The economic downturn of the past several years has had a significant impact on the global paint and coatings market. From 2002 to 2007, the global coatings market grew by over 30 percent. This is in stark contrast to the 2008-2009 timeframe, where the market actually contracted by nearly three percent.
One of the bright spots in the market has been the Asia-Pacific region which has dramatically outperformed the global market in terms of both volume and value growth. From 2004 to 2009, the Asia-Pacific coatings segment grew by 60 percent in volume and value. Due to its rapid growth over the past five years, the Asia-Pacific region has become the largest market for paint and coatings in the world.
The market in Asia-Pacific is now estimated to represent approximately 35 percent of the nearly $90 billion global value of all coatings. In terms of market volume, the Asia-Pacific region makes up roughly 41 percent of the 27 billion liter global coatings volume. (Note that for comparison purposes, powder coatings have been converted to liquid equivalents at the rate of 1.5 liters of liquid paint per kilogram of powder coatings.)
In late 2010, the International Paint and Printing Ink Council (IPPIC) published the second edition of its widely acclaimed comprehensive market analysis entitled, Global Paint and Coatings Industry Market Analysis Report (2009 – 2014). As with the earlier version, IPPIC retained Orr & Boss, Inc. to prepare this report. Coatings market data presented in this article is based on the intensive market research conducted for the completion of this study of the global paints and coatings industry.
For the purposes of the IPPIC report and this article, the global paint and coatings industry has been segmented into, studied and presented according to the five regional markets in Table 1: Geographic Segments Investigated.
While Asia-Pacific is generally viewed as one combined region, it is important to remember that this is not a homogenous group. There is significant variation among the constituent countries.
Within the Asia-Pacific region, China has experienced the most significant growth, posting compound volume growth rates in excess of 16 percent annually over the analysis period. India has similarly experienced strong growth with a compound annual growth rate (CAGR) of nearly nine percent.
In contrast, Japan and Australia have significantly lagged with a 2004 to 2009 CAGR of 0.7 percent and 1.5 percent respectfully. Other parts of Asia-Pacific have experienced a combined annual growth rate of roughly 5.5 percent over the 2004 to 2009 time frame.
The United States has been overtaken by China as the world’s number one market in terms of coatings volume. The position of Asia-Pacific and the leading countries in the region within the global marketplace is depicted in Chart 1: 2009 Global Coatings Industry Volume by End Use Segment.
Similar to the geographic segmentation, the global market has been divided into ten end use segments for the IPPIC market report. Data in this article is based on the same ten market sectors listed in Table 2: Major Segment/Component Sub-Segments.
Decorative coatings are the largest sub-segment of the Asia-Pacific coatings industry. In this region, however, decorative coatings make up a much smaller percentage of the overall market compared to other regions. Decorative coatings comprise approximately 35 percent of the market in Asia-Pacific compared to over 50 percent of the global market.
Unlike the decorative coatings markets in North America and Europe, this market sector has continued to grow in Asia-Pacific over the past several years. Within the region, decorative coatings growth has tended to follow overall market growth with China showing the greatest increase, followed by India.
In the industrial coatings market, and among the various industrial sub-segments, Asia-Pacific has outperformed the market and has experienced significantly higher growth rates than those seen in North America and Western Europe, as well. In particular, the general industrial, wood and coil coatings segments have grown at much higher rates than the overall market. Chart 2: Annual Volume Growth Rate by Segment 2004-2009 illustrates the growth in the Asia-Pacific industrial coatings sub-segments compared to the global market over the past five years.
Coatings demand is influenced by a wide array of economic factors. Demand for decorative coatings is affected by new construction, housing activity and overall affluence. While housing and construction markets in North America and Europe have languished during the economic recession, activity has continued to flourish in China, India and other parts of developing Asia-Pacific. As an example, new construction spending in the United States declined by four percent from 2009 to 2010. Over this same period, construction spending in China increased by over 10 percent. This trend in construction disparity is projected to continue over the near term.
At the most basic level, industrial coatings demand is a function of the production of end-use OEM products such as cars, tractors, furniture, packaging, etc. Much has been made of the changes in the automobile market, with China supplanting the United States as the largest car producer in the world, but the transition in the automobile market is but a microcosm of the shifting manufacturing landscape.
