Chemistry 4.0

Growth through innovation in a transforming world

Vienna, October 26th, 2017

22017 Deloitte https://www.youtube.com/watch?v=BqTNb7SSxXc

A short video introduction into the subject

32017 Deloitte

Agenda

Challenges

Loss of relative importance of the German/ Western European chemicals industry,

especially at the roots of the value chain

Trends

Incremental trends create new business opportunities. Disruptive trends create

winners and losers among players in the chemicals industry and new eco-systems

Chemistry 4.0

Innovation that combines Digitalization and Circular Economy allows players in the

chemicals industry to take an important role in those newly forming eco-systems

Recommendations

Companies should actively explore and capture digital and circular opportunities.

Regulators can support through standards, infrastructure and incentives

2017 Deloitte

Challenges

Loss of relative importance of the German/ Western European chemicals industry, especially at the roots of the value chain

52017 Deloitte

Chemicals have reached a value peak, which managers currently find difficult to defend and very difficult to further increase

Challenges in the chemicals industry (schematic)

CommoditizationCheap energy & raws

Deflation

Growth in ChinaSector Consolidation

State Owned Enterprises

Chemicals Industry

Value PeakMargin decline &profit increase

62017 Deloitte

Value Peak – Value in the chemicals industry has peaked. Diver-sified chemicals companies under activist & shareholder pressure

Total return to shareholders (TRS)

[$ indexed Dec 31, 2000 = 100] [CAGR Dec 2000 – Mar 2015 (in %)]

2000 2005 2010 2015

400

300

150

0

250

200

100

350

450

50

9.8

Electronics

5.9Pharmaceuticals

6.3

8.0Automobiles

Consumer goods

Construction materials 9.4

Oil & gas

9.4

8.7

Mining

12.7

Commodity

8.0

14.1

Diversified

Speciality

Upstreamsuppliers

Chemicals

Downstream customers

Average, world market: ~5%Chemicals average: 10.5%

Average, world marketChemicals average

Source: Datastream, McKinsey

72017 Deloitte

Margin decline and profit increase – It is difficult or impossible to increase profitability in businesses, where gross margins decline

0%

5%

10%

15%

20%

25%

30%

35%

(% o

f sale

s)

Gross margin(-0,8% p.a.)

EBITDA margin(+0,9% p.a.)

Net margin(+2,7% p.a.)

Margin decomposition in chemicals industry

[in % of sales]

Source: Capital IQ, Deutsche Bank, Deloitte analysis

82017 Deloitte

Cheap energy & raws – Flatter cost curves reduce gross margins

Cash cost comparison 2015

[$/MT], @ $56/bbl of crude

0 20 40 60 80 100 120 140 160

Cumulative ethylene capacity, million metric tons

20152014

2012

Brent Crude

2012 = 112 $/bbl

2014 = 99 $/bbl

2015 = 56 $/bblWEP

WEP

NEA

SEA

NAM

MDE 280

175

215

240

70

325

295

310

90

80

75

90

80

Middle East - Ethane

USGC - Ethane

Europe - Naphtha

China - Syngas/MeOH

SE Asia - Naphtha

Feed Utilities Fixed

630

600

575

430

140

E.g.C2: Changing competitive dynamics & hydrocarbon resources

Cash cost flattening as oil settles between naphtha and gas based producers

Source: IHS, Tecnon, Deutsche Bank, ICIS; Deloitte analysis

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Deflation – Economic growth is driven by services, not by chemicals, materials and other goods

Price o

f core

goods/p

rice o

fcore

serv

ices [

no r

ebasin

g]

Year

0

20

40

60

80

100

120

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Average rate of inflation, 1984 – 2016:

Core goods: 1.04%

Core services: 3.46%

50

60

70

80

90

100

110

1985 1990 1995 2000 2005 2010 2015

Price of consumer goods relative to consumer services

1982-1984=100

Source: BLS/Federal Reserve Bank of St. Louis

Average rate of inflation, 1984-2016

Goods: 1.8%

Services: 3.6%

Average rate of inflation, 1984 – 2016:

- Core goods: 1.8%

- Core services: 3.6%

Price of goods, materials and chemicals relative to consumer service prices

[1984 = 100]

