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Newsletter 14, March 2005 (No comments so far)
Old game, new rules
This article is the adapted text of a presentation given at the European Plastics News conference on polymer distribution held in Brussels on March 16th 2005 under the title " Old game, new rules". DistriConsult's registered clients may ask for the slides presented at the Conference.
Non registered clients will need to pay 500 Euros to obtain them.
The main questions we are asking ourselves and will try to answer are the following ones "Which polymer producers will still be around in 2010? "Will the Mid East producers change the scene in Europe?" Which will be the channel strategy of the new and old suppliers?" Who will be the winners among the channels already on the market? How to price polymers for profit and differentiation? What is the future of polymer distribution? Only by asking ourselves these key strategic questions will we come closer to finding the answers.
Our European business environment significantly changed since 2001: the growth engines are in Asia, the Middle East and Central Europe. European polymer producers are becoming less competitive in front of very efficient new Middle East producers making ethylene out of Ethane gas. European converters are facing competition on their own markets from new Chinese and Central European film producers and injection moulders.
European polymer producers are reviewing their options and checking their capability to adapt to this new environment or drop out. The competitive cost advantage of Ethane based Mid East producers is estimated at one fourth below European naphtha based producers. In that context, DSM sold the petrochemical business to Sabic, Dow spun off their PTA-PET businesses to Equipolymer, BP Oil is spinning off BP Chemicals, Total Petrochemicals spun off Arkema, Basell is put for sale by Shell and BASF, Nova and BP are merging their styrenics businesses, Bayer split their ABS and PC businesses between Lanxess and themselves, while it is expected that Bayer will soon focus on their life science business.
All of this happening in the context of multiple announcements of new olefins capacities due to come on stream in the Middle East between 2005 and 2010.
The increasing fragmentation of the European polymer producers' scene, the disappearance of several historical suppliers and the emergence of new producers are creating unprecedented challenges for distributors.
The channel scene is largely covered by agents, distributors and traders which are respectively following distinct business models. Agents work for the producers, traders tend to work for their customers and are paid by them while distributors strive to receive a margin both from their suppliers and their customers. Intuitive evaluations are often made of the various markets served by distributors, traders, compounders and producers. These evaluations are somewhat artificial and intuitive as distributors and producers sell both small lots and full truck loads.
There are no well defined borders between the various markets served by different channels as distributors sell to other distributors and some converters resell the polymer they buy to receive a bigger rebate from their strategic suppliers.
However, seven companies namely ResinExpress, Biesterfeld Plastics, Albis, Ashland Plastics Europe, Schulmann, Ultrapolymers and Distrupol, play a significant role on the polymer distributor markets and their joint market share is generally estimated to be around 50% of the total distributor market.
Distributors have a lower market share of the mass commodity markets which are led and influenced by the polymer producers while they hold a higher share of the engineering polymers and specialties markets. Several producers like BP, Dow, Dupont, Basell or BASF implemented recently pan European distribution strategies whereas several other producers maintained regionally oriented strategies.
The emergence of European polymer distributors was stimulated by the development of European alliances and strategic cooperation agreements between suppliers and producers. The resulting limited number of true European players and the existence of tightly managed alliances with existing polymer producers reduce the available channel options for new polymer producers and importers.
The numerous @market places and @channel failures, resulting from a limited customers' interest, took the dreamers, consultants and big spenders by surprise. In reality over the last six years and contrary to all predictions, @channels made larger inroads on the consumer markets and had only a marginal impact on the B2B markets, which are more conservative and more relationship driven.
As Rainer Huneke General Manager of Biersterfeld Plastics eloquently predicted it in 2001, "the Internet is here to look and get informed but not to book". It is for him a management tool and an information medium for polymers, not an ordering tool.
It is important to understand well the polymer distribution pricing mechanisms as they relate both to sale from producers to distributors and from distributors to their customers. When distributors try to offer differentiated services for commodities, they increase their costs which they generally cannot pass to their customers. The only way to sell commodities is with a no frill approach and by reducing the number and amount of discounts to be given to the customers. By comparison, engineering polymers and specialties must be sold by specialists on product performance. In general, it is better to buy and sell polymers with net prices rather than managing complex and costly discount systems.
