Adhesive and sealant formulations depend on raw materials and chemicals. So what’s happening in this often turbulent industry?
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Daniel S. Murad, President and CEO, The ChemQuest Group, Inc.
Specialty Chemicals represent a $730 billion industry. While fragmented, the industry comprises five major strategic markets—plus “Other”—as illustrated in Figure 1 above.
Within this landscape, there exists a common source of raw materials known as chemical intermediates. Intermediates are the key “building-block” substances synthesized to deliver desired functional performance to formulated products such as plastics, cosmetics, home care products, agricultural chemicals, coatings, adhesives, inks, pharmaceuticals, etc.
Intermediates comprise a number of important ingredients within a single formulation accounting for $217 billion globally of the $730 billion specialty chemicals space as shown in Figure 2.
Figure 2: Chemical Intermediates—Key “Building Blocks” in a $217 Billion Global Industry
Recent M&A trends point toward specialty chemicals spaces, and specifically intermediates, as being hot investment opportunities. Why are these intermediates perceived as the “darling?”
The simple answer is that the space is attractive for sustainable growth. However, the devil always is in the details. The most attractive features of the space include the following:
- Predictable business with consistent performance representing “sticky customers,” good cash flow, and ROI. These businesses typically operate at good, consistent EBITDA margins within a range of 12 to 20 percent EBITDA with relatively low capital intensity and low volatility;
- Good barriers to entry exist including fragmented customer base, regulations, brand equity, breadth of technologies, and a relatively high degree of service intensity;
- Attractive market structure with an identifiable growth profile including value-added products (often uniquely formulated) and services, low risk of obsolescence, and customer globalization providing opportunities to access high-growth emerging markets.
Shareholder return over the last 10 years validates the attractiveness of the industry. As can be seen in Figure 3, intermediates outperformed the rest of the chemical industry since 2010, with a total shareholder return of 169 percent from 2010 to 2014, a factor of 2-3X versus its peer group.
Figure 3: Intermediates vs. Chemical Industry Total Shareholder Return
Source: ChemQuest, FactSet
Market valuations of intermediate firms, have—as a result—been on the rise in 2014-2015, approaching an EV/next-12-month EBITDA multiple of nearly 12X, a rise in excess of 25 percent compared to the weighted average in 2012-2013.
Factors driving this performance include:
- Continued consolidation
- Reduction in oil and energy costs
- Emerging region growth
- U.S. housing and construction recovery
- Oil and gas exploration globally
- Global automotive builds
Key external trends impacting the intermediates segment include:
- Ongoing environmental regulations with proposed and enacted carbon caps to reduce emissions, volatile organic compounds as air pollutants, and growing water supply concerns in many regions;
- Chemical management regulations such as the European REACH program and global sustainability initiatives with greater emphasis on life-cycle assessments;
- Greater demand for sustainable products throughout the value chain.
The industry is not without challenges. Geographical turmoil is a leading cause of disruption in emerging regions. Accelerating R&D investments to meet changes in regulations and product innovation to address demand in new uses (e.g. growth in use of alternative energy globally and opportunities due to lightweighting such as substrate shifts, i.e. composites and higher use of plastics and light weight metal alloys) adds to the complexity management has to sort through.
Likewise, threat of new entrants from China, cost efficiency, currency volatility, increasing cost of labor, tort, and changes in corporate tax codes along with potentially increasing interest rates are all formidble headwinds that management must deal with to retain the value the industry has created and maintain the pace and consistency of earnings growth.
In closing, the intermediates industry, while complex, provides ample opportunity for sustainable profitable growth. Improving economic prospects coupled with rising levels of disposable income underscore a rosy outlook.
Fundamentally, the industry is in the best shape in years with balance sheets and income statements at their healthiest. We anticipate this combination—coupled with ample money supply at record low interest rates—is a receipe for continued deal flow in the short-to-medium term.
FOCUS Bankers May 2015 newsletter
The topic of “mergers and acquisitions” (M&A) is one that may seem shrouded in mystery, both for those who make M&A decisions (but are generally not involved in the details of implementation), and for those who are involved in the implementation, but not in the initial decision-making process. This article is intended for the majority of us in the paint and coatings industry who are not involved in the decision-making process regarding whether “to buy or not to buy,” but who must live with, and make work, the outcome of those decisions.
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Prepared by the ChemQuest Group, the American Coatings Association (ACA) Industry Market Analysis, 9th Edition (2014 – 2019), includes authoritative figures for value and volume of each major coatings segment, and projects growth rates and forecasts for the industry through 2019. ACA’s Market Analysis reflects a high degree of primary research conducted by the ChemQuest team, along with extensive input from a large number of key industry leaders, and will correct many earlier Census-based errors in a variety of market sectors. (This value-added feature is intended to address the absence of the detailed industry figures previously provided by the U.S. Census Bureau’s Current Industrial Reports on the industry, which were discontinued after 2010.) As a result, it is the most authoritative study on the U.S. paint and coatings industry ever published by ACA.
