capital markets and in economies the world over. We develop outstanding
leaders who team to deliver on our promises to all of our stakeholders. In so
doing, we play a critical role in building a better working world for our people,
for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the
member firms of Ernst & Young Global Limited, each of which is a separate legal
entity. Ernst & Young Global Limited, a UK company limited by guarantee, does
not provide services to clients. Information about how EY collects and uses
personal data and a description of the rights individuals have under data
protection legislation are available via ey.com/privacy. For more information
about our organization, please visit ey.com.
About EY's Global Advanced Manufacturing & Mobility Sector
Urbanization, changing consumer expectations and emerging digital
technologies are reshaping what’s possible, from the production and
distribution of goods to the transportation of people. To succeed in this new
world of mobility and smart manufacturing, incumbents must transform
themselves at unprecedented speed — to think like an innovative startup, tap
into new talent and engage the customer. With experience across the value
chain and key technology alliances, our teams show clients how to create
efficiencies now while adopting digitization and optionality for long-term
growth. Automotive, transportation, aerospace, defense, chemicals and
industrial products companies can draw on the strength of our network of cross-
industry players and put our diverse range of approaches to use today to equip
their businesses for tomorrow.
© 2020 EYGM Limited.
All Rights Reserved.
EYG no. 000555-20Gbl
BMC Agency
GA 1013740
ED None
This material has been prepared for general informational purposes only and is not intended to be relied
upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
ey.com/chemicals

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Remaining customer-centric in evolving chemicals

  • 1. Remaining customer- centric in an evolving chemicals landscape EY Chemical Market Outlook Frank Jenner EY Global Chemical Industry Leader February 2020
  • 2. Overview Page 2 The chemical industry, a supplier to all other industries, is transforming like never before. Globally, digitization and evolving demands from end-user industries have forced chemical companies to develop new offerings and applications. These businesses must also develop sustainable options for products, feedstock and automated processes to meet consumer demand. And to do this, the companies should co-create sustainable solutions with end customers. Chemical players are embracing artificial intelligence (AI) and machine learning in R&D to improve data analytics and digital platforms in high-potential technologies such as soft sensors, edge computing and 4D printing – with the goal of transforming their operating models. Industry convergence and technology-driven disruption in today's Transformative Age also require businesses to rethink their talent priorities. With the right mix of permanent and contractual employees, chemical companies can develop the culture of innovation and customer-centricity needed to keep up with constant change. In this edition of our global Chemical Market Outlook, we explore the trends and drivers that will shape the chemical industry of tomorrow. Frank Jenner EY Global Chemical Industry Leader frank.jenner@de.ey.com February 2020 Remaining customer-centric in an evolving chemicals landscape
  • 3. February 2020 Remaining customer-centric in an evolving chemicals landscapePage 3 Content Evolving customer and end-user needs A new digital age of chemical production The road to sustainable development Prioritizing talent and culture to drive growth Changing global and regional regulations
  • 4. Key trends Page 4 • A generational shift, emergence of advanced technology and convergence of end-user industries necessitate robust solutions that address customers' changing expectations. • The future of energy, agriculture, mobility and technology helps chemical companies shape portfolio planning. • New technology is both a driver of and partner to innovation in the chemical industry. • 3D printing industry drives an end-user demand for specialized inputs for example in selective laser sintering (SLS) printers. • AI facilitates an efficient innovation process. • Advanced technologies such as edge computing and 4D printing can further transform chemical operations. • The chemical industry plays a crucial role in the pursuit of the goals established in the United Nations' 2030 Agenda for Sustainable Development. • Several of these goals — zero hunger; good health and well-being; clean water and sanitation; affordable and clean energy; and climate action — will drive chemical companies' focus on health care and water treatment chemicals, as well as on energy efficiency, recyclability and use of renewable feedstock. • Besides focusing on digital capabilities, chemical companies must encourage and foster leadership, communication, innovation and other soft skills to develop an agile, skilled workforce. • Global preferred employers can be used as models for developing a culture of innovation, growth and employee well-being. February 2020 Remaining customer-centric in an evolving chemicals landscape Evolving customer and end-user needs A new digital age of chemical production The road to sustainable development Prioritizing talent and culture to drive growth Changing global and regional regulations • Chemical companies consider regulatory uncertainty and volatility as growth barriers. • A global sulphur cap targeting the petrochemical industry and tighter environmental rules in China have widespread impact.
