Several world leaders in specialty chemicals have, over the past 12 months, announced plans to increase their fixed asset investment in Southeast Asia’s booming personal care market, underlining their growing strategic commitment to this emerging region.
Swiss company Clariant has unveiled plans to build a new production facility at its existing Tangerang, near Jakarta, site in Indonesia, while Germany-based Evonik Industries has expanded its production capacity in Bekasi, which is also in Indonesia – in West Java.
It is no secret that sales of cosmetics, soaps, perfumes, skin care and hair care products have been growing rapidly in recent years across the ten-member Association of Southeast Asian Nations (ASEAN) bloc. Indeed, the five largest ASEAN members – the Philippines, Thailand, Vietnam, Malaysia and Indonesia – achieved a combined market size of Japanese yen ¥943bn (US$7.63bn) in sales in 2013, according to Tokyo-based market researcher Yano Research Institute.
Investment by specialty chemical companies supplying the personal care industry has followed.
The focus of this locally added production capacity would be on surfactants – key ingredients in many consumer care products from hair conditioners and cosmetics to fabric softeners and household cleaners. Specifically, Clariant announced in an October 2014 communiqué that it will be producing surfactants esterquats and methylquats, while Evonik seeks to enhance the supply of betaine/sulphosuccinates, cationic surfactants, ester/amides and alkoxylates – all surfactants too.
“The installation of our new production facilities in Asia [in Bekasi and also in China’s Shanghai] will enhance Evonik’s ability to share its latest innovations with Asia’s personal care and home care markets, based on a highly competitive platform achieved through close proximity to both raw materials and customers in Asia,” says a note sent from Evonik’s Personal Care Asia Pacific unit in response to a query from SPC.
“These two projects not only strengthen our global production platform but also position us well to increase our long term competitiveness significantly in this key market,” the unit adds.
Other Europe-based chemical companies with substantial production of specialty chemicals for personal care products in the ASEAN region are the UK’s Croda, as well as German companies BASF and Henkel.
Why ASEAN?
That said, industry experts speaking to SPC could not divine any trends or rules over whether it makes sense to move production of ingredients for personal care products to ASEAN countries from Europe, the US, Japan or China, which are all much bigger markets after all. What is clear, however, is that the ASEAN zone has a huge population, exceeding 608 million, and that the underlying drivers for continued growth in the future are readily identifiable. Market researcher Frost & Sullivan points at macroeconomic factors such as rising incomes, strong GDP growth and demographics boosting consumer spending.
“Age is also a factor to be considered because the middle aged population, aged 40-64, is expected to grow rapidly in ASEAN,” explains Kaushal Mathur, Senior Consultant at Frost & Sullivan in Malaysia.
“The substantial young population in the region is also expected to drive demand for personal care products targeted at youth,” he elaborates.
Mathur adds that these factors combined meant Frost & Sullivan forecast that the ASEAN personal care market would grow with a CAGR (compound annual growth rate) of 7% between 2013 and 2017.
He said that the top two end-use segments are hair care and skin care, comprising about 55% of the overall personal care market.
Consultants to the chemical industry believe that specialty chemicals manufacturers are also drawn to the region – particularly to Indonesia – by the availability of palm oil. Palm oil is readily transformed into alcohols, which are then turned into the very surfactants that are the heart of personal care products. Palm oil can thus replace the petrochemicals that are commonly used in the west for the same purpose.
“Palm oil is cheaper then petrochemicals if sourced locally, and it is a sustainable raw material unlike petrochemicals,” says Kai Pflug, CEO of Management Consulting – Chemicals, a Shanghai-based consultancy focusing exclusively on the chemical industry.
“Indonesia is also a plausible choice for Evonik’s and Clariant’s new fixed asset investments because its consumer market is large enough to absorb 30%-50% of the produced chemicals, providing economies of scale, while the remainder of the production can be supplied from there to their clients in a range of 2,000km-3,000km,” he adds.
