But China's entry into the World Trade Organisation regimen in September 2001 has since enabled the chemical industry to harness the benefits of a globalised economy and it is now expected to maintain an annual growth rate of 9 per cent through 2005, according to new market research from Frost & Sullivan.
While rising foreign investments have aided domestic chemical companies in creating globally competitive products, the entry of foreign participants into the Chinese chemical market has challenged the previously existing monopoly status of local refining and chemical production industries, it notes.
Neil Wang, director of F&S Industrial Group Shanghai, believes that smaller chemical companies are therefore likely to merge with larger counterparts that have the technological expertise and financial resources necessary to accelerate product innovation and obtain government support.
"At the same time, the projected opening of the financial sector is likely to provide domestic chemical companies more opportunities to acquire foreign direct investment, broaden domestic financing channels and reduce cost of financing," he adds.
The report notes that the removal of import tariffs has both threatened and benefited the Chinese chemicals market. For instance, the reduction of gasoline and fuel import tax from 9 to 5 per cent facilitated cheaper imports, increasing the risk of lower demand for products of local chemical companies.
But removing import tariffs on chemical raw materials, technologies and equipment has lowered production costs, leading to accelerated product innovation and higher quality exports.
Though import tariffs on more than 1,100 chemicals are expected to be reduced from 14.74 per cent to around 7 per cent by 2005, local production is likely to continue offering numerous advantages. For example, it can eliminate shipping costs incurred during import and help lower the price of the final product due to the lower manufacturing costs in China.
"Foreign chemical companies too can benefit from shifting manufacturing activities to China, as production costs are lower," notes the report. And they can also position themselves to exploit the supply gaps in many end-user segments that domestic chemical manufacturers are unable to satisfy.
For instance, the market for high-quality and pure chemicals such as super-decontaminated biochemical and organic reagents required by Chinese pharmaceutical companies provides potential opportunities to foreign companies.
And in more good news for foreign investors, legislative restrictions on the distribution system are expected to be lifted, permitting foreign companies to build sales networks and obtain rights for the wholesale and retail distribution of refined chemical products in China.
IP's the key
F&S recommends that foreign companies entering the Chinese chemical market must focus on common technology platforms, local competitors and manufacturing norms. Effective technology transfers, wherein the design and manufacturing process are protected from duplication and intellectual property rights theft, are likely to be the first step in successful localised production.
"Foreign companies must either set up a wholly owned foreign enterprise or adopt direct importation methods to minimise IPR theft. As an alternative choice, companies could directly import core components for further processing in China, thereby taking advantage of the cheap labour and other local resources, and simultaneously protecting their key technologies," concludes Wang.
For more information on this report, entitled Opportunities in the Chinese Chemicals Markets (Code B293), contact Noel Anderson.