The Chemical Industry Is Divided in 2 Parts, Low-Cost Commodity Providers and Providers of “Capability”
By Aaron Hand
If there were an award for most compelling session title at this week’s Emerson Exchange, it would probably go to Jos Berkien and Chris Hamlin, who put forth, “The Death of Quality and the Manufacturing Abyss.” The reality of the presentation was a little less stark, but nonetheless compelling.
Hamlin, marketing director for global chemical industries at Emerson Process Management,” and Berkien, expertise leader of the instrumentation and automation department for AkzoNobel Engineering & Operational Solutions in Arnhem, The Netherlands, presented the “thought experiment. “We believe some of it; we don’t believe other bits,” Hamlin said. “We’re not going to tell you which is which.”
The point about quality, however, has to do with the bifurcation of the chemicals industry and the death of quality “as we know it.” There was previously a continuum within the industry that ranged from large manufacturers producing high volumes of chemicals with cost as the only differentiating factor, on through to specialty manufacturers with differentiated products made in low volumes at a high price. Today, the two extremes still exist, but there is a chasm in between where there once was a range of intermediate chemical suppliers, Hamlin said.
“They thought they were a chemical company.” AkzoNobel’s Jos Berkien, together with Emerson’s Chris Hamlin, discussed the split of the chemicals industry into low-cost commodity providers on one side and providers of “capability,” not chemicals, on the other.
Quality, he contends, is no longer a relevant factor. On one end, the supplier is trying to be as big as it can be to dilute fixed costs. It needs to make products “just good enough” to meet spec, because too much quality is not cost-effective. What’s happening on the other end of the spectrum has more to do with delivering agile capabilities, integrating specialty products into the supply chain to provide solutions at the point of use. There’s no longer a premium offered for “quality” products because it’s services that are being offered these days. Instead, quality is simply a means for the supplier to drive consistency or lower its service costs.
AkzoNobel is the largest paint and coating company in the world and is major producer of specialty chemicals. By way of example, it now offers remote-controlled chlorine production (RCCP) facilities placed at customer sites. Rather than ship chlorine as a product to its customers, AkzoNobel provides chlorine services, making sure chlorine is readily available at the customer’s site.
“It’s a complete factory, but it’s on the customer’s site,” Berkien said. “Traditionally, we would transport the chlorine wherever we needed to.” Now, however, the customer wants the chlorine as a service, available as needed. “We are linked with them, with their control system. When their production goes up, we can put our output up as well.”
There’s a similar situation in the adhesives end of AkzoNobel’s business. Rather than selling furniture adhesive to Ikea as a product, for example, AkzoNobel now provides a complete gluing service to the furniture retailer. “We have the machines to glue all their wood together,” Berkien said. “We’re responsible for making sure the system is running. And we have to take care of the waste also.”
“What I’ve talked about conceptually is actually happening in reality for them,” Hamlin said. “They thought they were a chemical company.” Instead, the model has changed, and they’ve begun selling capability rather than products.
Hamlin and Berkien contend that the automation industry could go the same direction as chemicals. To serve low-cost, high-volume chemicals manufacturers, automation suppliers could just be tasked with keeping a plant running. Automation is not a core competency for these manufacturers. On the other end of the spectrum, “Flexibility and agility is a competitive advantage,” Hamlin said. So those manufacturers are likely to keep their automation competency in house.