The Chemical Company Is Dead

Long live the solutions provider

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I spent some time thinking about the business of chemistry and how the chemical industry is reorganizing itself. If you didn’t already know, DSM is divesting a significant portion of its remaining materials business to Avient for $1.8 billion dollars. DSM is still looking to sell its engineering materials business to someone if there is a buyer. DSM will focus on the “high value” biologically focused portfolio of enzymes, food/feed additives, and “health” end markets. This sort of situation with DSM is commonplace right now as companies try the answer the question of: 

Who Are Ya?

I tend to think of chemical companies as excellent actors across the globe (that’s why I include this clip of Tom Hiddelston doing accents). Chemical companies can conform themselves to local regulations, deliver on what is important to local stakeholders, while also doing their part in contributing to the bottom line of the company as a whole. Chemical companies subdivide themselves into business units that organize around a specific end market or sometimes around a specific type of chemistry. The business unit model enables companies to buy and sell specific types of businesses or chemistries as they decide who they want to become.

Business units are often fully self-contained so that when a business is bought or sold they are almost like these modular units that fit into a new company. All of the functions from R&D to sales to regulatory compliance to operators to process engineers are contained within the business unit and are run like mini-companies within a larger company. If you want to read more about business units this is a good place to start. The strategy of business units can make gigantic chemical companies feel relatively small.

DSM’s business units

While I do not think the concept of business units is going away I do believe that chemical companies that might have had four, five, or six business units will start to downsize into just a handful. Three feels like a good magic number.  Let’s use DSM again as an example:

DSM currently has 5 business units:

1. Nutritional Products

2. Food and Beverage

3. Hydrocolloids

4. Engineering Materials (up for sale)

5. Protective Materials (sold to Avient)

By divesting the two materials business units DSM seeks to gain simplicity. Instead of having to explain how they are in two completely different end markets they are really a chemical company focused on the nutrition industry and thus can be considered a pure play. There is also an underlying idea that these business units will theoretically find synergy or collaborative efforts provided the management teams can foster the necessary communication and collaboration. 

DuPont is already doing something similar with their business. They also have three business units now:

1. Electronics and Industrial

2. Mobility and Materials

3. Water and Protection

If it seems like these business units are broad it’s because they are broad. DuPont is still actively figuring out which parts of their business to divest, which parts to invest into, who they should acquire, and who to divest. To me it seems that they are not interested in being a true chemical company, but rather a specialty systems and solutions provider to their customers.

I suspect some chemical companies are trying to reposition themselves to be the “white knights” that enable climate change solutions to happen. Great examples would be epoxy resin producers enabling wind turbine blades or recyclable wind turbine blades, turning post consumer waste into chemicals, and moving operations towards net-zero emissions.

The future of the chemical industry is one of smaller companies that are specialized into very specific niches and verticals. Each company might have 2-3 business units, but I expect that they should be somewhat related to each other. When a shareholder inquires about “who are you” to a board or CEO of a chemical company it won’t be “we are a chemical company,” but rather “we enable X to happen.” 

Tony