Me Too and Cost Cutting

June Specialty Chemicals Issue

Source

One thing that was brought to my attention in comments on previous things I’ve written here is the concept of small tweaks to specialty chemical products and treating it as something new. The supplier gets to say it’s a new product while likely cutting costs and the customer if they are not careful ends up paying the same or more for something that now costs less to produce. This is primarily what happens when short term financialization is prioritized over long term investment and growth in my experience in specialty chemicals anyway.

The other thing that can happen is 3-4 big specialty chemical players in a particular market enjoying 20% margins in a particular specialty area, but then a new competitor enters the market with additional capacity in lower wage areas with a very close equivalent product or a “me too.” This can initiate what is considered a “race to the bottom” scenario where pressure to reduce margins on products occurs or alternatively this results in campaigns for reducing as much operational waste as possible. These programs are often led by black belt Six Sigma engineers that look to maximize efficiency in production operations while also maintaining high quality.

There is nothing wrong with cutting costs out of your supply chain or working towards manufacturing excellence in the short term, but if you have no defined long term strategy then you have already lost. A competitor who is playing on a 10 year time horizon as opposed to a two year time horizon will eventually gain the lead. The development of a specialty chemical product takes at least 2 years before it can get commercialized, maybe 1 if you get really lucky. It might take another 2-3 years for a customer to fully adopt the new product and then another 5 to get significant volume out of that product and to shift the market away from the incumbent technology. Patents only last 20 years.

Short term volatility in a chemical company can also create instability which leads to labor deciding to change jobs for greener pastures. Chemists and chemical engineers are inherently risk averse and if they can’t see a future within a specific industry they will exit the business either under their own power or by cost cutting initiatives (see above and article on layoffs). At will employment cuts both ways and as labor finds better opportunities at competitors with long term vision then the short term focused players ultimately lose. Chemical executives might have long term vision, but if it's not communicated then it doesn’t exist. Need to do a regulatory approval? Add in another year at least. If it takes 10 years to hit a home run product in specialty chemicals and 80% of your product development labor force turns over every 2-3 years what does that say about long term viability of your business?

Low raw materials costs and demand are back for now as well as inflation and high shipping costs. I expect many senior leadership teams at chemical companies are asking their product teams to look at how to remove costs to combat inflation and high shipping costs. Domestic manufacturing for certain things may no longer exist due to the cost of labor scenario outlined above. Once again short term strategies will become the focus. If you have been quietly innovating over the last 10 years this might be your time to capture new customers while the incumbents are scrambling to cut costs more than they already have.

One of my older coworkers used to tell me you can't cost cut your way to profitability. I think you can, but it's not a sustainable business model for the long term. This is why mature chemical companies who are not in a monopoly or duopoly position fail. New chemical product development is difficult and it takes a long time with a high performance team.

It’s easier to cut costs, make small tweaks, and write about how amazing and innovative you are compared to the competition. 

When the tide goes out we get to see who has been swimming naked. 

Tony