Over the period 2000 to 2009, China grew its proportion of global manufacturing output from roughly eight percent of the total to nearly 21 percent of the global total. Meanwhile, the U.S. contribution to global manufacturing has fallen from over 26 percent of the global total to less than 19 percent. These divergent trends are directly related as goods once produced in the U.S. are now being produced in China. Asia-Pacific now represents over 40 percent of the world’s manufacturing output.
The overall trends in construction and manufacturing are apparent in the gross domestic product (GDP) data of the various regions. The data suggests that Asia-Pacific grew faster than North America and Europe prior to the recession and significantly outperformed Western Economies during the recession.
Furthermore, the most recent data from the International Monetary Fund, World Economic Outlook forecasts that the disparity in growth will be even greater post-recession than pre-recession. Chart 3: Historical and Forecast Regional GDP Based on Purchasing Power Parity illustrates the historical and forecast GDP by region as measured by purchasing power parity.
Over the next five years the Asia-Pacific market is projected to continue to grow above the global average, albeit at a slightly lower growth rate than what it has previously experienced. As in the past, China and India are forecast to lead the region in growth. Several key industrial coatings segments, including wood, powder, packaging, and industrial maintenance and protective coatings are forecast to experience the greatest rate of growth to 2014. Given the recent advancement in the region and the projected continued growth, Asia-Pacific is forecast to account for approximately 43 percent of the total global coatings volume by 2014.
The forecasts offered in the IPPIC global market analysis and offered herein are clearly contingent on a number of factors. The first major assumption is that Western economies will continue to drag themselves out of recession. While much of the end use OEM products manufactured in Asia-Pacific is for domestic consumption, a great deal is exported to the U.S. and Europe.
Continued economic malaise in these regions will depress coatings demand in Asia-Pacific. Recent spikes in oil prices have emphasized the fragility of this recovery. An additional concern is the tight supply of key raw materials both in Asia-Pacific and in other parts of the world. Continuing price escalation could lead to market stagnation or replacement by alternate materials. Furthermore, it is uncertain how the recent devastation in Japan will affect the regional and global markets.
Asia-Pacific as a platform for growth
The rapid growth in Asia-Pacific, and in particular growth in China and India, has not gone unnoticed by leading coatings manufacturers and raw material suppliers. Especially given the slow growth in Western countries, many formulators and suppliers are focusing on the Asia-Pacific region for future growth.
The vast majority of new construction of coatings end product and raw material production facilities is occurring in Asia-Pacific. While the high level of activity in the region does present opportunities, many Western suppliers underestimate the differences in business culture in the region, particularly between Chinese companies and their Western counterparts. Differences related to conducting business in China can be broadly categorized as company, personnel, and market differences. Each of these is discussed briefly below.
It is important to note that there are different kinds of “Chinese companies” and there is a different way for Westerners to approach each of these ethnically diverse types of companies. There are Chinese-native companies, Taiwanese and Hong Kong-based companies and foreigner-owned Chinese companies. Recognizing each and treating them accordingly is important. In addition, initial interaction with them, either directly or through a Chinese speaking agent is very important and will affect how a Western company deals with a Chinese company.
Chinese-native companies tend to have a love-hate relationship with Western companies. On the one hand, they are proud and highly nationalistic. There is also a tendency by some to distrust Westerners and their motives. On the other hand, many believe that dealing with Westerners elevates their social/industrial status. In terms of business acumen, some feel inferior to the Westerners, and believe any association with the Western culture, brand and corporation is something good and is desired.
When dealing with Chinese-native companies, it is important to understand the Chinese culture of reciprocity. English-speaking Westerners should focus on professional protocols but should also be aware of certain customs such as offering small gifts at an initial meeting to help in building the relationship. Learning a few Chinese words is also sign of respect and will help in relationship building. When enlisting a Chinese-speaking agent to facilitate business with a Chinese-native firm, the agent will need a direct relationship or have a compelling background story.
Personal relationships (“guanxi” in Chinese) are a significant driving force for sales and cooperation among the Chinese firms. It is important to remember much of the decision making related to Chinese industrial cooperation and alliance are driven by short-term gains. Consistent with the culture of reciprocity and the short-term mentality, Western companies are often expected to provide extra incentives to “sweeten the deal” in order to make them happen in China.