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In 2015, ACA again partnered with the ChemQuest Group, Inc., the global strategic management consulting firm, to publish the ACA Industry Market Analysis, 9th Edition (2014-2019). This article provides an update to the chapter on Marine Coatings, just one of 19 coatings market sectors detailed in the valuable publication.
Contributors to this article include Frank Svafranski, AkzoNobel’s key account manager/regulatory liaison-Yacht, who serves on ACA’s Antifouling Working Group committee, and Neal Blossom, chair of ACA’s Marine Coatings Committee.
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State-of-the-art developments in coatings will garner significant attention during the fifth edition of the ACS. In the upcoming months, participants may be faced with the daunting task of evaluating new and existing technologies to determine, among other things, which are likely to be disruptive to markets.
The ACA Industry Market Analysis, 9th Edition (2014-2019), produced by the ChemQuest Group, Inc., in conjunction with ACA, is the ideal framework to use when evaluating technologies since it profiles the performance of the coatings industry’s 19 market sectors by examining technology trends, regulatory and economic influences, historical trends and key buying factors, culminating in a Porter’s Five Forces Analysis. An important takeaway of each chapter’s sector analysis is not only of unmet market needs, but the role technology is expected to play through 2019.
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The 9th Edition replaces the detailed industry figures previously provided by the U.S. Census Bureau’s Current Industrial Reports on the industry, which were discontinued after 2010.
ACA’s Market Analysis will reflect a high degree of primary research conducted by the ChemQuest team, along with extensive input from a large number of key industry leaders, and will correct many earlier Census-based errors in a variety of market sectors.
As a result, it will be the most authoritative study on the U.S. paint and coatings industry ever published by ACA.
For the full article, Click here.
ACA’s indispensable guide to the coatings industry — the U.S. Paint & Coatings Industry Market Analysis: 2010-2015 — prepared by the ChemQuest Group includes authoritative figures for value and volume of each coatings segment through 2012, estimates for 2013, and a five-year forecast for the industry to 2017.
Industry Consolidation with Modest Growth is Key Theme
Wells Fargo Securities, LLC Equity Research Department with The ChemQuest Group, Inc. hosts the 18th Annual Paints, Coatings, & Adhesives conference call.
Equity Research on Paint, Coatings, and Adhesives Market
ChemQuest’s Bright Outlook on Margins
Wells Fargo Securities, LLC Equity Research Department with The ChemQuest Group, Inc. hosts the 17th Annual Paints, Coatings, & Adhesives conference call.
Equity Research on Paint, Coatings, and Adhesives Market
ChemQuest Paints a Favorable Margin Picture
Wells Fargo Securities, LLC Equity Research Department with The ChemQuest Group, Inc. hosts the 16th Annual Paints, Coatings, & Adhesives conference call.
With a focus on Key Drivers of Water Based Adhesive Technology
Arm your North American teams in marketing, sales and product management with in-depth “qualitative” findings on the market outlook and value proposition of water-based adhesives. Glean strategic information on the market size of water-based adhesives by segment and sub-segment in transportation, packaging, woodworking and joinery, building/construction and OEM assembly markets – and the technology share of water-based adhesives – compared to competitive technologies such as solvent-borne, hot melt, and reactive adhesives.
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With a focus on Hygiene and Packaging Markets
Arm your North American teams in marketing, sales and product management with in-depth “qualitative” reporting on the hot melt adhesives’ market outlook to include growth opportunities, buying factors, unmet market needs, disruptive sealing technologies (key threats including those potentially posed by flexible packaging and ultrasonic welding), channel/ distribution strategies, end-product design and user requirements, environmental/ sustainability influences, an up-to-date regulatory analysis, as well as mega trends and market drivers, throughout the value chain.
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November 3, 2016 – Both residential and commercial construction continued to recover in 2016
By A. Todd Muhleman, The ChemQuest Group, Inc.
The slow recovery from the historic downturn in residential construction continues in 2016. In the mid-2000s, increasing prices and easy credit led to a rush of investment in residential construction. At the end of 2005, new residential investment accounted for an unsustainable 6.5% of GDP above its long-term rate. After dropping to a historic low of under 2.6% of GDP in 2010, it has since rebounded to 3.6%.
Both single- and multi-family housing starts have recovered from their lows of 550,000/year at the end of 2008 to 1.2 million currently. In 2015, existing home sales were 5.9% higher than 2014, with 5.25 million sold. New home sales were up even more, at 14.6% in 2015 with 500,000 units sold. Employment gains, record low interest rates and low inventory of existing homes for sale continue to be supportive of the new home market. However, as Figure 1 shows, new home sales and starts remain well below their 2005 peak.
Other factors are limiting buyers, including price appreciation (up 5.4% year over year as of July), low inventory and more stringent loan criteria. In addition, demographic changes among buyers are influencing the market.