  • 5. Evolving customer and end-user needs Page 5 February 2020 Remaining customer-centric in an evolving chemicals landscape
  • 6. Placing the customer at the beginning of the value chain creates real value Chemical companies must work with customers as a part of their ecosystem to co-create sustainable solutions that meet their needs February 2020 Remaining customer-centric in an evolving chemicals landscapePage 6 Source: EY Industrial Products Continuous Innovation Survey 2018 (120 chemical-industry respondents surveyed in April 2018). Chemical companies, which recorded a 10%+ profit margin and 5%+ revenue growth in recent years, prioritized Collaborating with customers to redesign or create products and services Improving reliability and availability of products and services Enhancing the speed of delivery of products and services
  • 7. The chemical industry must develop futuristic products driven by dynamic customer preferences and issues impacting end-user sectors February 2020 Remaining customer-centric in an evolving chemicals landscapePage 7 Automotive sector • Increasing demand for electric and connected vehicles, and ride-sharing and -hailing models • Emission reduction standards • Growing market for automated vehicles • Decarbonization across industries through electrification using renewable resources such as solar, wind and hydro • Rise of "prosumers" — consumers who both produce and use electricity Energy sector • Increased demand for high-capacity lithium-ion batteries • Reduced ownership and increased focus on utility • Growing demand for lightweight materials for vehicle bodies • Need for retroreflective surfaces • Increased commercial and industrial use of solar energy, leading to greater demand for solar panels and solar cells • Enhanced demand for energy storage devices involving the use of batteries such as lithium-ion and flow batteries • Emergence of a supporting industry for the maintenance of solar cells • Invest in in-house innovation to develop smart materials such as shape-memory alloys and cathodes for fluid batteries • Collaborate with research institutes, the automotive industry and start-ups to license the technology around the future of mobility (e.g., retroreflective coatings and dirt-repellent surfaces) • Invest in the development of low- cost solar technology • Identify ways to commercialize alternate fuel sources such as flow batteries • Develop dust-and water-repellent solar cells to reduce maintenance cost Key priorities for chemical companies Implications
  • 8. Disruption in end-user industries will drive the specialized chemical portfolio of the future February 2020 Remaining customer-centric in an evolving chemicals landscapePage 8 Agriculture sector • Increasing threats to crops • Trade wars and embargoes that affect commodity prices • Consumers' preference for healthier, traceable options • Increasing popularity of new agriculture techniques such as hydroponics and desert farming • Growing 5G applications include: • Industrial Internet of Things (IIoT) and robotics • Mobile broadband • Connected mobility • Precision agriculture • Invest in sustainable technology and products such as seaweed- based plant nutrients • Integrate blockchain into the supply chain to enhance transparency for the customer • Develop value-adding products to combat price drops due to commodity price volatility • Enter markets that are still in the nascent stage of collaboration with niche suppliers and start-ups • Invest in the development of chemicals for advanced electronics Telecommunication sector • Growing demand for health-and environment-friendly pesticides • Implementation of blockchain in sources that supply chemicals, particularly those catering to the food industry • Emerging demand for chemicals that enable growth in nonconventional agriculture • Increased use of touch-screen electronic devices across industries and vehicles • Increased use of sensor networks across industries Key priorities for chemical companies Implications
  • 9. A new digital age of chemical production Page 9 February 2020 Remaining customer-centric in an evolving chemicals landscape
  • 10. Digital technology is now a necessity as it aids growth by supporting companies across their segments and functions February 2020 Remaining customer-centric in an evolving chemicals landscapePage 10 Source: EY Digitalization in Chemicals survey (the respondents could select 3 options from a list of 11 digitalization topics), July 2019. High-potential areas of technology, per key global players Improved data analysis (e.g., big data, business analytics, AI and predictive maintenance) Improvement and integration of data management (e.g., master data) Digital marketing platforms (e.g., digital markets) 39% 36% 33%
  • 11. Chemical companies are leveraging digital technology to develop new business models, explore new markets and increase innovation efficiency February 2020 Remaining customer-centric in an evolving chemicals landscapePage 11 Source: EY Industrial Products Continuous Innovation Survey 2018. Digital technologies creating area of demand AI for innovation Services enabled by digital technology • New technologies such as 3D printing and 5G will drive the demand for enhanced materials to complement their use. • A major European chemical company has acquired several startups and suppliers that provide inputs (e.g. plastic powders) for SLS printers. • A US chemicals provider has developed integrated solutions for 5G services. • Some major chemical and petrochemical companies are using AI to automate scientific work. • AI and machine learning are being deployed for experimental iterations to reduce R&D time and costs. For example, a US chemicals producer is partnering with a machine learning and computing company to develop quantum computing tools for material science and chemical research. Digital and innovation • Several US and Europe coatings players are enabling collaborative innovation through labs where their customers can test and create prototypes. • Global agrochemical companies are offering more than just products by adding data-analytics services to their portfolios to develop holistic customer solutions. • Digital technology is facilitating a wide range of innovative services and solutions, and chemical companies are developing new business models to serve the resulting customers.
