Currently valued at about $20 billion, the global adhesives market is expected to grow 5.7% per year, reaching $24.6 billion by 2004, according to the Freedonia Group, Cleveland, OH. This is good news for the industry, which has been hit by rising raw material costs and tough economic conditions, however, getting there is going to be the hard part. Companies of all sizes are trying to portray confidence as they examine ways to push profitability via merger and acquisition, exploring growth applications, expanding product menus and placing more focus on foreign markets.
Sticking the Pieces Together
Take the market's size, projected growth rate and the fact that worldwide in 1999 the top four suppliers accounted for only 32% of sales, and it's not surprising that large corporate players were active in 2000 on the mergers and acquisitions front. While this trend has slowed somewhat in conjunction with the U.S. economy, many in the market contend that mergers and acquisitions will continue for the foreseeable future.
"More mergers and acquisitions are probable as smaller companies will start up to serve the specific needs of certain groups of customers," said Charles Call, senior divisional vice president and general manager, U.S. adhesives at National Starch and Chemical Company.
The scope of applications, technologies and service requirements in the adhesives industry has caused a number of companies to specialize and create unique portfolios. This has caused a fragmented market in the both the U.S. and internationally, according to Michael Terhardt, senior category manager for Loctite products at Manco, Inc. "The recent past has shown many mergers, both in the national environment, as well as the global marketplace. In my opinion this trend will continue. There is still room for consolidation in the industry, both on the consumer side as well as industrial adhesives," Mr. Terhardt said.
"The growth of the market and increased specialization in certain market segments has promoted the process of larger corporations acquiring or merging with small- to medium-sized companies," said Scott E. Hubley, manager of sales and marketing at Appli-tec. "In some cases this is due to a threat that a larger company may perceive due to technological advances made by smaller formulators. In other cases it is simply a strategic positioning move necessary to provide customers with a one-stop shopping arena."
Over the past two years, consolidation has created a shift at the top tier of the market and gave way to the formation of two new global players – Rohm & Haas and Bostik Findley. Prior to its acquisition of Morton International, Rohm & Haas was more of a materials supplier and fringe player in the adhesives and sealants market. However, with the acquisition it inherited a position atop the flexible packaging adhesives market, and has since focused on expanding its scope into pressure sensitive adhesives (PSA), transportation, construction and general industrial market segments.
Created by the merger of TotalFina and Elf Aquitaine, Bostik Findley, which recently weathered the departure of its CEO (see People on the Move, p. 75, May 2001), has become a market leader and achieved annual sales exceeding $1 billion. The company has also been particularly active on the acquisitions front, acquiring two significant companies, Durabond and Sitech Italia. According to Thierry Le Hnaff, newly appointed CEO of Bostik Findley, these purchases allowed the company to strengthen core sectors of its business. "The purchase of Durabond was a reinforcement of our company position in the flooring adhesive business segment, and Sitech was an acquisition in the industrial sector where we are focusing in particular on the high performance polymers area," said Mr. Le Hnaff. "These acquisitions were made to strengthen or complete our positions in these markets."
A desire to focus on synergies and strengthen market positions through acquisitions is something that has not been limited to Bostik Findley and Rohm & Haas. Several other accords have recently taken place, including Manco, Inc.'s acquisition of Dexter and GE's purchase of Mecklenburg Duncan.
The evolution of the adhesives business has not been limited to the manufacturing side of the market. Certain suppliers and DIY retailers have also been impacted by aggressive consolidation. "One thing we are definitely seeing is consolidation of retailers," remarked Rick Brown, president and general manager of GE Sealants & Adhesives. "Companies like Lowe's, Home Depot, Carolina Holding and Ace are all getting stronger and consolidating in the marketplace."
Two Different Years
While restructuring helped major players like GE, Rohm & Haas and Bostik Findley, success in 2000 was not limited to the upper tier of the market. In fact, nearly every company Coatings World spoke with cited 2000 as a banner year for sales. However, in spite of record performance for the first three quarters of 2000, by the end of the year, companies had begun to see the first ripples of slower times running across their financial shores.
In many cases, the first sign of what lay ahead began with slowing profits for adhesives end-markets, particularly the automotive and construction sectors, towards the second half of 2000. Luckily, by recognizing this early many adhesives and sealants manufacturers were able to refocus their strategies in expectation of a slowdown while sales were still going strong.
"Lowered consumer confidence and general uncertainty about the economy as a whole are having a negative impact on many end-use adhesives markets," said Jason Dewalt, marketing manager at Kent Adhesives Products (Kapco). "Although we expect the outlook to improve, we have noticed a decline in automotive accounts."