Home ownership rates continue to decline; this is most evident in those under the age of 45. Currently, the number of Americans owning their own house is under 62.9%—the lowest level since the mid-1960s—and well down from the peak of 69% in 2005. Those under 45 owning homes now are about 7% lower than the historical norms. This demographic shift toward renting has implications as to the type of housing stock being produced, mainly an increase of multi-family units for rent, and is influencing the trend toward smaller new single-family homes.
The unemployment rate for the construction industry was 4.5% in July, slightly lower than the current overall rate of 4.9%. Labor costs for builders are climbing due to many skilled workers leaving during the extended downturn in construction, offsetting lower costs of raw materials.
Traditionally, new residential housing led the economy into recession and historically has been a leading sector out of past recessions as well. The current recovery has been different, as housing has recovered at a much slower pace than previous recoveries (along with most areas of the economy). In fact, the U.S. has not experienced real GDP growth of 3% since the recession.
Non-Residential Construction Spending
Non-residential construction spending continues to increase as well, up 8.4% in 2015, according to the U.S. Census Bureau. Construction markets showing double-digit year-over-year increases include lodging, office, amusement/recreation and communication. Private residential construction spending is 29.3% below its peak, while private non-residential construction spending is 4.8% below its peak. Public construction is 8.2% below its peak.
Residential Remodeling Market Continues to Flourish
Remodeling includes both improvements and maintenance and repairs. Historically, spending is traditionally split 80/20 in favor of improvements vs. maintenance. Although remodeling projects use less adhesive than new construction, it is still an area of significant adhesive demand.
Currently, many homeowners are spending on improvements instead of upgrading to a larger residence. For the last two years, spending on remodeling has been growing about 10% per year. The long-term trend of homeowners moving away from do-it-yourself (DIY) and hiring others for projects has resumed after reversing a bit during the recession.
August 1, 2016 – The transportation and construction sectors led adhesives and sealants growth in 2015
By A. Todd Muhleman, The ChemQuest Group, Inc.
The ChemQuest Group estimates the global adhesive and sealant industry to be approximately $53 billion at the end of 2015, comprised of $46.3 million in adhesives and $6.5 billion in sealants. This figure represents an increase of 3.5% in 2015. The adhesives market is approximately seven times larger than sealants in terms of value.
Breaking sales out by region, North America, Europe, and Asia each make up are about equal in size, with the remainder (10%) split between South America and the Middle East/Africa (see Figure 1). In North America, sealants were 1.14 billion lbs, while adhesives were 7 billion lbs for 2015. In terms of revenue, the adhesive industry is nearly $16 billion and the sealant industry is about $2.4 billion. Gross domestic product for the U.S. was 2.4% in 2015, flat with 2014 and for the sixth year in a row under 3%. In line with the lower overall economic growth, we expect the industry overall to grow about 1.5-2.5% in volume (at or slightly higher than GDP) with an additional half a percent in pricing for overall growth of 2-3% in terms of value. Sealants are expected once again to outpace adhesives because of their position in construction and transportation (which make up 95% of sealant demand).
Among the individual market segments in North America in 2015, packaging was up slightly, consumer and product assembly were relatively flat, and transportation and construction were strong. The two sectors that really shined were transportation and construction. Auto and light truck sales were up 8.5% to 17.4 million units in 2015, marking the sixth consecutive year of sales increases. Total new construction was up 10.6% in 2015, with new single-family homes up nearly 15% from the previous year. The outlook for 2016 continues to be favorable; we expect to see growth (although muted) in all sectors.
Looking at the macro demand drivers for adhesives and sealants, the industry faces generally positive fundamentals across the markets where they find use. Improved construction standards enhance sector penetration, with significant interest from civil engineering applications for infrastructure repair. The 2025 Corporate Average Fuel Economy (CAFE) standards for autos is bringing more composites and plastics to save weight, which also results in the need for more non-mechanical adhesive bonding applications between dissimilar substrates.
Finally, while price increases for 2015 were muted, margin expansion for adhesive formulators was favorably impacted by lower raw material costs as oil fell dramatically (see Figure 4). Although oil has recovered recently, it’s unlikely to return to its highs of over $100 a barrel anytime soon, which bodes well for manufactures of formulated adhesives.
June 1, 2016 – Transferring laboratory development into a real-world environment
The adhesives and sealants industry has a continuing need to close the gap between formulators in the R&D laboratory and end users in the manufacturing and applications environment. Surprisingly, these disparate groups may be worlds apart in terms of day-to-day experiences and expectations regarding product performance. A variety of methods can be used for success in the final stages of the new product development cycle, in situproduct testing (including application procedure optimization) and end-user training as part of commercialization.
ARDEX uses its technical department to bridge the gap between formulators and applicators.
