media release Globalization raises more challenges for Coatings February 03, 2000 What are the forces driving globalization - the shrinking of the world through free trade, free flow of capital, the fall of the Berlin wall, and the creation of the European common market, of NAFTA (North American Free Trade Agreement) and similar developments in Asia? What are the forces driving globalization - the shrinking of the world through free trade, free flow of capital, the fall of the Berlin wall, and the creation of the European common market, of NAFTA (North American Free Trade Agreement) and similar developments in Asia? These developments have consequences for our industry. As customers become international, as they move out across the globe, our suppliers are following them. So we also become international. Increased mobility in all respects is the name of the game, for example, the quick spread of best practices. And of course that has given rise to new and less predictable competition and - on the whole - a less certain and continuously changing future. Companies, brand names and labels which were once competing in the marketplace are now part of a single group. This is happening not only in the automotive industry, where a truly Swedish company like Saab now belongs to General Motors, and Ford has joined with Jaguar, Volvo and Mazda, but elsewhere as well. A few years ago, who would have thought that furniture trading would become an international business, on the scale of what Ikea is today? That company is now one of the biggest global consumer merchandisers, and of course, if you are a supplier in the wood coatings industry, you have to follow them around; they are practically everywhere. The DIY market is not going to stay local either, as you can see from the evidence of B&Q and Castorama. Before coatings companies go international, they have to think carefully about how far to spread. If you are a European company like Akzo Nobel, you have to decide if you want to be in North America. Although the market is very mature, there is a lot of pressure to be there. You simply feel that once you become international, you must be there. In addition many best practices originate from the US. The exception in this regard might be Japan, which is often instinctively perceived as a difficult place in which to operate, although the reality may be different. Then there are the emerging markets - Asia Pacific, Latin America and Eastern Europe. These are very important regions of activity for our industry, because the rate of growth can be higher there than in the mature markets. Even taking account of the crisis in Asia, we are no doubt going to see more growth in these areas over a longer period of time than will occur in mature markets. However, development in emerging markets is not going to be smooth. Recent crises in the tiger economies and in Russia are two good examples. Another one is the development of the decorative coatings sector in Poland. That country used to be, essentially, a local paints market. Now the biggest company there is Kalon Total, and Akzo Nobel is the second largest. Other big players are also there (ICI and Beckers, for example). All are trying to introduce new ways of working in that market, which is difficult to achieve. The attempt by all the big companies to penetrate the market has resulted in quite some turbulence, including price wars and other problems. This is nothing new. Large-scale entry by an outside player can undermine the stability of a marketplace. It has happened even in the US decorative coatings market, and can occur in emerging markets as well. Another point to note is that acquisitions not only change the geo-mix of multinational companies in a very short time but also give them quick large-scale access. The company changes, and there is also an impact on business climate of the regions in which their presence is expanded. More focused So what type of evolution do we foresee in this industry? Nordsjö provides a good example of how things have been developing. Nordsjö with its nice, 300,000-square-meter plant, was one of the three leading Swedish paint companies in 1982, with 80 per cent of its business being decorative coatings. It had a strong position in Sweden and, like most other Swedish companies, exported on a small scale to Norway, Finland, Denmark and Germany. Norway wasn’t too bad, but the rest of these export sales were nothing to brag about when it came to profitability. In addition, there was a profitable industrial activity, with a broad product portfolio - a whole bundle of activities - but living in the shadow. Today, things look very different. Nordsjö is a dedicated deco activity, being part of a decorative coatings business unit within Akzo Nobel, and thus has a much more international focus. The industrial activities have been split up, partly divested, partly integrated in different product/market segments of our industrial business units. The plant is split into two, one decorative and one industrial. This is a common trait in the market. Local companies like Nordsjö, with their broad portfolios, are broken apart to become more focused. The parts, which remain as core business, selected segments, become international. However, not only smaller enterprises are affected. Broad product lines are transformed into focused activities when big enterprises come together. All this causes a tremendous momentum of change in the industry. In this world of big players, is there room for small and medium sized enterprises? Definitely! It is very difficult to run a big company with the same flexibility and efficiency as a small enterprise. Smaller firms function very well in penetrating niche markets, and generally have qualities such as entrepreneurship, a spirit of service, devoted ownership and creativity lacking in some big firms. In the changes now underway in the industry, big companies are bound to continue splitting off niche areas into which smaller firms can move. Evolution Over the years, we have developed paints with reduced solvent content; we and our customers produce also less waste. Layers have become thinner. Fewer layers are needed to achieve the same result. In general, this means that the market has expanded, but mainly with regard to covered surfaces. In terms of actual volume, there is a decline in many areas. This becomes a problem when we face up to this question: what compensation do we receive for providing this service? The technological evolution that has occurred over the past few years has meant solvent-based paint being substituted, to a