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Digital Transformation in Chemicals Industry with Platforms

Applico is the world’s first Platform Innovation Company. We’re a trusted advisor to enterprises looking to go beyond digital transformation and capitalize on the business model of the 21st Century – the platform – to survive the next 100 years of business. A key segment in danger of platform disruption is industrial distribution, which includes the chemicals industry, electronics distributors, toolmakers, and many more.

Amazon Disrupts B2B Industrial Distributors

What are some examples of B2B Industrial Distributors?

  • Industrial Supply: Grainger sources tools (DeWalt drills, Milwaukee, etc.) and packages them in useful bundles for factories
  • Chemicals: Univar purchases large amounts of chemicals and distributes them in smaller loads for their clients
  • Auto Manufacturing Suppliers: Magna International produces and sells car bodies/chassis and seats to automakers
  • Electronics Distributors: Arrow sources electronic components like capacitors and attenuators and then distributes them to people building bigger electronics

B2B distribution is an industry we’ve identified as a prime target for digital disruption. Amazon’s B2B division, Amazon Business, became a billion dollar business in under a year. It was able to scale so quickly because of its platform business model. Amazon is the world’s complete online store because you can buy anything on the platform; it has become the definition of e-commerce.

However, Amazon doesn’t manufacture these products itself. It invites merchants to list their products on the Amazon marketplace and they happily do so because Amazon = guaranteed revenue.

Now, Amazon is getting serious about B2B.

It’s courting B2B manufacturers to list their products on Amazon Business, which should be a major red flag for any B2B industrial distributor because Amazon is now a competitor and is diluting the value that distributors provide to customers.

In fact, the Amazon Business portal now has specific features to help with the enterprise procurement process, e.g., making it as easy for big companies to buy building products and systems in bulk as buying detergent with Amazon Prime. You don’t need to look any further than the chemicals industry to see the Amazon threat is real in industrial supply and distributors – Amazon is already selling chemicals!

Businessman holding a red flag; Amazon poses a huge threat to the chemicals industry

  • The market size for the chemicals industry in the US is $36.59 billion and is expected to grow to $45.9 billion in 2020
  • The market size for specialty chemical distribution in the US is $25.6 billion

The specialty chemical industry can be further segmented into subsections:

  • Industrials – paper, oils, plastics and resins
  • CASE – coatings, adhesives, sealants and elastomers
  • HPC – household and personal care
  • Specialty Agriculture
  • Life sciences

Here’s a breakdown of these by percentage of the specialty chemical distribution market and the market size for each: % Market Size (in billion $)

  • Industrials: 46%, $14.13
  • CASE: 12%, $3.69
  • HPC: 16%, $4.91
  • Specialty Agriculture: 15%, $4.61
  • Life Sciences: 9%, $3.37

Traditional Role of Chemicals Distributors

The distributor model in chemicals serves a basic function of matching supply and demand in a fragmented market. Distributors execute several function: sourcing from multiple producers to ensure a diverse and complete product offering; taking physical ownership of product and storing them until needed; mixing and blending, and repacking products according to customers’ needs; and finally selling and transporting to customers.

Operating this model as a solo player is no longer viable. Amazon’s encroaching threat undermines the value a single distributor can offer, meaning some sort of consolidation is essential survival.

Fragmentation!

Despite the ongoing consolidation, the chemicals industry remains extraordinarily fragmented. Consolidation in chemicals is needed since companies need to enhance their value proposition to customers with products, capabilities and scale, leading to opportunities abound for companies with strategic and global expansion plans. There were 248 M&A transactions with a total deal value of $15.6 billion in Q1 2015. This is typical behavior of a highly fragmented industry like chemicals. Fragmentation also spells opportunity for platform disruption.

Think of Uber and the taxi industry. Before Uber, there were thousands of small taxi companies and no major players. Uber’s platform consolidated that taxi inventory into a platform and became the dominant ride-hailing marketplace we see today. The same opportunity is available to chemical distributors to aggregate chemical products into a product marketplace (Amazon and eBay are examples of product marketplaces).

Amazon views fragmentation as an opportunity. It’s currently recruiting small- to medium-sized chemical producers to list their products on Amazon. By building a foundation from the ground up, Amazon is build an arsenal of inventory that will allow it compete with the larger chemical distributors. This strategy by Amazon is how it begins to solve the chicken and egg problem and start to build network effects.

What Can the Chemicals Industry Do?

Considering the level of fragmentation, the only firms liable to pull off a platform transformation and succeed would be the largest players in the market. A firm like Univar or Brenntag could develop a product marketplace and encourage smaller companies to list their products in order to access a wider swath of customers. As the platform adds more distributors, customers will be drawn to the increased variety of offerings, increased price transparency, and, presumably, lower costs. A shift in the industry’s demand will necessarily draw supply, pulling the other big distributors onto the platform, too.

To the first mover would go the spoils, provided it can act fast and act soon before Amazon Business subsumes the market’s demand and prices out competitors until they cooperate.

How Can Applico Help?

If you’re a digital or innovation leader at a chemical distributor company, we’d love to chat! Our advisory Platform Design approach will help chemical distributors build a strategic roadmap for building the product marketplace monopoly of chemicals before Amazon dominates. Please contact us to get a free copy of our book on platforms, Modern Monopolies, and schedule a free consultation with our leadership.

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