In the coatings industry, testing the application process and educating customers in dedicated facilities is commonplace among multi-national companies. Last September, PPG announced the establishment of an applications testing and training facility in Wisconsin, in addition to the expansion of its Allison Park, Pa., applications laboratory, while The Sherwin-Williams Co. has had three separate technology centers in operation for several years. The objective of these captive facilities is to test, optimize processes, validate quality and train the sales force. Importantly, these are also places where the companies can engage with customers in a setting that replicates an environment similar to what is found on the manufacturing floor without the inconveniences of borrowing production time at their customers’ expense.
The concept of testing within a replicate manufacturing environment is not as common for the adhesives and sealants industry, for a variety of reasons. For instance, the high level of confidentiality in the handheld device and display market makes gaining access to the production line more challenging, according to Daniel Hanscom, global market application engineer at Henkel Corp. Often, parts are not made available for hands-on testing in advance of production. In these cases, companies like Henkel must rely on their history of formulary success to recommend suitable products and best manufacturing practices. Alternatively, Henkel’s customers can elect to purchase a complete solution that includes the adhesives, dispensing and curing equipment, and robots that can be programmed to ensure application success in the production line.
In the medical device industry, the adhesives supplier and parts manufacturer achieve a higher level of collaboration due to biocompatibility needs and inherent liability concerns. Device manufacturers and adhesive formulators work together to specify products and conduct parallel testing, including accelerated aging to determine the long-term reliability of the recommended systems. These markets may welcome a non-captive, third-party facility that could assist with optimizing application procedures and validating performance.
Once a product has been proven under laboratory conditions, companies may conduct trials with beta customers to get rapid feedback on products before they are launched to the broader market. According to Dave Woodcock, Huntsman Corp.’s advanced materials market manager for structural adhesives, these trials provide real-world, production-line verification of recommended processes and solicit first-hand responses from the customer.
Another way to close the gap between the formulator and the end user is to conduct thorough product knowledge training sessions, often in a dedicated training facility. This type of training can be an important differentiator that builds loyalty and can reduce potential product claims due to misuse or non-standard application methods. For high-performance and differentiated applications such as aerospace, Huntsman conducts extensive hands-on, multi-day training sessions where distributors “roll up their sleeves and apply actual product.”
“A picture may be worth a thousand words, but if you smell, roll out and work with the adhesive, it is worth a million words,” Woodcock said.
In field applications, intensive training is critical because the installer becomes the standard-bearer and ad hoc representative of the brand. That is why ARDEX uses its technical department as the bridge between the formulators in the laboratory and the applicator or floor covering installer. According to Seth Pevarnik, director of technical service at ARDEX America, when the R&D laboratory develops a new product, they provide samples to the technical department to be applied and evaluated to make sure it performs to the customers’ expectations.
To ensure that ARDEX truly understands the mindset and drivers of their customer, the company hires ex-installers as technical service consultants and technical field representatives. These industry veterans are responsible for the product training sessions conducted daily in the company’s six training facilities across the U.S. and Canada. The two-part sessions are split equally between classroom presentations and physical demonstrations where installers can learn proper application techniques by working with the products themselves.
Adhesives formulators that may not have internal access to a dedicated applications and training facility also have options. Application equipment manufacturers such as Graco, Nordson and PVA allow companies to use their equipment and facilities for training purposes. Given the demand and benefits of a robust process optimization and commercialization program, we foresee the emergence of independent organizations to provide these services to the market in a non-captive arena.
In my 30 years as a senior materials engineering manager with Navistar International, a truck and engine OEM,conventional automotive and truck body manufacturing plants predominantly used 1K epoxy structural adhesives dueto their superior bonding performance and manufacturing-friendly properties. The adhesives’ cure is facilitated by the presence of an electro-coat (e-coat) epoxy prime system that is cured at similar temperatures by design. However, many commercial vehicle body manufacturers that are unable to justify the capital equipment expense of a full immersion e-coat system are not able to take advantage of the processing and performance benefits of 1K epoxy structural adhesives. In fact, the manufacturing of a school bus body assembled with mechanical fasteners and 2K epoxy or methyl methacrylate (MMA) structural adhesives is one such example that kept me up at night.
The assembly techniques that school bus body manufacturers use have changed little over time, compared with those of other vehicle body manufacturers. The bus bodies are constructed with flat sheet steel that is pre-coated on a roll coating line. Stamped parts that cannot be pre-coated are individually primed. While fastening methods commonly used in assembly vary by OEM and by application, standard methods for school bus bodies include welding, semi-tubular rivets, self-piercing rivets, sheet metal screws, pull rivets, and pin/collar bolts.
School bus joints must be in compliance with FMVSS-221 (a federal motor vehicle safety standard) and thus require a stiff, high-strength adhesive (typically achieved either through a 2K mixed system or 1K high-bake system). Practically speaking, regulations governing this bonding application mostly preclude the use of elastomeric adhesive/sealant systems unless strengthened with a higher number of mechanical fasteners. This regulation has not kept up with advances in understanding crash worthiness, bonding technologies, materials engineering and other safety improvements.