Source: Worldbank, BLS/ Federal Reserve Bank of St. Louis, Deloitte analysis

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Growth is largely determined by China. Outside China Chemicals grow 2.8% or 0.5% below global GDP growth

6.3 € T (100%)

Rest of World

1.6 € T (100%)

2.8 € T (44%)

LATAM

Rest of Asia

Germany (+1.1%)

2015

3.5 € T (100%)

South Korea

India

NAFTA

Japan

China

Rest of Europe

2030

1.3 € T (37%)

2000

0.2 € T (12%)8% of global

GDP

20% of

global GDP

24% of

global GDP

+2.8%

+3.4%

Chemical sales by country / region

[€T (% and CAGR in %)] (w/o pharma)

Source: VCI, CEFIC, Eurostat, Worldbank, Chemdata 2016, Prognos, Deloitte analysis Note: Without pharma sales

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Consolidation in Chemicals at segment, not industry level

TodayBefore 1990

CHF USDB/NL

Agro-

chemicals

Fertilizers

Ind. Gases

Polymers

Coatings

Horizonta

l Specia

lization

Specialty

Chemicals

Segment

From vertically integrated companies with national roots…

…to horizontally specialized, global segment leaders

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State owned companies increasingly dominate Chemicals

BASF

DuPont

Dow

ExxonMobil

Bayer

TotalFinaElf

Degussa

Shell

ICI

BP

2000

BASF

Dow

Sinopec

Sabic

Formosa

Ineos

ExxonMobil

LBI

Mitsubishi

DuPont

2015

Sinochem/CC

SaudiAramco

Mubadala/IPIC

Sabic

Sinopec

Reliance

Koch Ind.

BASF

Formosa

Ineos

2030

Western companies State owned companies

Top ten chemical companies by revenue

[2030 Deloitte estimations]

Source: C&EN, Deloitte analysis Note: 2030 are illustrative assumptions only

132017 Deloitte

The European chemicals industry is losing ground at global level, while at the same time increasingly relying on export business

German export share

[in %]

9.260

4.710

1.983

246189135

2000 2015 2030

GermanyGlobal

2.3%

5.9%

1.8%

2015 2030

85 %

2000

76 %

57 %

Commodity Chemicals 0.7%

Specialty Chemicals 1.9%

Pharmaceuticals 3.5%

Revenues and global market share

[in EUR bn (CAGR in %)] / [in %]

4.6%

7.1% 4.0% 2.7%

Source: VCI-Prognos Study; Deloitte Note: CAGR have been calculated based on 2030, not taken from original publication

142017 Deloitte

Especially the German/ Western European commodity chemicals roots are losing global competitiveness and market shares

DE Growth Rate (CAGR 1.8%)

DE Market Share 2015 (4.0%)

Global Growth rate (CAGR 4.8%)

DE Market Share 2030 (2.7%)

Commodity Chemicals Specialty Chemicals Pharmaceuticals

Specialty Chemicals

€19bn.(10%)

Petro-chemicals€48bn.(25%)

Polymers€29bn.(15%)

Bulk Inorganics

€11bn.(6%)

IndustrialChemicals

€10bn.(5%)

Pharma-ceuticals€46bn.(25%)

ConsumerChemicals

€21bn.(11%)

Fine Chemicals€5bn.(3%)

State-owned companies with low profit requirements

Import of base chemicals instead of production in Germany/ Western Europe

Low feedstock and energy prices

+

=

Strong WeakProduction in Germany / Europe endangered

Tran

sfo

rm

ati

on

Legend

X% X%

X% X%

-0.6% 4.3%

2.1% 1.0%

-0.3% 4.6%

7.3% 3.6%

1.5% 1.2%

3.8% 4.0%

2.2% 4.8%

4.4% 3.0%

1.2% 4.2%

4.8% 3.1%

1.3% 4.3%

3.1% 2.0%

3.5% 5.7%

3.8% 2.8%

2.6% 3.9%

3.1% 2.5%

Shortening of value chain

Source: VCI, Deloitte, Deutsche Bank Note: Figures are 2015 data [total: €189 bn., thereof €142.7 bn chemicals and €46.3 bn pharmaceuticals)

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Trends

Incremental trends create new business opportunities. Disruptive trends create winners and losers among players in the chemicals industry and new eco-systems

