The Top Challenges in Developing Specialty Chemicals (and How to Overcome Them)
- September 11, 2024
- Blog
The market for specially formulated chemicals that improve safety, enhance sustainability, boost performance, and more is primed for strong global growth over the long term. However, to find lasting success, entrants may face a handful of obstacles particular to this sector of chemical manufacturing.
A seasoned partner like Seatex with premium experience, quality management, and physical assets to put at your disposal can help you weather these challenges and innovate your way to being a market leader.
Here’s a look at four common hurdles in specialty chemical development and what it takes to rise above them.
Supply Chain Vulnerabilities
Specialty chemicals are often complex mixtures of a number of different chemicals, which themselves may be classified as specialty chemicals. For example, one popular brake fluid contains:
- benzotriazole, which is synthesized by treating o-phenylenediamine with nitrous acid
- formaldehyde, which is used in a wide variety of industries including medicine, agriculture, food, and waste treatment, in addition to automotive
- diethanolamine, used increasingly by the construction and agricultural industries but also in personal care, cleaning, pharmaceutical, and other products
- C10-14-tert-alkyl and other amines, derived from ammonia and widely used in various manufacturing processes.
A drop in supply (of these chemicals themselves or in commodities necessary for their production, such as natural gas) and/or price hike in any one of these raw materials exposes the brake fluid manufacturer to the risk of production delays, reduced margins, or both. Meanwhile, it must compete with demand from businesses in all those other industries for feedstock chemicals like methanol, which recently saw a price surge due to low-level inventories.
How to Overcome Them
An optimized supply chain is one that’s resilient, and optimizing your supply chain is all about being proactive. Look at your sourcing–do you have all your eggs in one, offshore basket? Engaging closer suppliers with strong surge capability and capacity helps insulate you from disruptions, as could devoting some R&D into using alternative, easier-to-source ingredients in your products.
What about your on-site supplies? Just-in-time inventory has its benefits, but resilience against supply chain disruption is not one of them. In uncertain market periods, increasing your raw materials storage space and stocking it with “buffer” materials could prove to be the best investment you could make.
And don’t forget about AI. Predictive analytics software can help you predict market trends and plan your purchasing accordingly.
Crowded Markets
To return to our example of brake fluid, a new market entrant would be up against names such as Exxon Mobil, Shell, Castrol, Dow, BASF…all globally recognized brands that have been marketing automotive brake fluid for decades, in many cases. Within the industry, they are competing for market share in essentially three main types of brake fluids: DOT (U.S. Department of Transportation) 3, DOT 4, and DOT 5.1. (DOT 5 is recommended mainly in classic car restorations and extreme military or industrial applications and is the least commonly used.)
This level of competition is the case in many–but not all–specialty chemical categories, especially in ones that are projected to see strong growth for years to come, as brake fluid is. As more competitors enter the market seeking their piece of that pie, finding unique selling points becomes harder.
How to Overcome Them
Your preferred business model will likely dictate how you approach the challenge of differentiation. Do you want to go after “the big boys” head-on with your version of a popular chemical and try to beat them on price? Or are you interested in developing a high-dollar, low-volume product aimed at a specific niche or demographic?
If you fall into the former camp, emphasizing other aspects of your company such as customer service can help separate you from huge multinational corporations with indifferent and/or offshored customer support. If you fall into the latter camp, market research will be necessary to forecast what the market will bear in terms of pricing compared to the performance improvement your chemical can offer.
Of course, a truly innovative new specialty chemical can create its own market in which its manufacturer is the only participant, although this is easier said than done…
Commoditization of Specialty Chemicals
As consulting firm PWC pointed out in a 2010 report entitled “Future of Chemicals III: The Commoditization of Specialty Chemicals,” the benefits of being a first-mover in this industry can be short-lived. Lured by the promise of large profits even at prices that undercut the original innovator, new competition floods into the market, turning products that once were seen (and priced) as special into just one product among many others like it, aka a commodity chemical.
Too often, companies respond by pulling back on R&D to cut costs, beginning a vicious cycle of spiraling away from innovation toward commoditization. To quote the report:
“The result is too much money and effort targeted at selling commodities, which hurts profit margins, while new product development lags, leaving the portfolio woefully shy of critical high-margin specialty items.”
How to Overcome It
The analysts were saying it in 2010, and they’re saying it now: customization can help you carve out market share with products designed for a specific target, such as paint for an individual automaker. But this is primarily a stop-gap approach–new entrants won’t be able to match your industry expertise to beat you there, but ultimately they will follow.
So devoting resources to ongoing development of products with strong business potential is critical. This doesn’t necessarily mean new products; for example, adjusting formulations to incorporate greener ingredients is a proven strategy yet one that is still fairly wide open to take advantage of. Digital tools such as AI software pose a cost-effective way to conduct R&D without making major outlays that may lead to dead-ends.
Staying nimble and being willing to change your operating model–even at the individual SKU level–once it becomes clear a specialty chemical has become commoditized is also important. This includes minimizing costs and adjusting your marketing to meet the needs of customers of differing regions and applications, especially their desire for standardization and simplicity.
Regulatory and Sustainability Pressures
Products with a gentler environmental impact are in demand from pretty much every quarter, from customers to hedge funds to governments. Each group puts pressure on chemical manufacturers in their own way, but it’s arguably the regulatory burden that’s the most burdensome for chemical manufacturers.
The American Chemistry Council recently put the costs of regulations facing the chemical and plastics industry at nearly $7 billion annually. Also recently, specialty chemicals industry group SOCMA (Society of Chemical Manufacturers & Affiliates) laid out five of the most pressing regulatory issues facing its members today. Among them were:
- “perpetual slowdowns” by the Environmental Protection Agency (EPA, which together with the Food & Drug Administration regulates specialty chemicals) in their reviews, making it “difficult for SOCMA members to commercialize new products and to meet customer expectations;”
- concern that the EPA’s Risk Management Program (RMP) would create subjective standards and wasted resources; and
- potential unintended consequences of the Hazard Communication Standard (HCS), which mandates disclosure of chemical hazards.
SOCMA maintains that these heavy regulations create barriers to entry in the industry, thereby stifling innovation, the lifeblood of the specialty chemicals industry.
How to Overcome Them
The old saying “You can’t fight city hall” is essentially the case here. Use good compliance software and stay current on relevant regulations by utilizing trade publications and memberships in industry groups–SOCMA says it saved member companies 1,000 hours and $45,000 each on regulatory analysis and compliance assistance in 2023.
Seatex Helps You Navigate Your Toughest Specialty Chemical Challenges
With a robust supply network, experience in multiple markets, and capabilities to help develop the most complex products, Seatex can help overcome the challenges associated with developing specialty chemicals.
