In its recent study, Capital-efficient Chemical Companies, global management consultancy Arthur D Little (ADL) analyzes capital strategies of the world’s top 70 chemicals players. It finds that those firms able to manage their capital expenditure (CAPEX) during the past decade’s economic boom are now looking beyond the downturn to strategically repositioning themselves for future growth.
According to the study, both capital-intensive enterprises with broad, multi-chemical portfolios and basic chemical manufacturing firms are more likely to weather economic downturns than labor-intensive specialist chemical companies. Because of their highly specific cash flow needs, multi-chemical and basic chemical producers have a better grasp on managing their capital efficiency than the less capital-intensive specialist firms.
The study urges chemicals companies to merge two basic businesses processes—margin improvement and fixed asset optimization—to achieve successful long-term growth. Businesses realize lasting margin increases through a combination of price increases, cost reductions, optimizing raw material costs, and changing their product and services mix. Equally, optimizing fixed costs can be tackled in a number of ways, including introducing lean manufacturing principles or relocating to more efficient production facilities.
However in most chemical companies margin improvement and optimizing fixed assets are not synchronized, and often conducted in isolation from one another. While profit optimization and a change in the product mix can be realized quickly, improving capital efficiency is a long-term undertaking. This leads to inefficient investment planning, hurting otherwise profitable chemicals businesses.
For chemicals companies looking to reverse their fortunes, ADL’s report outlines three potential strategies for chemical companies to overcome the current crisis: optimizing, expanding, and surviving.
Download the report at www.adlittle.com/capitalefficient.