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Dynamic, partly disruptive developments around chemicals and demand for sustainability create opportunities and threats

New competitors

Transparency & digital processes

Digital operating system

Digital business models

New technologies

New customer demands

Resource efficiency

Greenhouse gas neutrality

Digital & circular synergies

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Overall, 30 trends have been identified, which will have a grave impact on the chemicals industry until 2030

Energy & Raw Materials Business-to-Business (construction, mobility, packaging)

Pharma & Health Care

1. Raw material mix and supply forGermany (I/EE)

2. Power-to-X (D/SP)

3. Waste-to-Chemicals (D/SP)

4. Carbon Capture Storage/ Carbon Capture Utilization (D/SP)

5. Renewable resources (I/SP)

6. Bio-refinery (D/SP)

7. Industrial biotechnology (D/EE)

8. Material efficiency in construction (I/EE)

9. Energy efficient buildings (I/SP)

10. Modular building (I/EE)

11. Electromobility (D/SP)

12. Lightweight vehicles (I/SP)

13. New mobility concepts (D/EE)

26. Personalized medicine (D/EE)

27. Genome editing in medical applications (D/SP)

28. E-Health (D/EE)

29. New Medical Technology (D/SP)

30. Self medication (D/SP)

Business-to-Consumer

18. Personalization of consumerproducts (I/EE)

19. Perception of chemicals (D/SP)

20. Changing relationship chemicalsupplier – customer (D/EE)

Agriculture

21. Urban Farming (I/EE)

22. Agricultural turnaround (D/SP)

23. Genetically modified plants (I/SP)

24. Genome Editing for precision breeding (D/SP)

25. Digitalization of agriculture (D/EE)

14. Additive manufacturing (D/EE)

15. Material mix for packaging (I/SP)

16. Bio-plastics for packaging (I/SP)

17. Renewable energy –production technologies (I/SP)

Source: Chemistry 4.0 workshops and expert interview Note: D=Disruptive/I=Incremental; SP=Societally/Politically and EE=Entrepreneuerially/Economically driven

182017 Deloitte

Incremental trends are areas, where chemicals companies perform well. Additional opportunities through digital tools

Societally / politically driven

Incremental

Entrepreneurial / economically driven

Raw material mix and supply for

Germany

Material-efficiency in

construction

Modular building

Urban Farming Personalization

Lightweight vehicles

Genetically modified

plants

Renewable energy – production

technologies

Energy-efficient

buildings

Renewable

resources

Bio-plastics as

packaging

Material mix for

packaging material

Large impactModerate impact

Little impact

Impact: Positive, Neutral, Negative

I/SP [#7]

I/EE [#5]

Categorization of trends

[12 of 30 are incremental]

Note: D=Disruptive/I=Incremental; SP=Societally/Politically and EE=Entrepreneuerially/Economically driven

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Incremental trends – New, lightweight vehicles and materials

Illustrative example – carbon fibers

Sources: Schuberth, BMW, Boeing, Bilfinger, BBS, Deloitte

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Disruptive trends will have a fundamental impact on the chemicals industry, creating “winners” and “losers”

Societal / politically driven

Disruptive

Entrepreneurial / economically driven

Genome editing in plants

Electro mobility

Perception of chemicals

(discussion on ingredients)

New medical technology

“Agrarwende” Bio-refinery

Carbon Capture Storage / Carbon Capture

Utilization

Waste-to-Chemicals

Power-to-X

Self-medication

Digitalization of

agriculture

Personalized

Medicine

E-Health

Changing relations chemical

supplier – end customer

Additive Manufacturing

New mobility concepts

Industrial

Biotechnology

Genome editing in medical

applications

Large impactModerate impact

Little impact

Impact: Positive, Neutral, Negative

D/SP [#11]

D/EE [#7]

Categorization of trends

[18 of 30 are disruptive]

Note: D=Disruptive/I=Incremental; SP=Societally/Politically and EE=Entrepreneuerially/Economically driven

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High performance polymers

Polyurethanes and

polypropylenes

Coatings

Pigments

Brake System

Battery materials

Catalyst

Coolants

(except A/C)

Fuel & oil additives

Axle/transmission/

engine lubricants

Disruptive trends| New drive trains in cars (e-mobility)

