State of the Asian Coatings Industry: 2013 and Beyond

By Charles Bangert and Scott Detiveaux, Orr & Boss | August 13, 2013

2013 – A Year of Transition for the Global Economy?

As is the case in all regions of the world, coatings demand in Asia Pacific is heavily influenced by a wide array of economic factors.  So before getting into the main theme of this article, let’s first review where we are, or at least where we think we are, on the state of the global economy.  Simply put, there are two views held by international economists and cable television pundits on how the global economy is shaping up as we close in on 2013’s final quarter.  Those two divergent views are: (1) the global economy is certainly improving; and (2) the global economy is certainly still struggling.  Each perspective will be briefly reviewed below.

Supporters of the first view believe that 2013 may very well turn out to be the much anticipated “year of transition” for the economy since the global crisis of 2008 reared its ugly head –and decided to hang around for a while.  The “certainly improving” crowd believes that the world economy is now on a more positive, better-balanced growth path.  Among their observations, they point to the worldwide financial risks that existed a year ago and have since lessened.  In particular, they refer to the risks stemming from Europe’s deep financial challenges.  In recent months, their view is that Europe has begun to deal with these economic troubles head-on and is working through a solution.  In the United States, they point to the overall improving economy, the housing market that is finally back on track, and the pockets of economic boom occurring from cheap domestic energy sources resulting from drilling methods such hydraulic fracturing (fracking).  The “certainly improving” point of view also highlights the developing regions of the world, such as parts of Asia, Latin America and Eastern Europe, which continue to show strong economic growth, offsetting the sluggish activity of the mature economies.   

On the other side of the argument, the “certainly still struggling” crowd believes that the global economy has not yet shaken off the fallout from the 2008-2009 financial crisis.  This perspective points to the mature economies that are still healing from the deep scars left by events occurring five years ago.  Contrary to the “certainly improving” point of view, the “certainly still struggling” group believes that unlike what happened in 2010 and 2011, the emerging economies were not able to balance out the slack in GDP growth of the mature regions during 2012 as expected, and are probably not able to do so in 2013 either.  In fact, this view takes it one step further.  It says that the so-called BRIC economies (the developing economies of Brazil, Russia, India and China) which were the bright spots for growth during the 2008 – 2009 years will now be the contributors to the somewhat subdued global economic growth forecasted over the next couple of years.

Like most instances when there are highly divergent opinions the truth in this case probably rests somewhere between the two views.  There is no question that over the past two years, global growth has not been as robust as anticipated and in fact has slowed from the previous two years.  In 2012, the global economy grew by less than the forecasted amount – at only an estimated 2.9 percent.  The euro zone’s double dip recession, a more sluggish Chinese performance than expected and the less-than-stellar performance in North America all weighed heavily in 2012 on overall growth prospects.  However, policy makers on both sides of the Atlantic earlier this year would appear to have successfully defused two of the biggest short-term risks to global activity—the threat of a euro area breakup and a sharp fiscal contraction in the United States. 

Financial markets saw a strong rally throughout most of the first half of 2013 in response to a variety of factors, most of which are still somewhat baffling to the “market experts.”  According to the International Monetary Fund’s (IMF’s) latest World Economic Outlook (WEO) report, financial stability has improved throughout much of the world and the developing economies continue to lead the way on global growth.  The IMF has, however, lowered its outlook for the world economy this year, predicting that government spending is stifling U.S. growth somewhat and keeping the euro currency alliance in recession.  The IMF recently cut its forecast for global growth from 3.5 to 3.3 percent for 2013.  Interestingly, the IMF has not adjusted its forecast of 4 percent global growth for 2014 and its higher growth forecasts for the following couple of years.

Taking into account all of the views presented above and balancing them accordingly, it is probably correct to say that the global economy is transitioning into a period of greater stability, although growth will almost certainly be uneven from region to region.  The advanced economies will likely continue to experience a bumpy recovery while the developing economies, including many within Asia Pacific, will hopefully continue with their enviable growth rate of recent years.