Table 1. Structural adhesive joining systems chart:
The unmet need that kept me awake at night actually stems from the open assembly time (i.e., the period immediately following the application of the adhesive to the substrate through to the end of the adhesive’s ability to bond). Current 2K structural adhesive joining systems have a finite open assembly time. A typical commercial vehicle body assembly plant has a continuous run of the main line and many of the feeder lines. A curing adhesive changes the sequence of assembly, requiring the line operator to prematurely close out assembly work in some sections of the line, or even to strip a line (i.e., pull product ahead of sequence in order to halt operations in the entire line or sections of the line). Unfortunately, this requirement can be disruptive to “normal” assembly line operations, but the alternative may produce poor joints and possible non-compliance with a safety standard if the joint is not completed in this window. While no longer keeping me up at night (given my recent retirement from Navistar), ongoing pressure to reduce cure temperatures of e-coat prime systems (and subsequently the heat available for curing the 1K epoxy structural adhesives) continues to be felt in transportation markets such as automotive OEM manufacturing. The driver is the automotive OEM’s desire to use more composites and thermoplastic materials, which are prone to damage with exposure to high bake temperatures, in vehicle body construction to meet the industry’s future lightweighting requirements.
While perhaps an obvious solution from the commercial vehicle OEM’s standpoint, the structural epoxy innovation has not been easy to come by because the market demand by volume for lower temperature-cure epoxies has been insufficient to merit attention by adhesive formulators without the support of automotive OEMs. Dow Automotive responded to my requests on behalf of Navistar and has demonstrated significant progress in developing low-temperaturecure BETAMATE™ epoxy adhesives that may someday solve the aforementioned problems in school bus body assembly applications, as well as provide opportunities to automotive OEMs for using lower heat resistant body materials. Automotive OEMs can benefit from lower cure temperatures with broader material usage and lower energy costs. In the commercial vehicle sector, OEMs are seeking to lower their total applied costs, but that does not necessarily equate to a requirement for lower per-pound prices for structural adhesives. When an OEM switches from a 2K to 1K system, waste is greatly reduced, quality is improved, and superior joining methods become available, paving the way for a greater freedom in body design and improved efficiency in vehicle body assembly operations, which adds up to a significant benefit that can offset the higher cost of the adhesive materials.
Available through the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED®) program, LEED v4 is the newest iteration of a benchmark standard for high-performance green buildings. The LEED v4 standard is vastly different from its predecessor (LEED v2009) with respect to volatile organic compound (VOC) emissions compliance in building construction. Eligibility for earning a LEED v4 “Low-Emitting Materials” credit requires that a project team have the collective body of knowledge and experience to stay below the required threshold emission levels of interior coatings applied on-site in a residential or commercial construction project, combined with three other interior low-emitting material categories: adhesives and sealants; flooring systems; and composite wood. Hospital and school construction projects have added criteria that must be factored into emissions threshold levels to include the category of ceilings, walls, thermal, and acoustic insulation, as well as that of exterior applied products.
Within a building interior, the threshold levels of LEED v4 compliance include total VOC emissions, as well as “general emissions.” Achieving the “Low-Emitting Materials” credit earns a project team up to three points toward certification under the new rating system.
Can a lack of product knowledge when combining the stated three low-emitting materials be a barrier to attaining the credit on certain projects? Is the typical project team equipped with individual(s) who have adequate knowledge of both adhesives and coatings technologies to properly evaluate interior applied products, given that traditionally these products are used by different types of applicators and end users? An understanding of to what degree coatings practitioners (e.g., painting contractors) lack the necessary information on adhesives products to properly assess adhesives’ emissions when pursuing the “Low-Emitting Materials” credit is necessary. Moreover, what steps can be taken to ensure the appropriate information is accessible to those who need it?
Involving the Entire Team
David Ryker, chair of the Board of Directors for the Painting and Decorating Contractors of America (PDCA), believes these questions may have merit for PDCA members. PDCA comprises a diverse membership of 2,000 contractors in the U.S. and Canada that specialize in residential, commercial, and industrial painting. From a marketing standpoint, some of the owners of the contracting firms that belong to PDCA—those principally involved in commercial painting as opposed to residential painting—like the idea of having a successfully completed green building project for the professional credential that it earns them. In fact, Ryker, founder of the Midwest Decorating Co. Inc., a mid-sized commercial painting contracting firm based in Indianapolis, Ind., that has been owned and operated by the Ryker family since 1966, periodically encounters the need for green building credentials in his own business.
Given that PDCA’s main thrust, according to Ryker, is education and training for its contractor members, delivered through expos and PDCA’s online Contractor College, it may make sense to investigate the need for adhesives product information for PDCA members (as well as similar organizations that serve the needs of coatings practitioners) to satisfy the LEED v4 “Low-Emitting” Materials credit requirement.
Adhesives and sealants manufacturers need to first understand how a project team typically makes its product decisions. Is it the building owner who is making the decisions, or the architect/designer? While the building owner will need to stay informed on all decisions related to the construction project, the final decision is far more likely to be made by the “AP” (accredited professional). The AP, with varying degrees of knowledge and prior experience specifying adhesives and coatings, will either contact vendors directly with questions pertaining to the materials and their respective ingredients, or do their research online.
