Doing Chemical Business In China And Asia With Dan McLeod

Updated: Jun 2

TCSP Patrick | Executive Recruiting

A lot has changed in these recent years for the chemical industry when doing business in China and Asia due to the changing regulations and globalization. Now that China continues to become more and more self-sufficient, chemical companies are called to embrace adaptability and versatility in the future. Joining Victoria Meyer is Dan McLeod of East West Associates to explore the industry's current status in the Chinese setting. He looks at the topic from various perspectives, from the alarming environmental regulations that cause shutdowns and relocations, the many adjustments in logistics, to the country's call for more local business leadership. Dan also talks about the impact of the COVID-19 pandemic on the chemical industry in China, exploring the many opportunities western companies can still find there after a challenging time.


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Doing Chemical Business In China And Asia With Dan McLeod

I am delighted to have with me Dan McLeod, Director of East West Associates. Dan has a long history in the chemical industry and, throughout most of his career, has spent a lot of time working in Asia. We're going to have a great discussion about doing business in China and Asia as a chemical company and learning a bit more about what East West does to help facilitate that. Dan, welcome to the show.

Thanks for having me. I've been in the chemical industry for the better part of 40 years. I started in operations and engineering and had several roles in the US and around the US. In 1997, I moved to Shanghai. I was with Hercules Inc. at that time and we were building our first facility in China. I went on to manage that effort. I went there for a two-year assignment and stayed for 21 years. Thirteen of it was in China. Also, I covered the region of Singapore for about seven years. I spent a little time in the Philippines as well. Mostly in an engineering operations management background. I managed capital projects. I had a little bit of experience running businesses at the time.

For the last few years, I’ve been working with East West Associates. East West started in China in 2005, working with manufacturing companies primarily that were trying to enter the market. If they had been in the market and they were having operational issues, performance improvement, needed to develop their organization, find people. Also, risk management concerns, fraud and corruption investigation and background checks. It’s a whole range of operational services focused on China. We've expanded beyond that into Southeast Asia, Mexico and Central Europe. We have a chemical practice that we've started up and I'm running that. That's focused on China and Asia. We’ve gained experience in those markets and people I've worked with over the years.

China is a critical market for chemicals both from an end-user perspective but also a lot of growth going on in China. Can you talk about that at all?

It's a $1.5 trillion market. It's larger than the US and EU combined and has been growing. When I was first there, growth rates were substantially starting from a relatively low base mostly in the commodity and basic chemicals. Starting in the late ‘90s, you started to see more specialty chemical investment. Over the years, the growth rate is about 15% a year from a relatively small base. Now it's bypassed the US and North America. I mentioned the specialty chemical sector because early on, many foreign companies, particularly Western companies, were going there to participate in that space. Those gross growth rates have tailed off and are now more tracking with GDP, 5% to 6% a year. That's still a substantial growth rate.

Given that they’re industry-based, it's still a lot of growth.

The industry is a bit different than other parts of the world. It's a mix between state-owned enterprises, which are large and, in some cases, designated national champions, which are being promoted. Our growing domestic private industry sector and Western or other multinational companies are playing there. It's a little different. It’s a fragmented marketplace, although that's changing. You've seen a significant amount of industry consolidation over the years but it's still relatively fragmented and immature from a market standpoint.

TCSP Dan | China And Asia
China And Asia: It's not necessarily that the Chinese environmental regulations are more stringent than in the US or Europe, but the enforcement has been much more aggressive.

Another change that's different from other industries in China is there's little export from China to the rest of the world with chemicals. There are some but it's not a major part of what they do. It’s primarily for domestic consumption. If you went back years ago, there's significantly more import into the country than there is now. It's becoming a much more self-sufficient industry. You see US and European companies do export into China but it's a much smaller fraction of the industry than it used to be years ago.

That seems to be by design for China, which is a great opportunity there but also a challenge for all of the businesses. If I think about the petrochemical boom that’s taken place in North America. A lot of that product is destined for China. As China becomes more self-sufficient, it's challenging to that market and to the producers that are, hopefully, depending on that or presumed that they will have that growth there.

Beijing thinks about these things long-term. The objective is very much to become self-sufficient in all strategic sectors in the economy and the chemical industry is part of that. Particularly, when you talk about specialty in fine chemicals and more cutting-edge technology, that's where there's an emphasis out of Beijing to become more self-sufficient in that field.

You guys do a lot of work in East West with Western companies that are doing business in China or wanting to do business in China. Given this drive towards self-sufficiency, what are the challenges for international companies that are doing business in China or wanting to do business there?

There's a number of them. We'll start with one major challenge that's particularly impacted the chemical industry and that's around regulatory affairs and environmental awareness. It's not necessarily that the environmental regulations are more stringent than you've seen in the US or Europe but the enforcement of them has been much more aggressive. It’s much less of a collaborative relationship between regulators and industry.

Whereas years ago, if you had an issue, you could talk to your local regulators and you could figure out a solution to it and you work towards a resolution. Now, it's much more inspect, shut down until you fix your problem, call us when you think you've got it fixed and we'll talk about restarting. That has hit several industries and it's certainly across the industry but not just Western companies but it has an impact.

