Rethinking, repositioning and restructuring are now essential for industry survival

The CEOs of 2 major companies reported on consecutive days last week. Their messages couldn’t have been more different:

First, Indorama CEO Aloke Lohia told ICIS on Monday it was:

“Reviewing six operating assets in the ‘West’ for potential shutdown as it seeks to boost competitiveness and exit the merchant market for polyethylene terephthalate (PET) feedstocks amid intensifying competition from China. The Corpus Christi Polymers joint venture project in Texas between Alpek, Indorama and Far Eastern New Century (FENC), where construction has been halted since September 2023, is already under review, making it the seventh.

Next day, Arkema CEO Thierry le Henaff told ICIS their strategy was focused on resilience:

“Downstream is often less capital-intensive and that makes you less supply/demand-driven and because of that there is less volatility. Also because you are at the end of the chain you are less influenced by destocking: pricing is more stable, there is less destocking and less cyclicality. You need to have a balance between more resilient, less fast-growing businesses and more volatile ones which have more potential for growth.”

As promised last week, this therefore seem a good moment to explore how companies can become resilient.

As the chart confirms, today’s definition of ‘Business as Usual’ is no longer the status quo. Instead, its become a moving target.

SCENARIO PLANNING HAS BECOME ESSENTIAL

The simple issue is that the BabyBoomer-led SuperCycle is over. And central bank efforts to prolong it – by ‘printing babies’ in the form of stimulus – have simply left the world with record levels of debt.

So companies have to accept they are living in a far more uncertain world. Their portfolios have to be resilient in terms of trade wars. And they have to worry about the impact of actual physical wars. Plus, of course, nobody knows if today’s debt bubble might burst.

Critical Success Factors have therefore changed, as the chart highlights;

  • In the SuperCycle world, efficiency was king. Companies would build the largest possible plant, with the greatest possible integration. And they would aim to supply via global supply chains, based on lowest-cost supplies
  • In today’s New Normal world, resilience is king.  Companies need to be close to end-user customers, and very flexible in their operations. Advanced manufacturing is key to reduce costs and CO2 emissions

BEING DEMAND-LED REQUIRES A CHOICE BETWEEN LUXURY AND VALUE MARKETS

A key feature of the SuperCycle was the development of a major new market, the middle-market. This had never existed before:

  • There was a Luxury market, based on high-perceived value plus
  • A Value market, based on low delivered cost

In the 1990s, a new Middle Market developed, based on the concept of affordable luxury. Interest rates were falling from the 15% level of the early 1980s. And the Boomers had money to spend as they were moving along in their careers.

But today, as the chart shows, the Middle Market is disappearing again:

  • The Boomers have left the Wealth Creator 25-54 age group
  • They have joined the lower-spending, lower-earning Perennials 55+ age group

The iPhone 15’s performance in China – Apple’s second most important market – highlights the issue, as analysts Counterpoint note:

“It is getting squeezed in the middle on aggressive pricing from the likes of OPPO, vivo and Xiaomi. Although the iPhone 15 is a great device, it has no significant upgrades from the previous version, so consumers feel fine holding on to the older-generation iPhones for now.”

Resilience requires companies to refocus downstream and diversify their portfolio. They also need to be clear about the value proposition for their target market – are they providing Value, or Luxury?

Rethinking, repositioning and restructuring are now all key to survival and future profit.