Overview of the Asian Paint & Coatings Industry
Throughout 2012, under contract to the International Paint & Printing Ink Council (IPPIC), Orr & Boss, Inc., a leading management consulting firm to the chemicals industry, researched and produced a comprehensive report entitled, Global Paint & Coatings Industry Market Analysis (2011 – 2016). The report was published in December 2012.  An important chapter of this global coatings report is the one dedicated to the Asia Pacific region.  IPPIC has kindly agreed to let Orr & Boss share some of the important findings of the report in this article.

Asia Pacific is an important and fast growing region within the global coatings industry.  While Asia Pacific is generally viewed as one combined region, it is not a homogeneous group of countries in terms of coatings consumption.  There are significant differences in the importance of end use segments and in the overall size and growth rates of the various countries.

Orr & Boss estimates that in 2012, the global coatings industry was  $110 billion on approximately 34 billion liters.  In 2012, the Asia Pacific region represented approximately 40 percent of the value ($44 billion) and 47 percent of the volume (about 16 billion liters).  Figure 1 illustrates Asia Pacific’s share of the global coatings industry in both volume and value.

Within this region, China is the largest producer of coatings at slightly over $21 billion a year.  For years, China has been viewed as an engine of growth for coatings, not within Asia Pacific but for the global coatings industry as a whole.

India has seen dramatic growth in coatings production over the last decade and has recently emerged as the second largest producer and consumer of coatings within Asia Pacific, increasing from 1,205 million liters in 2006 to 2,725 million liters five years later.  In 2012, although India was the second largest producer of coatings in Asia in terms of volume, it was third in value – behind China and Japan.  India is experiencing some of the fastest growth in coatings throughout all of Asia, having much to do with its rapidly-growing construction and manufacturing industries. 

Japan ranks as the number three country in terms of consumption (in volume) within Asia and number two in value (nearly $7 billion).  Japan is larger in value than India even though its coatings consumption (volume) is lower because of the higher average price of its coatings – due both to product mix and its higher price points.
The next largest country in terms of consumption within Asia is South Korea.  Australia and New Zealand (known as Oceania) have mature, slow growing paint industries, not unlike that of Western Europe, with a very similar end-use structure.  Since they are mature economies, rapid growth within the Oceania region of Asia Pacific is not expected over the next several years. 
Over the last five years, coatings volume in Asia Pacific has increased by an average annual rate of seven percent.  Value has increased by an annual average rate of 7.5 percent over this period.  The automotive OEM, other transportation, powder and decorative sectors have experienced the largest increases in Asia Pacific over the past five years.  China grew at a rate of well over 10 percent per year in terms of both volume and value during this timeframe.  Figure 2 depicts the position of Asia Pacific within the global market as well as the position of the constituent countries within the region.

Economic Influences within the Asia Coatings Industry
Coatings demand in Asia Pacific is heavily influenced by a wide array of economic factors.  For example, 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 somewhat in the period following the economic recession, activity has continued to be strong 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 2011.  Over that same period, construction spending in China increased by over 10 percent.  This general trend in construction disparity is projected to continue, although perhaps not with such a large gap since North America’s construction industry will likely increase and China’s could cool down some over the next few years.

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.  Given that China is such a large percentage of the Asian market, it is important to note that coatings have continued to get a boost from the Chinese government’s investment in infrastructure development, including new bridges, landmark properties, alternatives energy facilities, nuclear power generation, hospitals, schools, etc.  Hosting world events such as the 2008 Olympics in Beijing, the 2010 Shanghai World Expo and the Guangzhou Asian Games has certainly continued to stimulate large infrastructure projects.  Also, much has been made of the changes in the global automobile industry, with China supplanting the United States a few years ago as the largest car producer in the world. This transition to the number one automobile market in the world is simply a microcosm of the shifting manufacturing landscape around the globe.
Market Trends and Driving Forces

In comparison to most developed nations, China, India and some of the Southeast Asian countries are more focused on the low end, low priced coatings segments.  An emphasis on low cost and low priced products and limited R&D capabilities result in a lower overall level of product quality.  Price is often the first priority, followed by product reliability or quality. 

