China’s growth and past capital investment mean that China accounts for a higher proportion of the total revenue of multinational chemical manufacturers. Of the total sales of China’s top 15 multinational companies, 7.5-50% come from China, while smaller companies tend to invest more actively.
Large multinational chemical manufacturer is not waiting. China’s growth has led to additional investment in petrochemicals, basic chemicals, polymers and specialty chemicals – including Dow’s US $8 billion to US $10 billion coal based chemical project with Shenhua Group, and DuPont’s joint venture with Chenguang Chemical Research Institute to produce fluororubber.
Chinese enterprises are also growing, and have made a lot of capital investment at home and abroad. In 2010, the revenues of state-owned enterprises such as Sinopec, PetroChina, CNOOC, Sinopec and Sinochem Group all increased by more than 30% year on year. Thanks to the support of the government, these state-owned enterprises have almost unlimited budget to carry out their own strategies, carry out international expansion and improve their competitiveness. The competitive position of multinational companies is becoming more and more difficult, not only in China, but also possibly globally.
As the chemical industry has become increasingly prominent in China, the rules of the game have changed – much more suddenly than many people working in global headquarters understand. Multinational chemical manufacturers, which have a large number of businesses, are now competing to a greater extent in an unfair competition environment. Their state-owned competitors (as well as China’s private enterprises with extensive contacts) are directly or indirectly supported by governments at all levels.
Such support includes direct subsidies and access to low-cost funds on preferential terms and conditions. Chinese companies may also benefit from less stringent enforcement, faster approval cycles, and privileges in land, water, waste disposal, energy and raw materials. The competitive position of SOEs may also change abruptly as government policy makers encourage them to make significant capital investments overseas, merge with competitors, or set up new facilities that may be designed to replace the capacity or exports of TNCs.
The cost of raw materials and energy obviously plays an important role in the chemical industry. Prices are rising and very volatile. As China’s already increasing demand for oil imports becomes greater, supply problems are a major risk for multinationals. State owned enterprises usually have priority access because they have access to capital, making it easier to cope with supply shortages, rising prices and market volatility. In a short period of time, there is less pressure to pass on the price rise of raw materials to end customers. Driven by profits, multinational companies need to pass on price increases more quickly.
Access to oil is now – and probably still – tightly controlled by the government, which is also trying to ensure a stable supply in the international market through contracts, investments and acquisitions.
In the medium and long term, multinational companies can become an alternative way for state-owned enterprises to obtain reliable oil resources through international contracts, ownership and relationships, so as to stand out.
For chemical manufacturer operating in China, the government’s policies are complex, even in the best of times. Government agencies have a strong influence on the economic system, and the size of the country leads to additional investment from national, provincial and local governments.
The Chinese government plays many roles, while in other countries, many are played by the private sector. In China, the government is a regulator, a lender, an investor, a land use planner, a municipal service provider, an industrial policy maker, an investment bank, a political organization dealing with employment and health issues, and a standard setter.
With the increase of water resources and land restrictions, as the central and provincial governments debate on environmental standards and local requirements to solve the problem of migrant workers’ mobility, policy makers will more decisively reshape the industry, and multinational companies can not afford to wait and see.
Investment decisions encouraged or required by the government are usually strategic. For example, the government has increased the capacity of the shipbuilding industry, exceeding the expected demand. Whether it is the preemptive strategy to fight against competition or the radical measures based on the long-term development of the industry, it will have an impact on multinational competitors.
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