great degree, by waterborne coatings, high solids, radiation curing systems, and powder coatings. But when we talk about fewer solvents, less waste, thinner and fewer layers, all of this leads to one direction – lower volumes. Another evolution has taken place in terms of application. Only one of the application methods is product-oriented: powder coatings. All the others are application oriented. The coatings industry in general is not very good at predicting where things will be moving in this respect. An example is the plastics coatings business, which has grown tremendously over the last few years. It has done so because the automotive industry has shifted its habits into that area. That is obviously a good situation for those companies, which have been in plastic coatings. Looking at powder coatings, this was considered for a long time as an environmental niche product. Today, in markets such as China, powder is not viewed in terms of eco-efficiency at all. It derives its popularity from the fact that it’s the cheapest and best way to coat metal surfaces. Another example is impregnated paper. This is a thin paper which when pressed on a flat board takes millions of square meters out of the coatings industry. Coil coatings, of course, has been stealing a lot of market share from conventional general industrial coatings. If in future you want to be successful in coatings you have to succeed in being where the new applications develop. Concentration If we look back on where the coatings industry was in 1986, the outline is roughly as follows. PPG was the biggest, followed by ICI, which by then had not finalized the acquisition of Glidden. Hoechst was still in the paint business. Today, with the acquisition of Hoechst/Herberts by DuPont and Courtaulds by Akzo Nobel, the change is dramatic. While in 1986, the biggest paint company had sales of 1.2 billion Euro, today the turnover is around 4 billion Euro. This change is of course not only the result of organic growth but the tremendous momentum provided by mergers and acquisitions. Akzo Nobel, Sherwin Williams and ICI are strong in Deco sales. However, interestingly enough it’s the industrial coatings companies which are becoming stronger, and reaching impressive size: Dupont/Herberts and PPG in particular. Many of the Top Ten companies are still regional, even while showing strong ambitions to become international. Sherwin Williams is one example. Sigma/Kalon (Total) remains European while showing ambition to become a stronger international Deco company. Japanese firms like Kansai and Nippon are international but stay very much in the Japanese tradition. The North American coatings industry is by far the most concentrated, with 60 per cent of sales in the hands of the ten biggest companies. It has been this way for quite some time now, whereas Europe has recently got from the 30 per cent margin to 50 per cent. In my view this can partly explain the better profitability of the US companies, since I believe profitability and structure go hand in hand. Europeans are struggling with radical changes, giving US based companies a major advantage. In my view profitability is freedom. In that area, US companies are much better off. Their rates of profitability are more than 15 per cent return on sales, whereas European companies usually get to about 8-10 per cent. The American style of management also tends to give an advantage in terms of profitability. And profitability leaves room for acquisitions. It is not a technology contest, but a race for market coverage. Questions such as how strong the distribution channels are, how a company’s network functions, how efficient the customer is reached, are vital to the success. This clearly means that size is important, if an enterprise wants to become and stay one of the three or four leading global companies in a certain market sector. But in order to achieve this status, they must have sufficient size, width, and the necessary financial resources. The future The internationalization of the coatings industry will continue. This means that key account management will also become more and more important - moving much closer to the customer, becoming more international. Only big companies have sufficient critical mass to build and use production sites with a large output. They can use their increased purchasing power a lot smarter and much more aggressively and they can standardize and they can improve their flexibility. In the end, this will also mean increased focus. In the area of industrial coatings, segments such as wood, marine and protective coatings will become increasingly independent. Trucks, automotive OEM, heavy machinery, car refinishes, household appliances and coil are forms of specialization. For the future, most companies will have two basic options. One is to go into low cost products with good/right technology. There will always be people in this industry who move in that direction, which is certainly one way of earning one’s keep. However, I would like the coatings industry to focus more on the added value its products provide. The coatings industry has the skill to change the world of our customers in a very professional way. This will become easier as customers become bigger and more streamlined. They will benefit from a coatings company with enough critical mass. A typical example of this is the automotive OEM, where paint companies have taken over responsibility for the whole coating process, instead of just supplying cans of coatings. But we can also add value in terms of interior and industrial design. Why leave the business to someone else? It is the coatings industry that has all the know-how in place and can make use of it. But we must become more fashion-oriented, taking note of trends and working with them. Other industries have shown how this can be done: we should move beyond merely selling paints. We need to offer customers a better living environment. Much of the volume we sell, for example, in decorative coatings is standard white. However, it should really be something more, which could be antique white, and there is much more room for color in our environment. What is the consequence of this? We have to become better at marketing, using interior decorating, industrial design, fashion and even art as vehicles. This does not mean we should forget that our products also protect the surface and that they are cost-efficient. But they also change our environment, give style to the way we live and influence the way we feel. A world without color is unthinkable – and color means the products of our industry.