Ultimately, the size of the project budget determines the types of professionals who can be hired and, subsequently, the methodology by which those professionals assess emissions threshold levels that influence adhesive and sealant product buying decisions.
May 1, 2015 – If you believe your product or service is a commodity, then you are helping to make it a commodity
By James (Jim) E. Swope, The ChemQuest Group, Inc.
I hear many salespeople complain that their product has become commoditized. This can be one of those “perception equals reality” traps; that is, if you believe your product or service is a commodity, then you are helping to make it a commodity.
So what is a commodity? Many definitions are possible and can change in context; for our purposes, let’s assume commodities are products or services where the customer enjoys freedom of choice with little negative impact by switching suppliers. In essence, price is controlled by the buyer. This condition pushes price discussions to the forefront, and competing suppliers engage in a race to the bottom, gutting the business of profit.
How do you avoid becoming a commodity or create enough valuable differentiation that you can earn more profit? The customer, or at least the buyer, benefits when you think your product is a commodity. Talking to the actual users of your product will tell you things a buyer might not want you to know. If you are supplying a component to a formula, changing the source of the raw material may change the reaction due to slight chemical or physical form differences. If you supply an adhesive to a manufacturer, changing adhesives can have big impacts on dispensing, curing, substrate interaction, and more. Unless that customer can trace a failed assembly all the way back to which adhesive was used at the time, they may never be able to finish a root cause analysis.
These are all costs and risks that can negate price reductions negotiated with purchasing. Speaking with the actual users provides other insights, even if your product can be freely substituted with a competitor’s product. To get the best price, we typically drive customers to buy the biggest package in the biggest quantity they can absorb. This can lead to product shelf-life issues, difficulty handling the larger packaging (e.g., drum handling vs. pails), waste due to internal repackaging, and loss of lot tracking capability.
In chemical businesses, waste reduction represents a tremendous opportunity for value addition beyond the obvious environmental consideration. On many occasions, I have had companies tell me that disposing of a product costs more than buying the product in the first place. Working with the customer to “right size” your product to their needs increases your value and puts your competitors in catch-up mode. Your solution may present a situation that your competition cannot or will not compete with because of their organizational structure.
In my first sales position out of college, I sold a true commodity chemical used in industrial processes. My competition in this arena was also my supplier; thus, I did not have much pricing control. Working at a small company, I was responsible for managing the delivery schedules of our union truck drivers in the region. Efficient use of those resources could make the difference between a good month and a bad month. Trucks returning with residual material in their tanks continually frustrated me. As an experiment, I approached a very large user sold by my competitor/supplier and asked if I could have my trucks empty there at the end of their delivery runs. I was prepared to work on very skinny margins, but I was surprised to learn that to get the best price, they constantly ran the risk of running out of material because they had to take a full tanker load. A tanker used almost all of their storage capacity. Running out of product incurred huge losses in downtime and restart costs. In the end, we negotiated a 20% increase in price for a guarantee that they would never run out and my company would manage the inventory. The competition did not have the infrastructure to compete with this arrangement. My need drove me to have a conversation about my customer’s needs that I should have had in the first place.
The simple lesson is that you must be talking to the people who actually use your offering. If you are a facilitator in commoditizing your product or service, then you are also facilitating your own job elimination. As margins erode, the cost of your position will rightfully draw scrutiny. Management may first increase the size of territories or look to other markets, but once commoditized, the incremental value of additional customers declines, too. Before you know it, management will have figured out that a website with technical data and ordering information is all they need.
March 2, 2015 – Historically, adhesives and sealants have been growing about one-and-a-half times of the gross domestic product in the U.S.
By A. Todd Muhleman, The ChemQuest Group, Inc.
Coming into 2015, the U.S. adhesives industry looks to continue its recent trend of lower-than-normal volume growth. Historically, adhesives and sealants have been growing about 1½ times of the gross domestic product (GDP) in the U.S. Since 2008, however, that figure has declined to one or even slightly less than one times that of the GDP. Reasons include: new construction representing a lower percentage of the U.S. economy, a slowdown in the substitution of mechanical fasteners to adhesives as the industry matures and, until recently, a lower number of U.S. auto and light truck assemblies.
Housing and Construction
The U.S. housing recovery continues but at a frustratingly slow rate. After reaching a peak of greater than one million new single-family units sold in 2005, homebuilders are struggling to sell even half of that number today (see Figure 1). In 2014, the number looks to have been about the same as 2013, with 430,000 units sold.
Some of the decline in single-family housing is due to an expansion of multi-family units, as the number of renters has been growing. Home ownership rates have declined from a peak of 69% to under 65% presently.