Successful Taiwanese and Hong Kong-based firms are sharp, realistic and hands-on. Because they incorporate expectations of both Western and Chinese business culture, dealing with Taiwanese or Hong Kong-based firms is perhaps the most difficult of all “Chinese firms” for Westerners. Companies wishing to conduct business with them must be professional and reputable by Western standards, but must also effectively demonstrate their capabilities, while building a relationship. Simply being Western is not enough to get their attention.
In addition to ethnic differences in ownership, there are legal differences as well. Companies can be described as either owned by the military, by the government or by a private entity. Businesses or sectors that are deemed important to the security of the state tend to be military-owned. State-owned companies are often those that are central to the planned economy and the current Five-Year Plan. Privately-held companies tend to be those where there are either opportunities for rapid growth or opportunities to gain access to foreign technology, or both. Companies wishing to invest in China should remember that despite recent progress in opening its markets, China remains a communist country that acts in a mercantilist manner rather than a free market manner.
Despite the large population in China, there is a shortage of qualified manpower. This tightening of the labor market has tended to drive wages up in China, and has led to other challenges in the marketplace. Chinese employees sometimes lack loyalty to their companies and change jobs frequently for better opportunities. The lack of loyalty coupled with the high demand for employees has led to a situation where employees sometimes do not feel compelled to work hard of efficiently since other opportunities can always be found. Some companies are run by a core cadre of leaders, who carry most of the company workload as opposed to distributing work down the chain of command or working as a team.
Another challenge for Western companies is the wage disparity between Westerners and the local Chinese. The differences in cost of living and salary standards combined with the low profit margins of many Chinese companies make it difficult for them to remunerate at the same level. When special accommodations are made to Western employees, this often generates jealousy among their Chinese counterparts. In addition to the wage disparity, there is often a disparity in professional practices between Westerners and their local counterparts. This can also be a source of tension if Westerners try to force their practices onto their local employees.
In comparison to other developed nations, the Chinese coating market is more focused on the low-end segment. An emphasis on low cost and low priced products and the limited R&D capabilities result in a lower overall level of product quality. The situation is further compounded by the current supply situation. The continuing growth in coatings demand, coupled with ongoing raw material shortages and price increases has created a conflict between pricing and resources. Price is often the first priority, followed by product reliability or quality. Large enterprises that win the price war or resource war will emerge to dominate the Chinese coating market. Small-scale, lower-level corporations are expected to close down or be acquired.
One opportunity for Western companies is the lack of specialized, innovative, high quality products. There are already enough Chinese firms producing low cost products. Western companies are unlikely to win a price war with local producers. Companies with high-tech innovation and superior product quality will also likely emerge unscathed from the recent supply chaos.
Government policy can also have a significant impact on the market. The 12th Five-Year-Plan that has recently been enacted is anticipated to continue to push growth in the market but with stricter product and environmental regulations. Solvent-based products may lose significant share depending on the commitment of the government to enforce these laws. Westerners must be aware of government policy, and how to interact with the officials. Furthermore they must understand that regulatory enforcement is not always even and consistent.
The Asia-Pacific region is an important and growing part of the global coatings marketplace. Unlike other regions of the world, the Asia-Pacific region has continued to grow, even in the face of the global recession. In particular, China and India have shown the greatest levels of growth, with China becoming the world’s largest coatings market in terms of volume. Over the next five years these growth trends are projected to continue with China and India leading the way. From a market segment standpoint, wood, powder, packaging, and industrial maintenance and protective coatings are forecast to experience the greatest rate of growth to 2014 in the region.
Due to the market size and continuing growth, many Western companies are looking to expand in Asia-Pacific and specifically in China. However, to be successful in China, Western firms need to learn about the Chinese culture. They need to be aware of the different types of Chinese firms and the differences in companies, personnel and markets as compared to Western countries. Western companies should uphold their professional protocols but need to understand how to build relationship when dealing with Chinese firms. Maintaining good relationships and communications should be a top priority when dealing with the Chinese. Companies looking to expand in other parts of Asia-Pacific such as India and Vietnam should expect there to be significant cultural and operating differences in these countries as well.
About the Authors: Orr & Boss, Inc. is a U.S.-based, international management consulting firm that specializes in the global specialty chemicals and coatings industries. Scott Detiveaux is a senior consultant with Orr & Boss and was the project manager for the recently published IPPIC global coatings market study on which this article was based. Allen Tsaur is a Shanghai-based consultant with Orr & Boss who specializes in the Asia-Pacific marketplace.