Pricing between distributors and producers should be based on the contribution of the distributor to his supplier and reciprocally. By measuring their respective contribution, both partners are in a better position to align their resources toward serving more efficiently the end customers. In summary, polymer pricing for distributors should be based on performance and contribution rather than on elusive market considerations. This is the only way to give to partnership its true meaning.
The overall profitability of the polymer distribution business is usually dismal and around 50% below what is to be found on the chemical commodity and specialty markets. As long as this is the case, new investments in polymer distribution or further channel consolidation will be limited.
In addition, the 2000 European laws on competition and vertical restraints impose new rules and new practices to producers and distributors.
Previously, agency agreements were regulated within each state whereas distributor contracts generally were not. Since 2001, both agency and distributor agreements are regulated and the relevant rules are gradually implemented and enforced. For more information, you may consult the European Commission site.
A close reading of the new competition laws may still give room to some interpretations but it is obvious that the concept of exclusivity is obsolete and illegal when it relates to producers seeking to impose exclusive or 100% volume supply obligations to their distributors. It is also illegal to restrict the resale territory or the type of customers to which a distributor is authorised to sell to. Any customer in Europe may order from any distributor he wishes to wherever the distributor is located. This also applies to Internet ordering.
A sensitive aspect lies on the pricing front where neither the prices made by the distributors to its customers, nor the names of the customers should be communicated to the supplier. From a strict legal standpoint, the status of a distributor who takes title of the goods he resells becomes now the status of a competitor to his supplier. A distributor is not anymore a sort of agent or an exclusive selling arm.
A distributor is an independent company whose purchasing, pricing and margin strategies cannot be restricted by his suppliers. He may consecutively offer similar polymers from various sources to his customers. The European legal environment for distributors becomes gradually similar to what is already in place in the USA.
A supplier who is ready to transfer his small lot distribution business to a distributor is not allowed anymore to provide him with a list of customers to serve and prices previously concluded. Reciprocally, the concept of transparency for the distributor towards his supplier excludes any detailed information about prices quoted to specific customers. General information given on market trends and price levels is authorized.
The topic of direct deliveries or full truck load deliveries is a sensitive issue in polymer distribution as it represents significant volumes. A supplier is not supposed to know to which customers his distributor resells to and at what price. To comply with this requirement, producers interested to manage direct deliveries through distributors should sell the relevant volumes on a "Free On Truck" basis. In such instance, the distributor takes title of the polymers purchased at the site of the producer, organizes and pays for the transport to his customers. His supplier will not know who the buying customers are, since he does not deliver the goods himself. Another legal possibility offered to the supplier is to consider the distributor as an agent and pay him a fixed commission on the direct deliveries made through his organisation. It seems important for each producer to clearly state and publish their internal business rules and standards for the volumes they will sell themselves and the minimum revenue dimension of the customers they will serve directly.
At a time when governance becomes a fundamental corporate feature, the adaptation to the new guidelines on vertical restraints as stated in COM 2000 C 291/01 seems necessary for both polymer producers and distributors to avoid possible penalties and legal risks.
Polymer distributors face several specific challenges such as low profitability expressed in gross and net margins, industrial delocalisation to emerging countries, reduction of number of small and medium size converters, uncertain alliances with insecure suppliers, difficulty to manage polymer price lists, higher operating and supply chain costs, market development cost increases, adaptation to new competition laws and a tougher competitive environment.
The winners among the polymer distributors will be those who will be able to find the appropriate answers to these unprecedented challenges.
In conclusion, the new rules to the old polymer distribution game are:
Non registered clients will need to pay 500 Euros to obtain them.
The main questions we are asking ourselves and will try to answer are the following ones "Which polymer producers will still be around in 2010? "Will the Mid East producers change the scene in Europe?" Which will be the channel strategy of the new and old suppliers?" Who will be the winners among the channels already on the market? How to price polymers for profit and differentiation? What is the future of polymer distribution? Only by asking ourselves these key strategic questions will we come closer to finding the answers.
Our European business environment significantly changed since 2001: the growth engines are in Asia, the Middle East and Central Europe. European polymer producers are becoming less competitive in front of very efficient new Middle East producers making ethylene out of Ethane gas. European converters are facing competition on their own markets from new Chinese and Central European film producers and injection moulders.