  • 12. New technologies can boost operations and open new avenues of growth February 2020 Remaining customer-centric in an evolving chemicals landscapePage 12 Why does chemical manufacturing need soft sensors1? Can be used to predict product quality Helps achieve accurate quantities in R&D and operations Facilitates the smart factory (more efficiency than hard sensors), maintenance and transportation How can 4D printing2 help shape the product portfolio of tomorrow? Why is edge computing3 relevant to chemical operations? Helps in the development of materials whose functionalities can be expanded Can be used to develop products with self-assembly feature, to skip the middleman Enhances the effectiveness of cloud and IoT systems for plant management Reduces equipment failure to minimize maintenance cost Promotes plant and employee safety Helps increase efficiency through service flexibility, and lower capital, time-to- market and inventory requirements 1. Soft sensors are inferential models that use easily measured variables to estimate process variables that are otherwise hard to measure because of technological limitations, large measurement delays or high investment costs. 2. 4D printing is the process through which a 3D printed object transforms itself into another structure over the influence of factors such as temperature, light and pressure. 3. Edge computing involves deployment of data-handling activities directly to the individual sources of data, such as laptops, tablets or smartphones, reducing reliance on centralized and always-connected network segments. Advanced technologies such as soft sensors, 4D printing and edge computing can help chemical companies enhance product quality, develop new business models and accelerate innovation.
  • 13. February 2020 Remaining customer-centric in an evolving chemicals landscapePage 13 The road to sustainable development
  • 14. As suppliers to all industries, chemical companies will need to be part of the circular economy long before other sectors. February 2020 Remaining customer-centric in an evolving chemicals landscapePage 14 of chemical companies surveyed currently have, or plan to develop, metrics for measuring social value in the next 12 months. 82% 20+ chemical companies, along with consumer products companies, cofounded the Alliance to End Plastic Waste. Source: EY Global Capital Confidence Barometer survey, October 2019. EY Advanced Manufacturing Global Capital Confidence Barometer highlights, November 2019.
  • 15. The UN Sustainable Development Goals are expected to reshape demand across industries … February 2020 Remaining customer-centric in an evolving chemicals landscapePage 15 UN Sustainable Development Goals1 Subsequent impact on product demand for different industries Agriculture • Focus on higher yield for the rapidly increasing population • Need for sustainable agriculture Energy • Focus on renewable sources of energy Life sciences • Demand for nutrition supplements • Need for easy availability of lifesaving drugs • Customized food for fighting diseases caused by lifestyle factors Manufacturing (including industrial and consumer products) • Demand for eco-friendly raw materials • Focus on maximum product recyclability (e.g., a global food and beverages producer has taken steps to shift all of it products to paper packaging by 2025) • Demand for personal and home care products that contain bio-based products • Focus on reducing industries’ carbon footprint (e.g., a global fast-moving consumer goods company plans to halve its consumption of new plastic by 2025) • Responsible wastewater management Government and public services • Affordable health care • Pollution control across air, water and land • Regulatory enforcement focused on the "three R's" – reduce, reuse and recycle • Regulations to boost use of renewable energy sources for commercial and residential purposes • Encouragement of initiatives focused on water-source clean- up and environmental preservation Zero hunger Good health and well-being Affordable and clean energy Climate action Sustainable cities and communities Responsible consumption and production Clean water and sanitation Life below water Source: “UN Sustainable Development Goals”, UN Sustainable Goals Knowledge Platform, UN Sustainable Development website, accessed 16 October 2019.