"For the automotive industry, we ended the year performing in a very positive manner," said Greg Hopton, vice president of marketing, automotive division, Sika Corporation. "However, we could see a trend beginning that we knew was going to start affecting us as they began shutting down plants. We had a record year last year, but we knew 2001 was going to be tougher coming into it."
"The year 2000 was an absolute record in sales and profit growth for us," said Guido De Keersmaeker, executive vice president, adhesives at global market leader Henkel. "However, 2001 started for us in a moderate fashion and we expect the first half to be rather soft in general. Markets that are not doing well, particularly in the U.S. are electronics, transportation and assembly."
The Pricing Cycle
As raw material costs continue to spiral upward in 2001, companies are feeling pressure on their margins. According to Nick Gutwein, Rohm & Haas' vice president and business unit director�adhesives and sealants, increased raw material costs have impacted all segments of the adhesives business. To counter tightening margins and rising costs, many companies have announced price increases during the past few months.
"Everything has been impacted, and we are working feverishly to try and reformulate and get costs down," said Mr. Gutwein. "We have taken our prices up several times in the past year and will continue to take these st EPS to offset raw material increases."
"We've had a price increase in some of the different markets we serve," said GE's Mr. Brown. "We try and focus on reducing our own costs, but there are obviously times when inflation hits you to a degree that you have to pass it on."
Increasing prices, however, is never easy, and companies have been forced to draw up several strategies based on the market segments and customers they are dealing with. Sika, for example, has taken the approach of relating to its customers exactly why and where the increases are being levied.
"We always go through an in-depth cost analysis with our customers," said Barry Kutch, vice president of marketing for Sika's industry division. "One of the things we try to work out with them is the total installed cost of the product, not just the material cost, to include anything and everything that goes into the manufacturing process that our products will have an impact on�either on the positive or the negative."
According to Mr. Le H�naff, Bostik Findley also sees a need for justifying increases to its customers. "We have to pass price increases on to our customers because over the last 12 months, like the entire industry, we have experienced very high raw material costs," he said. "A very important part of this is to explain to our customers on a product by product basis the reasons for these price increases."
But according to Mr. Le H�naff, it has been difficult to make recent price increases stick in markets wrought with more competition. "Our market position in many sectors helps because when you have very high raw material prices, being a large company with a leadership position in many markets is a very important factor," he said.
Essential to the success of any business is taking advantage of any opportunity to gain market share. For adhesives manufacturers, this means being active in markets outside of North America and western Europe. According to a world adhesives report released by the Freedonia Group, the annual growth rate for adhesives sales in the Asia/Pacific region more than doubled that in North America and western Europe during the 1990s and will continue to do so over the second half of this decade. What is even more striking is the fact that while growth rates in other less developed portions of the world lagged far behind at only 1.1% during the 1990s, it is expected that these areas will grow at an annual rate of 5.1% between 2004-2009. During that same period, growth will take place at the rate of just 2.8% for North America and western Europe, according to the Freedonia Group. For this reason, a number of new adhesives manufacturing plants are being built in these developing areas and in some cases, a large portion of production is being shifted there.
"If you look at the growth in China, Thailand and India, we see those three markets in particular growing at the eight to 12% range, with some market segments exceeding even that," said Mr. Gutwein of Rohm & Haas. "In addition, in Latin America, the Brazilian adhesives market is growing nicely and has been for a while. It is subject to cycles surrounding the local economies around the southern cone of Latin America, but overall you will see growth well above general GDP levels in that area of the world.
"Asia, Latin America and parts of eastern Europe are very important and fast growing markets for us," Mr. Gutwein continued. "We have just announced plans to build an adhesives plant in Brazil that will be up and running near the beginning of 2002. We will also be announcing plans for a new plant in Asia in the not-too-distant future. These are designed to take advantage of local growth and have production as close to the market as possible."
National Starch and Chemical Company, which is active in a variety of market segments around the globe, also expects high growth rates for the adhesives industry in Latin America, Asia and eastern Europe. As part of its strategy to expand in growing regions, the company acquired Aranal, a former joint venture in Mexico, in the second half of 2000.
While establishing a presence in foreign markets and growing through acquisition are essential elements of success for companies operating on a global basis, so is keeping abreast of the trends. Among the current trends presenting promising opportunities to grow sales are the replacement of mechanical fasteners and the use of adhesives in electronics and medical applications.
While the automotive industry has been hard hit in recent months, one application that is growing in this area is the use of adhesives to replace mechanical fasteners. Mr. Kutch of Sika contends that the move away from mechanical fasteners in automobile construction is a trend that started in Europe, but has increased in strength over the last five years in general, and even more so in the past 12 months.