European polymer producers are reviewing their options and checking their capability to adapt to this new environment or drop out. The competitive cost advantage of Ethane based Mid East producers is estimated at one fourth below European naphtha based producers. In that context, DSM sold the petrochemical business to Sabic, Dow spun off their PTA-PET businesses to Equipolymer, BP Oil is spinning off BP Chemicals, Total Petrochemicals spun off Arkema, Basell is put for sale by Shell and BASF, Nova and BP are merging their styrenics businesses, Bayer split their ABS and PC businesses between Lanxess and themselves, while it is expected that Bayer will soon focus on their life science business.
All of this happening in the context of multiple announcements of new olefins capacities due to come on stream in the Middle East between 2005 and 2010.
The increasing fragmentation of the European polymer producers' scene, the disappearance of several historical suppliers and the emergence of new producers are creating unprecedented challenges for distributors.
The channel scene is largely covered by agents, distributors and traders which are respectively following distinct business models. Agents work for the producers, traders tend to work for their customers and are paid by them while distributors strive to receive a margin both from their suppliers and their customers. Intuitive evaluations are often made of the various markets served by distributors, traders, compounders and producers. These evaluations are somewhat artificial and intuitive as distributors and producers sell both small lots and full truck loads.
There are no well defined borders between the various markets served by different channels as distributors sell to other distributors and some converters resell the polymer they buy to receive a bigger rebate from their strategic suppliers.
However, seven companies namely ResinExpress, Biesterfeld Plastics, Albis, Ashland Plastics Europe, Schulmann, Ultrapolymers and Distrupol, play a significant role on the polymer distributor markets and their joint market share is generally estimated to be around 50% of the total distributor market.
Distributors have a lower market share of the mass commodity markets which are led and influenced by the polymer producers while they hold a higher share of the engineering polymers and specialties markets. Several producers like BP, Dow, Dupont, Basell or BASF implemented recently pan European distribution strategies whereas several other producers maintained regionally oriented strategies.
The emergence of European polymer distributors was stimulated by the development of European alliances and strategic cooperation agreements between suppliers and producers. The resulting limited number of true European players and the existence of tightly managed alliances with existing polymer producers reduce the available channel options for new polymer producers and importers.
The numerous @market places and @channel failures, resulting from a limited customers' interest, took the dreamers, consultants and big spenders by surprise. In reality over the last six years and contrary to all predictions, @channels made larger inroads on the consumer markets and had only a marginal impact on the B2B markets, which are more conservative and more relationship driven.
As Rainer Huneke General Manager of Biersterfeld Plastics eloquently predicted it in 2001, "the Internet is here to look and get informed but not to book". It is for him a management tool and an information medium for polymers, not an ordering tool.
It is important to understand well the polymer distribution pricing mechanisms as they relate both to sale from producers to distributors and from distributors to their customers. When distributors try to offer differentiated services for commodities, they increase their costs which they generally cannot pass to their customers. The only way to sell commodities is with a no frill approach and by reducing the number and amount of discounts to be given to the customers. By comparison, engineering polymers and specialties must be sold by specialists on product performance. In general, it is better to buy and sell polymers with net prices rather than managing complex and costly discount systems.
Pricing between distributors and producers should be based on the contribution of the distributor to his supplier and reciprocally. By measuring their respective contribution, both partners are in a better position to align their resources toward serving more efficiently the end customers. In summary, polymer pricing for distributors should be based on performance and contribution rather than on elusive market considerations. This is the only way to give to partnership its true meaning.
The overall profitability of the polymer distribution business is usually dismal and around 50% below what is to be found on the chemical commodity and specialty markets. As long as this is the case, new investments in polymer distribution or further channel consolidation will be limited.
In addition, the 2000 European laws on competition and vertical restraints impose new rules and new practices to producers and distributors.
Previously, agency agreements were regulated within each state whereas distributor contracts generally were not. Since 2001, both agency and distributor agreements are regulated and the relevant rules are gradually implemented and enforced. For more information, you may consult the European Commission site.