Pflug stresses that the specialty chemicals to be manufactured at Evonik’s and Clariant’s Indonesia production sites are actually standard ingredients commonly used in personal care products as opposed to ingredients for exclusive day creams with clinical trial-proven anti-ageing claims that may sell for unit sales prices of above €50.
“If you only need 1,000 tonnes per year of an ingredient and it is so expensive that you even could bring it in by air freight, then you would only build one plant,” Pflug explains.
“That plant could be anywhere in the world, but for organisational reasons, it would mostly still be located in the US or the EU,” he adds.
Getting competitive
As to whether Evonik, Clariant and other companies will soon suffer from competition in ASEAN by local or Chinese chemical manufacturers, Pflug believes that the European firms do not have to worry much for the time being.
“I assume that Evonik will be more expensive than Chinese competitors, but what if the client finds quality control, technical service and a better contact network to international clients more important?” he asks.
Pflug questions whether Chinese firms would easily produce cheaper specialty chemicals while at the same time managing “to get suppliers’ qualification [approvals] in Indonesia from clients such as Procter & Gamble and Colgate, who frequently send their teams to inspect the plants”.
He adds that production facilities for specialty chemicals employ few workers, meaning the Europeans’ local or Chinese competitors would not be able to obtain significant advantages through paying their employees lower wages.
“If German firms’ regional sales managers are all expats, then there is a cost disadvantage, but they can put up with [it because]… an expat workforce tends to bring along branding advantages,” Pflug says.
Positives and negatives
As to a possible downside to the new European investment, he warns that local rivals might start making certain product segments at a lower price. Talent recruitment for a reasonable cost could also become difficult, Pflug warns.
Meanwhile, another cosmetics industry executive wishing to remain anonymous adds that Asia’s bad track record in terms of IP protection remains a headache too, particularly when it comes to ingredients for very expensive personal care products, such as anti-ageing creams.
Also Frank Steffen, Partner at Roland Berger Strategy Consultants, emphasises that the specialty chemical players’ latest ASEAN moves are not to be seen as them leaving their traditional western bases. Rather, he says, the new investments are an addition of capacity reflecting the trade-off between high logistic costs – if raw materials and ingredients are shipped across the globe – and the effort needed to set up production closer to markets that still grow considerably.
“Precursors and ingredients are crucial for the product’s features and quality, but shampoo consists mostly of water, which is expensive to ship around the globe,” explains Steffen.
“Chemical manufacturers like Beiersdorf and Henkel have long established many production facilities around the globe, where they produce formulations of partly imported ingredients from their overseas plants by using local water,” he elaborates.
Where critical production volumes are met; where quality matters much; where the chemicals must be adjusted to the needs of the local markets; where the chemicals need local registration; and where they can be made with local raw materials, “it makes sense to manufacture them locally, instead of shipping them across the globe”, Steffen adds.
But companies may also have been helped by ASEAN governments hoping to attract foreign direct investment (FDI) to upgrade their own industrial landscape when deciding to invest in the region. According to him, subsidies for plant investments may have been granted.
A personal care product executive, who did not want to be named, tells SPC that it is hardly a secret that Singapore has for decades been showering foreign chemical manufacturers with preferential treatments, such as easier market access, to persuade them to locate on its artificial Jurong island, transforming the city state into a regional hub. Neighbouring countries’ governments are now trying to follow in Singapore’s footsteps, they suggest.
Steffen is among those observers believing that although Asian chemical companies are extending their value chain coverage more downstream and are thus becoming more competitive, their western counterparts will still be maintaining their edge in the ASEAN region as they apply advanced production technology and have long lasting industry know how.
“Of course, this catch-up race started some years ago, but it will take one or two decades,” he says.