Expected volume change

Impact on chemistry

[example: E-mobility]

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Disruptive trends – Smart, digital products use radically less chemicals and materials to fulfill the given task

Precision farming

In-mould electronics

3D-Printing

Examples for illustration

[40-65% less chemicals & material usage]

Source: LocalMotors, Bayer-Monsanto, Holst, Faurecia, DuPont, Deloitte analysis

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Disruptive trends| Precision Farming optimizing the use of seeds, irrigation, fertilizers and agrochemicals

Data IntensityAsset Intensity

Extended Digital ProductsSolution Provider

Platform IntegratorIntegrated Ecosystems

1. Product

+ +

2. Smart Product

+

+ +

3. Smart, interconnected

Product

Planter

Culti-vation

+

Smart Tractors

Harve-ster

4. Product-System

5. Ecosystem

Innovation Model

Bala

nce

of

Pow

er

Farmer & Retail

Agchem, Seed & OEM

Open s

hare

d, publically

available

technolo

gy

Pro

prie

tary

inte

gra

ted

solu

tions

Bio and organicIndependent

Farmers

Commoditization

and generics

AgChem and Digital

Farming

Farm

equip-

ment

Data Intensity

Will there be a closed (iOS) or open system (Android)? Will AgChem Companies drive it?

Source: ClimateCorp, now BayerMonsanto (2015), PWC Global Industry 4.0 Survey; Deloitte

242017 Deloitte

Customer requirements gradually increase from incremental to disruptive changes in the surroundings of the Chemicals Industry

Production of better, optimized products or better production of excising products

Roles in value chains are newly defined and roles are

potentially changed or eliminated in the process

Optimization Customer Relationship

Disruptive ChangeIncremental change

Business Models

New business models and value structures arise; differentiation primarily

based on total offer being delivered in networks of manifold players (often

using digital tools)

Product

Existing products are replaced by fundamentally new products (physical or

digital)

New demands in the customer industries, driven by changed customer behavior, new technologies or regulation, results in fast and fundamental strategic, structural, and

technological demands for the chemicals industry

Customer demands grow along the historical development

Example:

Changing relations chemical supplier – end customer

E-health

Example:

Digitalization of agriculturePower-to-X

Additive Manufacturing

Example:

Industrial BiotechnologyPersonalized Medicine

Electro mobilityPerception of Chemicals

Example:

Lightweight in automotiveMaterial efficiency in

construction

2017 Deloitte

Chemistry 4.0

Innovation that combines Digitalization and Circular Economy allows players in the chemicals industry to take an important role in those newly forming eco-systems

262017 Deloitte

Digitalization and Circular Economy are the essential elements of Chemistry 4.0, following the 1.0, 2.0 and 3.0 developments

Chemistry 1.0Foundation and coal chemistry

Chemistry 2.0Petrochemicals

Chemistry 3.0Globalization & Specialization

Chemistry 4.0Digitalization & Circular Economy

1865

1950

1980

2010

Source: VCI, BASF

272017 Deloitte

With digitalization the industry can benefit from transformation through efficiency gains and driving new business models

Capturing company-internal data

Physical Digital

Capturing external data

Analyzing, interpreting,

connecting and visualizing data

(Analytics)

Applying algorithms, taking

decisions, acting based on data

Improving and connecting processes

Company Internal External

Introducing new products, services, business models

Transparency & digital processes

Digital business models

Data-based operating models

Source: Deloitte

292017 Deloitte

The efficiency potential of digital processes and digital operating models are rather in the downstream segments

R&D 30%

Procurement 5%

Logistics 20%

Production 15%

Sales & Marketing

40%

Administration 40%

Inorg

anciBulk

Chem

icals

Petr

ochem

icals

Indusri

al Chem

icals

Poly

mers

Fin

e &

Specia

lty

Chem

icals

Coatings,

Pain

ts,

Adhe-

seiv

es,

Ela

sto

mers

Pharm

aceuticals

Consum

ers

Chem

icals

Agro

chem

icals

Effic

iency g

ain

s(m

ax)

EBIT

DA e

ffect

(max)