Despite much of the coatings market in Asia being lower end, there is an emphasis being placed these days on R&D efforts and “higher technology” formulations due to the increased importance and growth of the industrial coatings sector.  Many of these efforts are accomplished through collaboration (i.e., licensing agreements, joint ventures, technology transfers, etc.) between the multinational and local/regional companies.  For example, within India, applications include performance coatings for the growing oil & gas and power plant sectors, packaging coatings for India’s exploding packaged food and beverage industry, coil coatings for the construction industry, automotive OEM and refinish coatings, and the conversion of liquid coatings to powder coatings for a range of durable goods.  Other than powder coatings, much of Asia’s industrial coatings is still based mostly on solvent-borne technology.  This will slowly change over the next decade throughout the developing parts of Asia Pacific as environmental and health & safety issues gain greater prominence with regulators and the general public.

Over the past five years, China has contributed significantly more to the overall world growth than any other country, and this is forecast to continue for the foreseeable future. That being said, there has clearly been a recent slowdown in China’s GDP growth compared to past years.  Some of China’s and other Asian countries’ economies are tied to the economies of North America and Europe.  For instance, as Southeast Asia’s exports to these regions have fallen due to the Western regions’ sluggish economies, so too has the GDP growth of these Asian exporting nations.  In another example, the ongoing debt crisis in Europe has impacted Chinese exports.  While this has been occurring, there has been a leveling off of middle class consumer demand across China which has resulted in thousands of layoffs and anemic sales of certain products for domestic consumption.  In fact, there are some international economists who worry that China could experience hard economic conditions which would result in negative consequences for other countries across the globe that have come to rely on China to fuel the global economy.  On balance, what is stated above, China’s GDP growth is still likely to do better than most other countries, perhaps seven to eight percent per year over the next few years. 

The expectation is that the disparity in growth rates between Asia Pacific countries will continue over the next several years.  China and India are forecast to experience the greatest growth in GDP per capita to 2016.  Japan and Australia are projected to post positive growth but will lag China, India and other parts of Asia Pacific.  Since growth in consumption per capita closely mirrors growth in GDP per capita, the expectation is that the growth areas of the past five years will continue to be the growth areas for the next five years.  Figure 3 depicts the forecast growth in GDP per capita by country for 2011 to 2016.

Competitive Landscape
Global coatings competitors play a significant role in the Asia Pacific market.   Their role, however, is less than in other regional markets and tends to be more specific to selected end use markets.  For example, in China, it is estimated that more than 15,000 manufacturers are active in the coatings marketplace, although the vast majority of them operate on a very small scale.  There will likely be a fair amount of consolidation taking place over the next several years in Asia as the best of the small and mid-sized companies get acquired by the multinationals and the weaker players get edged out by environmental pressures and the demand for higher quality products by customers.

AkzoNobel, through the ICI acquisition, is a leader in the Chinese decorative and industrial markets and has a very strong presence in powder coatings in the region. BASF, DuPont (Axalta) and PPG have carved out strong positions in the automotive OEM and refinish markets in China. Valspar has a large presence in the industrial coatings market in China and is active in the decorative market through Huarun Paints.  In September 2010, Valspar completed its acquisition of Australian paint manufacturer Wattyl Ltd. Both Kansai Paint and Nippon Paint are not only the market leaders in Japan but are also major suppliers in China.  Chugoku Marine Paints, another Japanese-based company that sells paint into the marine and industrial sectors, recently completed the construction of its third manufacturing plant in China.  While most of the local and regional Chinese paint companies tend to focus on the low-end parts of the market, there are a few Chinese paint manufacturers that offer high-end coatings.  For example, Guangdong Carpoly Chemical Group, Guangzhou Strong Chemical and Daoqum are Chinese companies that offer high end products, although none of them have very large market shares. 