Bostik Findley's Mr. Le H�naff's concurred. "The replacement of mechanical fasteners with chemical fasteners made from adhesive additives is a continuing trend. This helps the adhesives industry to grow by increasing consumption. Other factors for this growth include the ongoing evolution towards new materials and also the strong evolution of glue application equipment."
The disadvantages of mechanical fasteners include high stress points, the potential for corrosion and uneven stress. Additionally, the removal of fasteners for use in automobile manufacturing also cuts down on weight, which is a growing concern due to rising fuel costs.
According to Mr. Kutch, there are also aesthetic benefits to be realized. "A number of the newer trailers have rather extensive graphics on them and one of the problems that the OEMs encounter is trying to get those graphics on or around the rows of rivets that you find on trailers," he said. "If you look at the bus industry, you will notice that most of the buses have now gone to smooth sidewalls. There is a real advantage there in terms of aesthetics and some of the latitude that you have if you use bonding as opposed to mechanical fastening."
Electronic manufacturing is another market that holds growth opportunities for adhesives manufacturers. And while the recent economic downturn has overloaded inventories in the electronics industry, the future of the market is still sound, according to many industry insiders. "The rapid growth in the high-tech sector has fueled the electronics adhesives and sealants market," said Mr. Gutwein. "While that is slowing a bit, it is still a strong organic market in terms of growth."
Two markets that have continued to grow rapidly over the past few years are adhesives for medical products and sealants for the stone industry.
New applications as well as the popularity of delivering drugs, hormones and nicotine suppressants via transdermal methods are increasing the number of applications and amount of adhesives required in the medical market. As a result, this market has seen growth rates exceeding 15% in the last three years, according to Mr. Gutwein. Additionally, many industry insiders predict this will be the case for the next five years as well.
"Currently, the greatest demand seems to be in the medical market," noted Mr. Hubley of Appli-tec. "With health costs increasing we've seen a trend of technological advances trying to offset costs and reduce the price of health care. It's a market that has continued to evolve with technology and has developed a significant reliance on higher quality adhesive systems."
According to Mr. Hubley, equipment used in hospitals, such as MRI or CAT scanners, are now being made at lower costs by using "high tech materials, including adhesives or potting compounds."
While the expansion of the medical market is linked to technological advancements, the growth of the stone sealant market is more closely tied to design trends. "The growth rate of stones in homes and commercial settings is eight to 12% per year," said Christopher J. Martin, product manager at DuPont Fluoro Additives. "This is being driven by a desire for stones like limestone that aren't as polished and dense. They have a flat or 'tumbled' finish and need better protection. Trends towards those types of products increase the need for protecting chemicals and help drive the performance of the market."
Technologies and the Environment
As more attention is paid to removing or lowering VOC content from adhesives, regulatory concerns have been a major driver of technological advances in the industry. What had once been niche technologies are being strengthened and creating new modes of growth.
"I see as much intensity in the adhesives industry on the environmental side as I have ever seen before and it is very good for the industry," Mr. Gutwein said. "It becomes another factor that pushes companies like Rohm & Haas to look at new technologies that are more environmentally favorable. It is costly, takes a lot of work and must be practical, but it's important and we will address it as another factor to look at when we develop new technologies for customers. It also opens up the opportunity for companies to bring in new technologies."
According to a report recently issued by San Jose, CA-based Frost & Sullivan, radiation curable adhesives is one technology that has benefited from environmental regulations. According to Frost & Sullivan, while radiation-curable adhesives sales in the U.S. were $97.7 million in 2000, that figure is expected increase by about eight percent per year to reach $150 million by 2007.
"The U.S. Environmental Protection Agency (EPA) is forcing manufacturers in a wide range of industries to switch over from solvent-based adhesives technologies that do not emit VOCs," said Deepika Zutshi, a Frost & Sullivan industry analyst. "Consequently, the demand for radiation-curable adhesives is growing and is expected to make significant inroads against solvent-based formulations."
Environmental regulations have also helped the growth of the stone sealant market, according to Sal Banchitta, CEO and president of Akemi North America Inc. "We have seen our business in the stone industry increase recently," he said. "There has been a lot of activity in the market regarding EPA compliance. A lot of development has been going towards non-toxic and water-based products."
California in particular is a hot-spot for environmental pressures, as was noted by Scott Aiello, director of marketing for Maaco, an ICI company that manufactures Liquid Nails brand adhesives, sealants and repair products. "VOC regulations in California have limited the products that can be sold in that market," he said. "Therefore, we must continue to monitor and prepare for additional increases in these regulations."
One mitigating factor when it comes to the advancement of new technologies in the adhesives market is the speed with which the adhesive can be applied on the production line and how long it takes before the finished product can be placed on the market. This is an area where UV-curable adhesives have made the strongest technological advances of any of the newer technologies currently on the market, according to Appli-tec's Mr. Hubley.