Construction can also be broken down by public vs. private and residential vs. non-residential. In general, non-residential construction makes up about two-thirds of the total value of construction annually. Similarly, private construction makes up about two-thirds of the annual value of construction. Nine years after peaking at $1.2 billion, construction still has not fully recovered (see Figure 2). In 2014, the total value of construction spending looks to have finished at $1 billion.
Crude Oil and Natural Gas
Historically, raw material costs for adhesives formulators are the largest component, representing about 52-60% (vs. 45-49% in the coatings industry) of income, and more than 80% of the cost of goods sold (see Figure 3). Given that a large percentage of raw materials used in making adhesives derive from crude oil and natural gas, the adhesives and sealants industry is sensitive to their movement.
The second half of 2014 saw crude oil prices decline more than 40%, while natural gas prices have fallen by about half as much. It generally takes four to six months for these prices to work their way through the supply chain.
Figure 4 shows the relative change in oil production by region from 2006 through 2013. Why did oil get to its current price level so quickly? It’s a stretch to say that a drastic change in supply or demand over the last few months is the reason prices fell so dramatically. Instead, it’s more likely that market expectations have changed. OPEC has, so far, not cut production in response to the price decline. Instead, the lower prices are expected to force many of the smaller U.S.-based shale producers out of business. Many are highly leveraged and have made capital expenditure decisions based on the expectation that prices would be higher than they are now.
As forecasters continue downward revisions to the average price per barrel, the futures market indicates lower prices for crude oil and natural gas for at least the next two or three years. If prices do stabilize at current levels, consumer spending may increase due to lower prices at the pump. In fact, most estimates predict that the drop in prices could add an extra 1% to the U.S. GDP in 2015. I hope that proves to be the case.
May 1, 2014 – Companies need to tell the whole story when they are marketing “green” product attributes
By James (Jim) E. Swope, The ChemQuest Group, Inc.
Green, bio-based, renewable, eco-friendly—no matter which label we attach, the current marketing buzz is about environmentally conscious products. With that much buzz and growing demand, how hard can it be to sell green solutions? As many companies are finding out, there are more barriers than one would think.
Mention the words green, renewable, or eco-friendly during most interviews, and you will be met with eye rolls or the verbal equivalent: a sigh. Why is that? The reasons are numerous and will change depending upon your market and your product, but here are some thoughts and tools.
One of the first barriers is cost. Few green alternatives are equivalent or less expensive on a unit-comparison basis. Only about 5% of buyers in the consumer market would be willing to pay more for an eco-friendly solution just because it is eco-friendly. Those buyers view a 10-15% premium to be reasonable. The higher the premium, the more restricted the market.
For business-to-business sellers, the target narrows even more. Your target needs to have a market that demands eco-friendly solutions, and your product needs to make a significant contribution toward that goal. For example, if the goal is to have greater than 50% renewable content, and you supply an adhesive that is less than 0.05% of the total weight of the assembly, testing and implementing your product will not be a priority.
You can play up your green impact by attaching cost savings to specific features. If your product lowers energy costs, reduces the use of facility resources, or increases durability, highlight the financial impact of those features to change the evaluation from unit cost to total cost.
Perhaps the biggest hurdle is the hype, misinformation and greenwashing prevalent today. Snake oil may be bio-based, but it is a pollutant in sales and marketing. Most people want to do the right thing, and reducing environmental impact is considered to be a good outcome. The problem lies in separating truth from embellishment.
One notable consumer website offering “green” products extols the energy-saving features of compact fluorescent bulbs (which contain mercury), while simultaneously condemning the use of disposable batteries because they “add mercury and other heavy metals” to the waste stream. Both claims are true, but both also left something out. The first claim never mentions the need to handle fluorescent bulbs differently to minimize the negative impact on landfills. The second claim fails to address the question of disposal for rechargeable batteries that also contain heavy metal contaminants.
In a better example, nicotine-based insecticides have become popular with green gardeners as a natural alternative to synthetic chemicals. To their credit, most proponents of this method note the potential for nicotine poisoning and how to avoid it. In doing so, they are educating people regarding safe use and that “all natural” does not equate to “all healthy.”
Effective Eco-Friendly Marketing
One of the first things I do when engaging with a new client on market strategy or business development is look at the messaging of their major competitors. Are they educating the market or deceiving it? Do their claims have supporting data? Believe it or not, stronger competitors that educate the public are better for you. Educators grow the market, while misinformation damages the market. In the current state of rampant over-marketing of “green” attributes, the challenge is to re-educate your potential buyer. If you let yourself become part of the “green noise,” your company and product will be lost.
These suggestions are basic marketing approaches, but they seem to be overlooked when promoting eco-friendly products and services:
• Know your customer/market and their needs.
• Target your message to them in their terminology.
• Support your claims with technical documentation.
• Quantify your value proposition.
So what am I proposing? Be honest. Tell the whole story. An informed customer is a good customer. Be a company, a brand and a person that can be trusted. What do you think of the company that labels marshmallows as a certified fat-free food? Do you want a reputation for hiding the whole truth? If your product or service has a hidden risk or cost, it will appear at some point as a deception, and your market will have permanently decreased by one.
March 1, 2014 – About Predictions
By A. Todd Muhleman, The ChemQuest Group, Inc.
On a daily basis, television, newspaper, and radio fill their programming with “experts” who are all too eager to prognosticate where the stock market will be in 12 months, how quickly the sea will rise in the next 100 years, or who will win the Super Bowl and why. One thing they have in common is that nearly all will be wrong — and by a large margin. Even the ones who “got it right” are usually not as accurate as they appear; a closer look shows that even the small-number predictions that seem to be correct are often only partially right. Research has shown that humans are terrible at dealing with and understanding uncertainty.
Despite an abysmal record of prediction, year after year people continue to listen to “experts” explain why their latest prediction will come true. In reality, it is confidence, factual knowledge and communicative ability that give rise to the popularity of experts, not their forecasting abilities. The proliferation of data available to use for forecast modeling hasn’t increased the reliability of forecasts all that much. Paradoxically, behavioral research has shown that more data can make prediction less reliable; it is more likely to lead to overconfidence than it is to increased accuracy.
Forecasting Errors and Alternatives
It is one thing to listen to predictions for entertainment, and another to make major decisions based on forecasts that turn out to be woefully incorrect. Whether a prediction by the Federal Reserve, the International Monetary Fund, the bond rating agencies, or an acquisition evaluation, forecasts of complex systems inevitably turn out to be incorrect. The real-world systems that humans are most interested in predicting are often nonlinear and dynamic in nature. Those two conditions can be too complex to model accurately, and errors in assumptions can and do lead to gigantic forecasting errors.
For example, the Congressional Budget Office issues annual 10-year baseline projections for federal spending and receipts. In January 2001, the forecast was for a cumulative surplus of $5.6 trillion for the years 2002-2011. However, the projected surplus over that period actually turned out to be a $6.1 trillion deficit, for a total variance of $11.7 trillion.
If it is next to impossible to model an accurate forecast of complex issues, what is the alternative? First and foremost, it is necessary to recalibrate how to think about forecasting. Learn to embrace and incorporate uncertainty into the forecasting process rather than accept the human tendency to provide “the answer.” At The ChemQuest Group, we have included this approach into our Decision & Risk Analysis (D&RA) Toolbox. It is what we use to aid decision making for considerable investment decisions with a high degree of complexity. Examples include major capital expenditures, potential acquisitions and new product development.
The toolbox contains nine tools (see Figure 1). The first three steps in the toolbox frame the problem. The framing stage raises important issues, creates a wide range of alternatives and provides the framework for analysis.
The next three steps quantify risks and uncertainties. One prevalent tool contained in these steps is the influence diagram. An influence diagram depicts relationships among all the variables and decisions that will ultimately impact the decision criteria. Another tool is the “10-50-90” analysis. It requires experts to assess the probabilities of impact that each variable has on uncertain events. At a 10% probability, the expert’s estimates reflect a one in 10 chance that the real value of the uncertainty will lag his/her assessment. At 90% probability, however, the expert’s estimates reflect a one in 10 chance that the real value of the uncertainty will exceed his/ her assessment.
The final three steps perform sensitivity analysis, generate a range of outcomes and apply the decision criteria. The sensitivity analysis shows precisely how decisions change as values and probabilities vary. The sensitivity analysis focuses the entire organization on those variables that have the greatest influence on the bottom line. It directs effort toward resolution of a small number of critical uncertainties responsible for a large percentage of total risk.
Another key decision-making tool is the decision tree. The decision tree defines the chronology in which decisions are made and integrates the entire analysis in a recommendation based on probability. Together, decision trees and influence diagrams can help decision-makers evaluate the range of possible strategies and scenarios to reach the best decision. The final step applies the decision criteria to the full range of probabilities to develop a risk profile. It plots the distribution of decision criteria, such as profitability, showing the probabilities associated with each profit level.
Our methodology is certainly not the only or necessarily best way to bring more robustness to decision making. The advent of excellent analytical tools, such as Palisade’s @RISK Monte Carlo simulation software, has made modeling complex decisions and probabilistic outcomes much easier and more prevalent in the corporate world. While the @RISK software allows an easy input of probability distributions for uncertainties, we still prefer to use the triangular distribution from our “10-50-90” analysis. It’s a time-consuming exercise, but it teaches participating groups (e.g., R&D, marketing, production) to critically reevaluate and recalibrate their assumptions about uncertainties, as well as to buy into the output of the final decision.
Incorporating a robust methodology to deal with uncertainty does not necessarily lead to accurate forecasting and optimal decision making. There will always be the unknown unknowns that former Secretary of Defense Donald Rumsfeld talked about: events that almost no one will see coming that dramatically affect the future and can’t be foreseen (i.e., black swans). However, by gaining a better understanding of the nature of uncertainty and incorporating it into the decision-making process, it is possible to do a better job with the known unknowns.