Participation by the large multinational paint companies is growing in India. AkzoNobel, BASF, DuPont (Axalta) and PPG are all active in the Indian automotive refinishes, powder coatings and industrial coatings markets. Kansai Paint and Nippon Paint are also gaining a foothold in India. For example, Kansai Paint is the holding company for what was once known as Goodlass Nerolac of India, now called Kansai Nerolac Paints Ltd.

Within India, the large, well-financed coatings companies, including an increasing number of multinationals as mentioned above, comprise the so-called “organized” part of the Indian coatings market.  This is estimated to be over two thirds of the total coatings industry.  By contrast, the “unorganized” part of the Indian market is still quite fragmented with well over 1,000 small participants.  This segment tends to be more focused on the local and regional markets. 

Do Opportunities Still Exist in Asia Pacific for Western Companies?
The future growth of the coatings industry within Asian countries will depend on the growth and prosperity of their economies.  Certain aspects and drivers of the economy impact some segments of the coatings industry more than others.  For example, within the industrial coatings sector, sales of automobiles and other consumer goods are closely linked to personal income and overall GDP.  As GDP and personal income within a particular country increases, sales of products requiring coatings also increase.  Economies in Asia expected to see the greatest increase in GDP over the next several years include China, India and certain Southeast Asian counties.  Some of the more developed countries such as Japan, Australia and New Zealand are expected to have GDP growth below the global average.

As mentioned earlier, another major factor impacting the size of a country’s coatings industry beyond GDP growth is per capita consumption of paint.  While GDP growth has been quite rapid in the Asian Pacific region, the relatively low paint consumption per capita indicates that room for future growth is potentially quite large.  On a global regional basis, there is wide variation in coatings demand per person.  For example, the per capita consumption in Asia, which is less than five liters, is significantly lower than that of North America at nearly 12 liters per person per year.  As the developing economies of Asia grow and as the standard of living continues to increase in these countries, so too will the demand per capita for coatings.  The growth potential that exists for coatings in Asia is tremendous given the large populations and the population growth compared to Europe and North America.  Figure 4 depicts coatings demand per capita for Asia Pacific compared to the other four regions of the world. Since growth in consumption per capita closely mirrors growth in GDP per capita, the expectation is that the growth areas of the past five years will continue to be the growth areas for the next five years. 

By 2016, Orr & Boss forecasts that the global coatings industry could reach over $140 billion on more than 40 billion liters.  The Asia-Pacific market is projected to grow above the global average, albeit at a slightly lower growth rate than how it has previously performed.  By 2016, Asia Pacific will likely represent 51 percent of the global volume and 43 percent of the global value.  This kind of rapid growth in Asia Pacific has really gotten the attention of the Western coatings manufacturers and raw material suppliers over the past two decades.  Especially given the slow growth in Western countries, many paint industry participants have focused on the Asia Pacific region for future growth.  While the opportunities are many, Western suppliers often underestimate the difficulties in market entry at this time and the differences in business culture within the region.

Western companies looking to enter these markets for the first time may be surprised to find a new and more challenging reality compared to years past.  For example, as China transitions from being a developing economy to a leading one, labor rates have increased, particularly in the metropolitan areas as the standard of living for workers continues to increase.  Raw materials costs can be as high as they are in the more developed regions of the world.  Environmental and sustainability issues continue their migration to the forefront, sometimes driven by government regulations and sometimes driven by Western customers operating in that region.  And competition from international and even the more sophisticated local companies has reached a new high. 
To be successful with entry into Asia, a Western company should learn about the culture of the country that it intends to enter, and not just assume that all Asian cultures are the same.  They are not.  The Company must be aware of the differences in companies, personnel and markets compared to Western countries.  Western companies can uphold their professional protocols but need to understand how to build relationship when dealing with Asian companies and people.  Maintaining good relationships and communications should be a top priority when trying to enter any new geographic market.

About the Authors:  Charles Bangert, MBA and Scott Detiveaux, MBA are partners within Orr & Boss, Inc., a leading international management consulting firm to the specialty chemicals industry, headquartered in Detroit, Michigan, U.S.   (www.orrandboss.com).

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