"The usefulness of UV-curable adhesives to increase throughput has in some instances revolutionized manufacturing processes," he said. "The speed of processing with UV is astronomical compared with a historical thermal cure system. The savings are realized in set-up, processing time and volume of material. With a typical thermal cure two-part epoxy, you'd have to monitor the pot life and work life of the adhesive. With a UV, it's typically less critical. A UV adhesive can stay at ambient temperatures for days, weeks or months with out affecting the work life."
In spite of the success of UV-curable adhesives, many in the market place are not ready to anoint it the only technology of the future. Adhesives cured by electron beam, hot melt and water-based adhesives are also realizing gains and showing potential for the future. And even with the advancement of these alternative technologies, the majority of the market still relies on traditional products.
"We are looking very carefully at new technologies such as UV curing and other areas, but we realize that for the time being they represent only a small portion of the applications available on the market," said Mr. Le H�naff of Bostik Findley. "A large part of innovation comes from investing in new technologies, but there isn't one single leading technology that I believe will replace the technologies already in the adhesives market."
In support of the rising market for environmentally friendly adhesive products, a number of companies have introduced new products utilizing several of the more prominent new technologies.
Rohm & Haas, for example, has introduced a water-based flexible laminating adhesive, as well as a reactive hot-melt technology to the industrial laminating market.
Sika has also seized upon the popularity of hot-melts, introducing two new hot-melt products for specific applications including standing seam roofs. "In the past, foaming hot-melts had been used for these applications," said Mr. Kutch. "The equipment for this type of application is relatively expensive when compared to the kind used for a non-foam hot-melt."
Predictions on how the adhesives market will fare in 2001 and beyond are segment specific, but closely tied to economic conditions. Two areas that have been severely impacted by the recent downturn have been the transportation and construction markets. However, the recent economic slowdown came following years of near record housing starts and automotive sales.
"Prior to the economic slowdown, housing starts were at an all-time high," noted Dave Fuller, vice president of marketing for DAP. "As a result, there isn't the growth in the housing starts sector that there was a year ago. They have flattened out, but the important thing to realize is that they were at an all-time high. Even though it has slowed, it has not done so to the point of previous eras."
Mr. Kutch of Sika said that although the transportation and metal building markets look as though they will remain soft for the rest of 2001, he expects the fourth quarter to be generally stable. "Based on what the market is telling us, all things being equal, by the fourth quarter they will not recoup what they have lost in the first three quarters but it will be back up to the build rates that would have been expected if there had been no downturn," he said.
On a positive note, DIY adhesives have not been affected as much by economic downturns as homeowners tend to repair their homes themselves to save money. What concerns some players in this segment, however, are inventory situations at retailers.
Due to the need for technological advancements, Mr. Hubley of Appli-tec predicts that the electronics, aerospace, defense and medical adhesives markets will continue to experience strong growth despite what may remain a slow U.S. economy over the rest of 2001. "I firmly believe the specialty adhesives and sealants market will continue to prosper," he said. "The need for high tech materials has never been greater. As electronics continue to get smaller the need for adhesives as opposed to a mechanical fixtures will continue to rise. The aerospace, defense, and medical markets are also continuously advancing their own fields with improvements to technology. Many of these areas will continue to look for the development of synthetic materials to take the place of higher cost mechanical apparatus."
Indeed, many participants in the adhesives market remain excited about the prospects that the future holds.
"In a slower economy, the weaker players have a more difficult time dealing with market conditions," said GE's Mr. Brown. "I believe that strong companies can weather this economy and come out of it more prepared for the future. We are very excited about the adhesives and sealants market and our presence in it. We are about a year old as a stand-alone company and there is a great opportunity for us to be a major player in this marketplace."
"Tough periods expose areas of our businesses that aren't quite working right," added Mr. Gutwein. "Everyone suffers in these times, but if there is good in it for us, it is a clear view of the areas of our portfolio that needed fixing. It has showed us opportunities that we feel are clearer now than when we entered the market."
Easy Does It
In the DIY and professional contractor markets, the focus has been on project-specific adhesives and sealants that are easier to use. "The DIY market is continuously focused on how you can provide products that are easier to use, primarily from an application standpoint," remarked Dave Fuller vice president of marketing for DAP. "From a professional standpoint, contractors only want to do the job once. They want products that consistently deliver high performance with low variability in behavior from one tube to the next."
Maaco has also introduced two new cartridge adhesives to its Liquid Nails line-LN-905 (lanscape block, stone and timber) and LN-922 (plastic lumber and decking). According to the company, LN-905 is designed for the growing market of retaining walls in landscape architecture and LN-922 should be used in applications where extreme movement due to expansion and contraction associated with plastic lumber.