Worlds apart
DKSH, a Switzerland-based market expansion service group with a network
of sourcing offices across Asia and strong commitment to the Asia Pacific region, is another company with deep insight into the shifts of the ASEAN personal care industry. In its Asia business, DKSH has been helping European and US personal care brands importing ingredients from Japan and South Korea, but in line with the rising intra-Asian trade in the previous decades, the share of Asian clients the company represents in Asia has increased substantially.
“This is a product of the fact that, on the one hand, the ingredient markets in other Asian countries, such as China, India and in Southeast Asia, have developed and continue to develop, plus, on the other hand, the cosmetic industry has expanded in the markets across Asia,” says Cesar Saez, DKSH Global Business Line Vice President for the personal care industry.
“Asian clients are thus now representing a major portion of our business globally, and we are constantly assessing new opportunities for both innovative new ingredients and new entrants for established materials,” he adds.
As to the role of ASEAN countries as ingredient sources, Saez stresses that there are many different types of products that can be sourced from Asia, and that DKSH accordingly feels that each country has its own set of strengths.
“As the personal care industry thrives on innovation and differentiation, Japan and [South] Korea continue to be the leaders in Asia when it comes to unique and innovative materials,” he explains.
“Meanwhile, Southeast Asia has been traditionally the world’s largest providing region for oleochemicals and the quick development of regional markets means we have been witnessing an increasing capacity for oleochemical derivatives in the region,” he elaborates.
Saez adds that DKSH has, in the ASEAN region and in China, also been noticing an increasing number of sustainable suppliers that “base their ingredients on both traditional medicine concepts and endogenous plants from the region, building on the huge local variety of natural resources and ecosystems”.
He observed that consumer tastes in Southeast Asia and western markets differ considerably, which leads to different formulation types and, in consequence, to some differences in the ingredients used, or even the relative amount in which the same ingredient is used, modifying the respective ingredient markets altogether.
“The best-known example of a specific market preference in Southeast Asia is probably whitening in facial care products, which is common across Asia and was previously unique to Asia, as skin tanning formulations are unique to western markets and are not seen at all in Asia,” Saez says.
“This generates, for example, a higher demand for a certain type of rheology modifying additive required to manufacture such formulations, while such additives would not have such a demand in western markets,” he elaborates.
An example in the facial care and facial masks segment is the usage of animal originated ingredients, such as snail mucus.
“This ingredient category is widely used and sought after in Southeast Asia for its anti-ageing benefits, but there is a very limited market in the west, as consumers in the US and Europe prefer not to use animal-origin ingredients,” Saez says.
As well, the fact that the population in Asia is largely living in big, densely- populated cities causes ingredient demand to be different in the ASEAN bloc, as cosmetic manufacturers are targeting protection against pollution in its various forms and therefore need active ingredients that provide such protection. By contrast, Saez says an example where ASEAN and western markets are moving closer toward each other is Asia adopting, in an increasingly harmonised way, regulations which are in force in western markets (especially Europe) related to preservatives.
The recent ban in Europe of biocides MIT (methylisothiazolinone) and CMIT (methylchloroisothiazolinone) for leave-on formulations and the limitation of usage of long chain parabens “are driving substantial sales growth for such novel preservative systems”, Saez says.
The ASEAN Cosmetic Committee (ACC), the association’s regulatory body for the personal care product sector, announced in January a ban on isopropylparaben, isobutylparaben, phenylparaben, benzylparaben and pentylparaben as preservatives in cosmetics. In most ASEAN countries products including these ingredients were banned from sale from 30 July, while in Thailand and the Philippines they can be sold until 31 December (2015). The decision aligns ASEAN with European Union (EU) regulations, which have already banned the use of these parabens.
It also restricted the biocidal active substance triclosan – an antibacterial and anti-fungal agent – to 0.2% in mouthwashes and 0.3% in other cosmetic products, such as toothpastes, hand soaps and face powders, and is considering limiting its use in shampoos. The committee also decided to continue monitoring developments regarding the use of MIT in the EU, where the safe use of the substance in leave-on products is still under discussion.
