Marketing and innovation

Europe are 1) the decreasing attractiveness of investments in
Europe due to low demand growth in the region, delocalization
of customer industries, high production costs and highly regulated
environment; 2) the decline in R&D spending in the region
(see Figure 2); and 3) an eroding skill base (according to
CEFIC, the number of graduates in the field of chemicals in the
EU is estimated to decrease by 10% per annum between 1996
and 2007).
Strategies of European companies to remain competitive
p Expansion to Asia … The importance of the Asian markets for
the chemicals industry is well known, and for virtually all companies
under our research coverage, expansion to Asia is a key point
in their strategy. Between 2001 and 2005, BASF, for example, is
investing approximately 20% – 25% of the group’s total capital
expenditure, or USD 5.6 billion (including USD 2 billion in China),
in Asia. European companies follow diverse strategies in Asia, but
it is clear that their activities in the region are not confined to
production, in order to reduce costs or to be closer to the chemical
consumer markets. They also include the formation of R&D
centers. Ciba Specialty Chemicals, for example, has just opened
a new R&D center in Shanghai.
p … and differentiation through innovation. The other pillar of
the strategy currently followed by the industry to remain competitive
is product differentiation through innovation and improving
customer relationships. We observe a strong trend in the sector
toward innovation, driven by the need of providing solutions to
customers. Clariant, for example, is able to offer color systems
for every element in the interior of a car. The “Clariant Color Concept”
for the automotive industry enables the harmonization of
colors of textiles, leather, plastics and aluminum inside the car.
This process takes place mainly in collaboration with customers,
which means that R&D and marketing efforts come together to
ensure the market relevance of new products and services. Specialty
chemical companies aim to have a proportion of approximately
25% new products (products less than five years old) in
their portfolios.
Despite the focus on innovation, R&D expenses as a percentage
of sales have remained more or less stable during the past
ten years (see Figure 3). The fact that the focus on innovation as
a key for competitiveness does not translate into higher R&D
expenses as a percentage of sales is due to several factors. First,
R&D expenses do not necessarily correlate with productivity of
R&D. Second, the most important trend in R&D seems to be the
necessity of focusing on a smaller number of projects with potential
for quick commercialization, rather than following a large
number of projects in parallel.
Besides in-house research and collaborations with companies
with new technologies and academic groups, a possibility to
drive innovation is the acquisition of technologies or smaller firms
with expertise in specific fields (see Figure 4). BASF, for example,
invests in start-up companies through its BASF Venture Capital
GmbH subsidiary.
Figure 2
R&D expenditures as percentage
of sales by region
Source: The European Chemical Industry Council (CEFIC)
4.5
4.0
3.5
3.0
2.5
2.0
1.5
25
20
15
10
5
%
95 96 97 98 99 00 01 02
EU USA Japan
Figure 3
Despite more focus on innovation, R&D
expenses as a percentage of sales
remain stable, at approximately 5% on average
for the sector
Source: CSFB HOLT
%
R&D focus on extending product lines, improving processes
The golden age of innovation in the chemicals sector was in the
1930s to 1950s, when the industry brought to the market life-changing
products such as plastics and man-made fibers. During the
last 20 years, there have been only a few really “revolutionary”
products.
0
94 95 96 97 98 99 00 01 02 03
R&D as % of sales
SG&A as % of sales