Feature article - Remaining competitive in the transition to sustainability

Georg Winkler, a senior partner at McKinsey & Company, and Alexander Kei, a partner at the firm, explore how sustainability can secure the competitiveness of Europe’s chemical industry*

In the 20 years to 2020, the European chemical industry delivered strong financial performance, providing total return to shareholders (TRS) similar to its North American peers and higher than Asian peers. However, since 2020, chemical companies in Europe have fallen behind their global competitors.

The cost of materials and labour has increased throughout the industry and EBITDA margins are declining. This has had a significant impact on companies operating in Europe. Couple this with rising natural gas prices and European chemicals organisations are facing a tumultuous time.

While gas prices have already come down from record-high levels in Europe in fall 2022, they are still and could remain significantly above pre-crisis levels with continuing high volatility, since gas shortages could persist until 2025. This has left many in the industry wondering what it will take for European chemical businesses to stay competitive.

There are four intrinsic strengths chemical and other can companies in Europe can build on, replicate and leverage in the future: size and stability, ingenuity, diversity and sustainability.

What is the opportunity?

As the second largest single market in the world by GDP, Europe’s chemical industry has revenue of about $500 billion and benefits from seamless intra-trade agreements and a stable political environment. In addition, Europe’s cultural diversity also provides its chemical industry with a natural advantage.

With almost 30 countries, 24 languages, and a good standing when it comes to the gender gap in the workplace, European chemical companies have experience operating across many countries, with a diverse management team and workforce. This is valuable knowledge that can support seamless expansion into America, Asia or other regions.

Europe’s innovation capability is on par with that of Asia and North America. With comparable investment in R&D and patent registrations, European chemical companies are displaying strong innovation prowess. The region’s business environment is also proving to be conducive to nurturing chemical start-ups.

One reason behind this is that European companies tend to operate in smaller home markets compared to their North American counterparts. As a result, European players have acquired a better grasp of local consumer needs, enabling them to tailor their products to meet those needs and gain a competitive edge.

Crucially, Europe is at the forefront of global sustainability efforts, seeking to create a climate-neutral environment by 2050. Brand owners in consumer-facing industries are fast to reduce their carbon footprint and the indirect emissions that occur within the wider supply chain. Since these industries are typically all customers of chemical companies, there is growing demand for chemical companies to decarbonise their own operations.  

Many of the top 20 to 30 players in the European chemical industry have already committed to ambitious science-based sustainability targets. And new opportunities are emerging for chemical companies that can meet demand for more sustainable chemical products from regulators, customers and consumers.

How sustainability can boost competitiveness

Chemical players have a variety of investment options to strengthen and maintain their competitiveness, especially in areas like decarbonisation and circularity. For example, a rigorous focus on embracing the latest approaches in digitalisation, analytics and enterprise agility could improve energy performance and support chemical companies in taking steps to decarbonise existing assets and processes.

Our experience shows that chemical companies can save up to 10-20% on energy spending and 10-40% on the energy they use. Such steps could also deliver 10-20% in throughput improvements and 10% in yield increases.

Alongside taking steps to decarbonise existing assets and processes, European chemical companies can reassess their product portfolios and develop new sustainable solutions. Given green chemical supply shortages and high demand from consumer and automotive companies, market indications show temporary premiums will be available for sustainably made chemical products. However, being a first mover will be critical as green resources, like renewable feedstock, may be scarce.

To prepare for the major shifts to come, European chemical companies could consider what to keep, what to decarbonise, what to relocate and what to sell. There may also be an opportunity for to upgrade their capabilities in pricing, branding, marketing, and go-to-market initiatives for sustainably made chemical products. Finally, the changes in energy supply, sustainability regulations, global supply chains and other factors could lead to a major shift in value pools, creating an opportunity for new chemical products or businesses to emerge.

Decarbonisation of power, low-carbon mobility, circular products and packaging, and low-carbon agriculture and food supply are just a few of the new value pools. While scaling these businesses will take time, it will be important to identify opportunities, develop business blueprints, and design ambitious scale-up plans early on.

Transitioning to sustainability

Business leaders should not underestimate the scale of the challenge for the European chemical industry. The next few years will be difficult as alternative gas and other energy supplies are ramped up. Besides focusing on sustainability and taking advantage of Europe’s size and stability, ingenuity and diversity, the industry will have to pursue operational performance improvements to remain cost-competitive in world markets. These improvements include embracing the latest approaches in digitalisation, analytics, and enterprise agility and building resilience in the physical supply chain.

In addition, companies could transform and redefine the industry, with fast execution and agility, doubling down on green business building and partnerships to capture new value pools, while developing a competitive strategic advantage using their knowledge advantage in decarbonisation, toxic-free environments and sustainability commercialisation as regulations catch on in other geographic markets. A strong chemical industry is vital for Europe, and Europe is vital for the chemical industry and its transition to sustainability.

* - Acknowledgments: The authors wish to thank Eren Çetinkaya, Jakob Fischer, Avinash Goyal, Andreas Seitz, and Theo Jan Simons for their contributions to this article