A close reading of the new competition laws may still give room to some interpretations but it is obvious that the concept of exclusivity is obsolete and illegal when it relates to producers seeking to impose exclusive or 100% volume supply obligations to their distributors. It is also illegal to restrict the resale territory or the type of customers to which a distributor is authorised to sell to. Any customer in Europe may order from any distributor he wishes to wherever the distributor is located. This also applies to Internet ordering.
A sensitive aspect lies on the pricing front where neither the prices made by the distributors to its customers, nor the names of the customers should be communicated to the supplier. From a strict legal standpoint, the status of a distributor who takes title of the goods he resells becomes now the status of a competitor to his supplier. A distributor is not anymore a sort of agent or an exclusive selling arm.
A distributor is an independent company whose purchasing, pricing and margin strategies cannot be restricted by his suppliers. He may consecutively offer similar polymers from various sources to his customers. The European legal environment for distributors becomes gradually similar to what is already in place in the USA.
A supplier who is ready to transfer his small lot distribution business to a distributor is not allowed anymore to provide him with a list of customers to serve and prices previously concluded. Reciprocally, the concept of transparency for the distributor towards his supplier excludes any detailed information about prices quoted to specific customers. General information given on market trends and price levels is authorized.
The topic of direct deliveries or full truck load deliveries is a sensitive issue in polymer distribution as it represents significant volumes. A supplier is not supposed to know to which customers his distributor resells to and at what price. To comply with this requirement, producers interested to manage direct deliveries through distributors should sell the relevant volumes on a "Free On Truck" basis. In such instance, the distributor takes title of the polymers purchased at the site of the producer, organizes and pays for the transport to his customers. His supplier will not know who the buying customers are, since he does not deliver the goods himself. Another legal possibility offered to the supplier is to consider the distributor as an agent and pay him a fixed commission on the direct deliveries made through his organisation. It seems important for each producer to clearly state and publish their internal business rules and standards for the volumes they will sell themselves and the minimum revenue dimension of the customers they will serve directly.
At a time when governance becomes a fundamental corporate feature, the adaptation to the new guidelines on vertical restraints as stated in COM 2000 C 291/01 seems necessary for both polymer producers and distributors to avoid possible penalties and legal risks.
Polymer distributors face several specific challenges such as low profitability expressed in gross and net margins, industrial delocalisation to emerging countries, reduction of number of small and medium size converters, uncertain alliances with insecure suppliers, difficulty to manage polymer price lists, higher operating and supply chain costs, market development cost increases, adaptation to new competition laws and a tougher competitive environment.
The winners among the polymer distributors will be those who will be able to find the appropriate answers to these unprecedented challenges.
In conclusion, the new rules to the old polymer distribution game are:
- Partnership between leading distributors and their strategic suppliers will remain a fundamental channel management aspect. The partnership rules set between the supplier and the distributor will have to meet the terms of the new EU competition laws.
- Profitability and margin management is a key issue to resolve
- Middle East producers will seek PE/PP distributors in Europe. Initially traders and resellers will benefit. Some distributors will shift their alliances and align themselves with them.
- Distributors must focus on end user pricing, CRM and supply chain management to cope with increasing costs and declining European markets.
New European Union Rules
| Distribution terms | Before 2001 | After 2001 | Examples. Comments |
| Geographical exclusivity | Common | Restricted | Volkswagen Italy fined 90 M€ for preventing Italian dealers to sell abroad |
| 100% supply exclusivity or single branding or single sourcing | Common | Illegal | Michelin fined 20 M€ for restricting dealers purchasing of industrial tyres |
| Market and customer information or "Transparency" | Not regulated | Possible, but excludes customers' names & prices | Nintendo fined 168 M€ for imposing prices & trade restrictions |
| Offering different brands | Not regulated, producers restricted multi sourcing | No buying restrictions may be imposed on distributors | Already in practice |
| Customer repartition among direct and indirect channels | Not regulated | Restricted/illegal | Not recommended, because of the risk of collusion |
| Resale price lists | Tolerated | Restricted | Not recommended |
| Direct shipments Streckengeschaefte |
Free delivered, transport paid by the supplier | Restricted. Moving to Free on Truck. "FOT", transport paid by the distributor | Supplier should NOT know the names of the customers and prices quoted |
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