  • 16. … which, in turn, would drive chemical companies to rethink their focus areas in strategy and innovation February 2020 Remaining customer-centric in an evolving chemicals landscapePage 16 UN Sustainable Development Goals Key priorities for chemical companies Zero hunger Good health and well-being Affordable and clean energy Climate action Sustainable cities and communities Responsible consumption and production Clean water and sanitation Life below water • Investing in R&D to develop high-yield fertilizers and growth enablers • Developing agrochemicals with minimal effect on the environment and consumers’ health • Expanding portfolios in nutrition and bioscience segments • Investing in development of innovative application programming interfaces (APIs) to respond to increasing demand for pharmaceuticals • Investing in the development of low-cost solar cells and fuel batteries • Collaborating with the energy sector for the development of sustainable fuel • Developing lightweight materials for the mobility sector to reduce carbon footprint • Developing chemicals with minimal ecological impact • Investing in R&D for the development of bio-based feedstock • Upgrading the supply chain to support a circular economy by: • Reusing carbon emissions • Reusing waste chemicals and plastics • Strategizing to gradually increase recyclable and bio- based materials as part of the company’s portfolio • Enhancing water treatment and purification technologies • Collaborating actively with recycling and waste management firms for reuse or treatment of waste effluents Source: “UN Sustainable Development Goals”, UN Sustainable Goals Knowledge Platform, UN Sustainable Development website, accessed 16 October 2019.
  • 17. Prioritizing talent and culture to drive growth Page 17 February 2020 Remaining customer-centric in an evolving chemicals landscape
  • 18. Chemical leaders believe their company culture somewhat helps them address key business priorities February 2020 Remaining customer-centric in an evolving chemicals landscapePage 18 Source: EY Industrial Products Continuous Innovation Survey 2018. Note: The survey included 121 chemical respondents, and the above data is for chemical respondents with positive profit margins for the preceding three years. Respondents could choose more than one option. 70% Producing high-quality products 67% Reducing costs 65% Customer experience How effective is your culture in serving the following business needs?
  • 19. In this Transformative Age, chemical companies are focusing on skills beyond their technical know-how to develop an agile workforce February 2020 Remaining customer-centric in an evolving chemicals landscapePage 19 86% 85% 85% Leadership InnovationCollaboration and communication Key skills at chemical companies Source: EY Industrial Products Continuous Innovation Survey 2018. Chemical employers are focused on developing and nurturing their employees' sector expertise and digital skills to facilitate the deployment of the latest technology in their operations.
  • 20. Chemical employers can gain insights from leading industries to model themselves as the preferred employer February 2020 Remaining customer-centric in an evolving chemicals landscapePage 20 What can chemical companies learn from employers in other sectors? What do the top rankers of Forbes1 best places to work have in common? 1 ”Top 10 reasons to work at Google,” investopedia.com, https://www.investopedia.com/articles/investing/060315/top-10-reasons-work-google.asp, July 2019 9 7 6 2 1 Technology giant • Lifestyle and health benefits • Growth opportunities within the firm • Creative and innovative work environment Oil and gas company • Supportive work culture • Learning and development opportunities Life science company • Collaborative work culture • Investment in employees’ health and well-being • Focus on developing a safe and environmentally responsible workplace Leading hotel chain • Employee-focused workplace culture • Investment in employees’ comfort • Additional benefits, such as adoption assistance Automotive company • Strong corporate culture • Widely recognized brand • Investment in futuristic solutions Develop an employee-focused culture Provide holistic reimbursements beyond monetary benefits Foster an innovation-focused culture Develop a corporate brand Offer adequate growth opportunities
  • 21. Changing global and regional regulations February 2020 Remaining customer-centric in an evolving chemicals landscapePage 21
  • 22. A changing regulatory landscape also presents challenges to the chemical industry Page 22 67% of chemical companies consider the following to be barriers to the growth of their businesses: • Regulatory uncertainty • Geopolitical or local political uncertainty • Supply chain disruption due to trade disputes • New environment-related policies The impact of the tighter International Maritime Organization (IMO) on the global petrochemical industry • The IMO’s limit on sulfur content in fuel oil for the shipping industry is expected to have a dual impact on chemical suppliers: • Freight costs for chemical imports will likely increase as shipping companies' capital expenditures are impacted. • Production of light crude oil will increase the global supply of naphtha which may benefit the naphtha- dependent petrochemical producers. Environmental regulations affecting the chemicals industry • As the Chinese Government tightens environmental regulations, chemical companies may be facing plant closures and overall operations cost increases. • On the upside, some segments have seen demand grow. For many companies that have passed costs onto the consumer, revenues and profits have grown. February 2020 Remaining customer-centric in an evolving chemicals landscape
  • 23. The sulphur limit will have mixed effects on the petrochemical industry Page 23 • Effective 1 January 2020, the IMO is imposing a limit on sulphur in marine fuels to 0.5% from 3.5%. • Under new regulations, shipping companies would need to either shift to low-sulphur fuel oils (LSFOs) or gas oil. • LSFOs are generally more expensive than high-sulphur fuel oils; hence, navigation costs for shipping companies may increase. • Gas oil is less expensive, can be blended into diesel and may provide greater value for oil and gas companies. • Shifts in the types of fuel used may lead to higher freight charges for chemical buyers that rely heavily on imports. • The European polyethylene terephthalate and purified terephthalic acid industry, which heavily depends on imports from South Korea and China, is expected to face increased freight charges. • Production of sweet crude or light crude is expected to increase alongside demand for low-sulphur fuels. As a result, the global supply of naphtha will likely grow (sweet crude's production is associated with a high quantity of naphtha). • Petrochemical producers using naphtha crackers will likely benefit. February 2020 Remaining customer-centric in an evolving chemicals landscape
  • 24. China’s tightened environmental regulations have mixed effects on chemical suppliers February 2020 Remaining customer-centric in an evolving chemicals landscapePage 24 • Most chemical companies in China have been impacted. • As a result of the regulations, some companies have faced heavy penalties, mandatory plant upgrades for effective waste treatment, shutdowns of manufacturing plants responsible for heavy pollution and relocations of plants to an industrial zone away from human inhabitants. Threefold impact on revenue and profits Regulatory costs are increasing overall chemical and material production costs in the country. Certain Chinese specialty-chemical producers that cannot pass these costs onto the customer have seen their margins take a hit. 2 As several plants with unsustainable operations have been shut down, China has become an importer of chemicals such as naphthalene, which may benefit other economies, such as South Africa and Nigeria. 1 Product prices have increased in segments where chemical companies can pass the costs onto the customer. As competitor facilities close, some producers are seeing greater demand; coupled with price increases, this is leading to higher profits. 3 For more on how global trade impacts the chemical industry.
  • 25. February 2020 Remaining customer-centric in an evolving chemicals landscapePage 25 Key contacts Frank Jenner EY Global Chemical Industry Leader +49 621 4208 18000 frank.jenner@de.ey.com Jade Rodysill EY Americas Advisory Chemical Leader +1 214 969 8650 jade.rodysill@ey.com Our latest thinking Link How 3DP is moving from hype to game changer Link Where the next wave of consolidation in the chemicals sector could occur How additive manufacturing is becoming a core process and value driver Link How chemical companies respond to changing trends Link Visit ey.com/chemicals and follow us @EYManufacturing for the latest updates to learn how EY is helping chemical companies to transform.
  • 26. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com. About EY's Global Advanced Manufacturing & Mobility Sector Urbanization, changing consumer expectations and emerging digital technologies are reshaping what’s possible, from the production and distribution of goods to the transportation of people. To succeed in this new world of mobility and smart manufacturing, incumbents must transform themselves at unprecedented speed — to think like an innovative startup, tap into new talent and engage the customer. With experience across the value chain and key technology alliances, our teams show clients how to create efficiencies now while adopting digitization and optionality for long-term growth. Automotive, transportation, aerospace, defense, chemicals and industrial products companies can draw on the strength of our network of cross- industry players and put our diverse range of approaches to use today to equip their businesses for tomorrow. © 2020 EYGM Limited. All Rights Reserved. EYG no. 000555-20Gbl BMC Agency GA 1013740 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/chemicals