With Western companies, generally, your compliance activity is strong. You got good compliance. It tends to be hit a little bit hard from a shutdown perspective. Where it impacts companies in the chemical history and across the industry is on your supplier base. If you have key suppliers that are domestic companies and maybe they don't have the regulatory awareness of the compliance stature then they're going to be hit. That's going to cripple your business potentially. From a regulatory standpoint, that's what you see.

China is a $1.5 trillion market, larger than the US and EU combined, and it has been growing.

Do you see that there's genuine progress being made? I think about the regulatory, pollution, sustainability and all the environmental aspects. Is it to improve their environmental profile? Is that what's going on?

You see that in the quality of life. The most visible and obvious one is air quality, which years ago, was a huge issue and much less of a concern now. Years ago, everyone had an app on their phone that would give you real-time data on the particulate emissions in the air, for example. Whether you were red, yellow or green, over a couple of years, you can see that dropdown. You can see the progress on this. That was one indicator. They've made progress in improving the environment there. The challenge is around the relationship between regulators and the industry.

It sounds like there's a bit more animosity versus collaboration.

We’re starting to see that around.

What other challenges do you see international companies having in doing business there?

Many manufacturing companies have been concerned about cost increases, the cost of labor has grown. In the chemical industry per se, it's not a labor-intensive operation. The cost of labor is not a huge driver of what people do. However, many people find, chemical or specialty chemical sectors, their customers are being impacted by that. For example, the textile industry, textile manufacturers, leather manufacturers, they're leaving China. They've left China. They've gone someplace else.

TCSP Dan | China And Asia
China And Asia: Progress in improving the environment in China has been huge. The challenge is around the relationship between regulators and the industry.

Where are they going?

Primarily to Southeast Asia. They're focused on low labor costs. In the textile industry, you see a lot in Vietnam. Because they've established a garment sector where they are high labor, they're also trying to move upstream to the textile sector. Chemical companies are finding that, in some cases, their customers are leaving or being impacted more than they are per se by cost pressures. Another area that has been a concern for many years and improvements have been made but it's still a long way to go is around IP protection.

There is IP protection and the courts will listen to foreign companies when they bring suits. In favor of foreign companies, they will award if there's an issue. The problem with that is the penalty to someone who's appropriated your technology is not sufficient enough to discourage them from continuing or to start in the first place. The legal recourse is better than it used to be but there's still not enough of a disincentive to do that.

That's been a hard area for a long time, such as the lack of IP protection, enforcement and then the dilemma, particularly a lot of chemicals. There is a lot of proprietary technology that goes into the manufacturing processes, etc. Exposing that IP, that know-how, etc., is always a concern. I've worked with some companies that are pretty tech-heavy and technology licensing and elsewhere and they have to think twice as they enter the Chinese market. It's an attractive market in many ways and yet it's also a challenging market in terms of defending your position.

The rule of thumb that I've heard over the years for a Western company when they're thinking about bringing newer technology is maybe we can protect it for five years. It's unlikely we'll be able to protect it any more than that. That's how you weigh it. If we think the payoff and the risk of losing it after five years are still going to pay off, we bring it in or we don't. We’ll figure another way around it.

One of the things you and I've talked about previously is that there also seems to be pressure on at least some of the smaller and more established chemical operations that are being forced to relocate. Can you talk about that?

As the industry grew, a lot of entrepreneurs jumped in. I was involved in an acquisition of a chemical company. The owners came from the motorcycle business and they had money. They had no experience in the chemical industry but it seemed to be a place where they could make some money. A lot of people jumped in without necessarily a lot of background. Where are they located? It was a variety of industrials zones, some general-purpose, some focused on the chemical industry. Much of the industry, particularly the smaller players, moved into general-purpose industrial zones. Those sites did not necessarily have the infrastructure in terms of wastewater treatment or energy supply that you would need in the industry. Often, they were sited in urban sprawl. They began to approach them. Those sites were inappropriate.

Economically, in the manufacturing and industry, things got back to normal in China by the summer of 2020.

Several years ago, Beijing started to look at both consulting industry and forcing companies to move into specialized chemical parks. That sounds like a good idea from an environmental and a safety standpoint. The difficulty is now you've got companies that are in the wrong location. Many Western companies find that the facilities that they had purchased, maybe they purchased a local company, now they were operated. They’ve taken the operation. They were faced with having to relocate. You don't get your relocation expenses fully reimbursed. You can negotiate something but it usually doesn't cover the cost. They've been faced with those costs and decisions whether to move and where to move and your options are limited.

Let’s say you have to go to a chemical or a chemical park. At the same time, the government has acted on the poor performing parks and closing those down. There's a shrinking supply of those zones. The ones that are remaining and the ones that are run professionally and run well can be choosier in who they allow getting in. What you see is the more well-established, well-run professional zones, larger ones that would be attractive to Western companies. The price of entry has got to be high where they're not interested. In many cases, they’re not interested in projects that are less than $50 million or over $100 million. The small to medium-sized specialty chemical company that's trying to find a place to set up shop, they're struggling.

They're getting squeezed out a bit. Are they establishing themselves elsewhere? Are they simply shutting down? What is it that you see? I know you get involved in some of this.

It's a combination. Some people walk away from the operation and most don't because the market is large. They find themselves having to move further away from the major population centers than they'd like. You can find professional well run zones further West or further North from the economic centers in East China, Shanghai and the Yangtz