Digitalization is accelerating the introduction of new business models across industries. Established players such as Uber, Airbnb, or Amazon are leading digital platforms offering services in other sectors while owning little or no capital assets. The chemicals & materials industry is now also experiencing the entrance of new players and start-ups trying to replicate such concepts that build digital marketplaces on top of the traditional chemicals and materials value chain. Will these new digital platforms become the new market disruptor in the chemicals and materials industry?
Operating models
Practically, we divide digital platforms in the chemicals industry into two categories. One is a digital marketplace focused on commodity chemicals that allow for greater access and variety of products, more transparency on pricing, and enhanced supply chain services, to name a few. The other is dedicated to specialty chemicals and materials, focusing on formulated products, compounded materials, or sustainable products. Each model fulfills different purposes; while the first one is more conscious of price (i.e., optimizing cost), the latter focuses on increasing value.
As seen in other industries, new players are emerging, offering services on a digital platform without actually owning any assets – at least initially. Start-ups such as Knowde created a digital marketplace for chemicals, allowing customers to search and compare multiple providers and receive quotes from different producers. Other players are Chembid or Chemonids aiming to replicate business models that have worked in other industries.
However, there is some skepticism around digital marketplaces in the chemicals industry related to the operating model. While open platforms are helpful for commodity chemicals, for formulated specialties, proprietary platforms are more valuable. Further, commodities already have tight margins, and thus, it is questionable how players can generate profit in such a setup.
What are the advantages?
Currently, the existing marketing and salesforce manage one part of the business in chemical companies, usually handling the hefty contracts of leading customers. External distributors take the remaining volume. Such digital platforms can provide a more efficient way to connect upstream producers with downstream customers without having distributors in the middle.
One main benefit of digital platforms refers to enlarging the customer base. Many customers are willing to buy directly from producers. In particular, smaller customers can get better access to new products through such a platform. Thus, large companies can enlarge their business without adding complexity.
When it comes to commodity platforms, supply chain and support services that used to be offered by distributors can provide greater value to the customer. Other services such as formulation help, sustainability indexing, regulation,environmental health and safety data are examples of capabilities critical to creating value for specialty chemicals.
It is also a lot faster to go on a platform than to call a salesperson. Customers benefit from improved usability and customer interface. However, many customers prefer a personal interaction for final discussions, particularly around pricing in commodities and performance and availability in specialties. Therefore, a platform can provide digitized information and exchange with customers leading up to final confirmation and sale conducted by an actual sales representative.
What services are offered on digital platforms?
Prominent chemical players are using digital platforms more as an information portal rather than a sales portal. Essentially, companies are making their product catalog and data sheets publicly available to their customers, either on their website or an external platform.
From a customer’s perspective, an external platform with multiple suppliers provides a more efficient overview of products and materials from various suppliers in one place. Once the customer has decided on the materials to use, they would typically order them through a more traditional sourcing channel. This approach is particularly true for specialty chemicals. Hence, the usage is tied more to a marketing effort than transactions.
One of the providers operating in this space is Citrine.io, which is consolidating databases of products and formulations. They provide a smarter front-end that allows customers to ask more open-ended questions and queries referring to hundreds of products offered by a company. Generally, they structure a front end that resonates more with a customer’s approach to chemical and materials selection vs. how a particular supplier organizes its database of products. Digital platform providers can address this pain point by building interfaces that allow for a more rapid and efficient chemicals & materials selection process.
This approach represents a real opportunity for innovation in the market. They offer a more user-friendly system for customers to find materials or solutions that they would typically not, creating tremendous value. Especially smaller customers, which distributors have traditionally served, benefit from such a platform by gaining access to such an overview.
Advanced analytics tools enable the next level of innovation that allows greater ease of formulation. Organizing data sets from companies in a standard format is the first step. Adding machine learning and AI solutions to identify formulations drives the competitive advantage rapidly. This new model is emerging as it goes beyond traditional marketplaces by also linking formulation aspects.
What role will digital platforms play in the future?
Offering formulation services on top of a digital marketplace might not be the only role digital platforms play. The chemical industry is experiencing a significant push towards more sustainable production, which would enable customers to claim that their products are produced more sustainable and thus, boost their own sustainability goals. Identifying and certifying such sustainably produced materials provides an opportunity to enter digital platforms. Currently, there is too little information available on sustainability indexes of chemicals and materials.
This challenge leads into various industries. When thinking about consumer products, it presents a tremendous hurdle to trace all the hundreds of different elements that go into these products. Companies will need to conduct risk assessments and audits of each supply chain to understand where sustainability or other risks could impact a company’s ESG claims.
Another example would be battery supply chains, where customers are interested in production certificates. In this space, upstream suppliers (i.e., metals & mining industry) are closely connected to downstream customers to prevent production risk, for example avoiding child labor in the production of cobalt.
This risk assessment of supply chains will only increase due to sustainability and ESG goals for which companies are striving. Companies have a sustainability index they want to achieve and thus, need to know more about their raw materials and suppliers that provide such.
As there is not sufficient information system set up available to address this challenge, digital platforms could pick up on the opportunity.
What can be considered a disruptive concept?
Digital platforms that provide a more user-friendly interface and efficient selection process of chemical and material products present a crucial innovation in the industry. Further, transactions conducted through these digital platforms that replace the traditional sales process may be considered disruptive. Since a lot of customers still prefer a personal interaction throughout the sales process at some point, we may see a hybrid model of digitized marketing together with a traditional salesforce used by some companies.
Formulation-related services, as well as sustainability tracing and certification, present further innovation opportunities for digital platforms. It remains to be seen if such ideas can be considered true industry disruptors. It is certain, however, that such capabilities are necessary for chemical companies to stay competitive.
10EQS Contributors for this blog post include: