The global chemical industry is currently facing significant challenges, with declining revenues and shrinking margins becoming the norm. A primary factor contributing to this downturn is China’s aggressive expansion in chemical production, leading to an oversupply of alternatives at much lower costs. This situation serves as a critical wake-up call for chemical industry executives to prioritize operational efficiency and initiatives focused on improving Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
The Impact of China’s Oversupply and Low-Cost Production
China has solidified its position as a dominant force in the global chemical industry. In 2022, the country accounted for 44% of global chemical production and 46% of capital investment in the sector. This rapid growth has been fueled by substantial investments and a vast labor pool willing to work for lower wages, enabling Chinese chemical companies to produce and export chemicals at significantly reduced costs .
The influx of low-cost Chinese chemical products has led to a global oversupply, exerting downward pressure on prices and squeezing profit margins for chemical companies worldwide. This oversupply has been particularly detrimental to companies in regions with higher production costs, such as Europe and North America, where energy prices and labor costs are substantially higher.
The Need for Operational Efficiency and EBITDA Improvement
“In this challenging environment, chemical companies must shift their focus from traditional growth strategies to enhancing operational efficiency and improving EBITDA. Many companies have historically operated with outdated work management processes, sub-optimal tools, and disconnected systems, leading to significant inefficiencies,” states Innovapptive CEO and Co-Founder Sandeep Ravande.
Studies indicate that approximately one-third of maintenance costs in the chemical industry are unnecessary or improperly executed . Addressing these inefficiencies presents a substantial opportunity for cost savings and margin improvement.
Avoiding the Allure of Flashy Digital Projects
While digital transformation is essential, many chemical companies have been sidetracked by flashy projects that offer little in terms of tangible ROI. Investments in technologies like Digital Twins and DataOps Platforms, Augmented Reality/Virtual Reality (AR/VR), AI Powered Connected Worker Platforms solving for Skills & Knowledge with basic Work Instructions, and Artificial Intelligence (AI) agents often lack a clear connection to EBITDA improvement.
Consulting firms such as McKinsey and Bain advise that digital initiatives should be closely aligned with operational goals. For instance, digital manufacturing transformation projects focused on work management process transformation can lead to a 15-30% reduction in maintenance costs and a 10% increase in overall productivity. Therefore, chemical companies should prioritize digital projects that directly contribute to cost reduction and efficiency gains.
Real World Impact: $8M – $12M/Annualized Savings in a Single Site
A notable example is a $24 billion chemical company that implemented Innovapptive’s solutions at one of its plants. The results were impressive:
These improvements underscore the potential of targeted digital initiatives to drive operational excellence and EBITDA growth.
Setting Clear Goals for Maintenance Spend Reduction
Given that up to one-third of maintenance spending is considered wasteful, chemical companies should set clear objectives to reduce maintenance costs by at least 10%. Achieving this requires a comprehensive approach that includes:
The current challenges in the chemical industry, exacerbated by China’s oversupply and low-cost production, necessitate a strategic shift towards operational efficiency and EBITDA-focused initiatives. By addressing long-standing inefficiencies and aligning digital transformation efforts with tangible operational goals, chemical companies can enhance their competitiveness and ensure sustainable grow in a rapidly evolving global market.