Small impact Large impact

+1%

+2%

+1%

+2%

+3%

+2%

Overview of the digitalization impact

Source: VCI, Industrieverband Klebstoffe, Deloitte Analysis

302017 Deloitte

Societal, political and factual requirements increasingly demand higher resource efficiency. Seven levers to accommodate this need

(Re-)Design Resource-efficient and climate friendly

production

Return Recycling Regeneration of energy

Removal

Residue depositing

Customers and users of chemicals

Production of chemicals

Circular economy in the chemicals industry (7Rs)

312017 Deloitte

Application of chemicals and materials with different character-ristics - determine the use of the seven circular economy levers

Chemicals for

consumption

(e.g. detergents)

Pharmaceuticals and

food supplements

Crop protection

agents and fertilizers

PackagingPlastics,

synthetic fibers,

synthetic rubber

Composites,

ceramics,

metal alloys

Catalysts,

Membranes,

Cellular cultures

Additives,

pigments

Resins,

binders

Water chemicalsChemicals for mining

and fracking

Solvents

Abrasives, heating

media, coolants,

lubricants

auxiliaries

Production in all

segments of the

chemical and

pharmaceutical

industry

Production

ConsumptionAuxiliariesIn products –concentrated

Application through customers and consumer

Chemicals/

Materials

In products –dispersed

~ % revenues in DE 10% 35% 15% 40%

Source: VCI, Branchenverbände, Deloitte

322017 Deloitte

New ecosystems, new players, new alliances are being formed,E.g. Precision Farming, 3D/4D-printing, Personalized Medicine

Competition Competition

Chemical

Producer

Supplier

Distributor

Customer

New

players

Software

provider

Hardware

provider

Supplier

Chemical Producer

Distributor

Customer

Go

od

s, S

ervic

es, B

ran

d

Co

llab

orati

on

(D

ata

/ K

no

wle

dg

e)

Value based on production of

chemicals and materialsValue based on designing and building

smart, sustainable solutions

From linear economy … …to complex, often circular, ecosystems

2017 Deloitte

Recommendations

Companies should actively explore and capture digital and circular opportunities. Regulators can support through standards, infrastructure and incentives

342017 Deloitte

Companies should set strategic goals, seize opportunities, enhance resources, and transform the culture to embrace the trends

Improve political framework

Seize opportunities

Transform culture

Company structure

Competences – training

and recruiting

Investments

Enhance resources

Anticipate disruptions

Make digital and circular

an integral part of your

strategy

Amend decision criteria

Set strategic goals

Ideate freely

Utilize economic networks

Establish co-operations and

platforms

Develop new concepts for

participation

Seize opportunities

Transparent and open

Agile and tolerant

Collaborative und

communicative

Act multi-modal

Transform culture

Source: Workshops Chemistry 4.0, Political dialog sessions, Deloitte

352017 Deloitte

We have developed a check list for your chemistry 4.0 readiness

Chemistry 4.0 Checklist

Ch

em

istr

y 4

.0 C

hecklist

Opportunities

Digital opportunities

Circular economy

opportunities

Joint opportunities

Service Functions

Finance processes

IT processes

HR processes

QEHSA-processes

General Admin processes

Procurement processes

Document and contract

management

Operating and Business Processes

Cybersecurity

Efficiency potential (own value chain)

Efficiency potential (with suppliers,

customers, partners)

Efficiency potential in application

technology and development

Virtual R&D

Strategy and Organization

Strategy

Organization

Communications

362017 Deloitte

Chemistry 4.0 – Executive Summary

New development phase “Chemicals 4.0” (Digitalization& circular economy)

International competition

30 trends in the surrounding classified as incremental vs. disruptive and societal vs. economic

3 categories, 20 examplesof digital

Transparency and digital processes

Digital operating model

Digital business model

Circular economy as a holistic and open approach

From linear economy to resource efficiency and largely closing of material loops

Digitalization as enabler for circular business models

Companies need to- Set strategic goals

- Enhance resources- Transform culture - Build co-operations and

platforms and develop new engagement models

Politics should - Extend innovation grants- Support platform building- Train digital - Build infrastructure- Improve regulations for a

holistic concept of circular economy

- Create societal awareness what is needed to shift to a circular economy

Business models increasingly developing in ecosystems

Digitalization Circular Economy

Recommen-dations

Field Analysis

372017 Deloitte

Thank you for your attention!