Prof. Wendelin Stark
is the Professor of Functional Materials Engineering at the Institute for Chemical and Bioengineering of ETH Zürich. He studied chemistry at the ETH and has a Ph.D. in mechanical and process engineering.

Startups and Spinoffs—Are Major Companies Going Extinct?

Thanks to their sophisticated and capital-intensive production processes, the established major chemical companies still seem to be protected from attackers using disruptive business models. But innovative young competitors could soon put them in jeopardy as well.

TEXTWENDELIN STARK

ILLUSTRATIONHENRIK ABRAHAMS

The view from the executive floors of big international companies frequently offers great perspectives. However, it can also generate a sense of unease. That’s because sitting somewhere far below are those people—the super-innovative and fully digitalized young teams of dynamic, highly motivated employees who would lay down their lives for their companies.

Some of these teams are hidden away in nondescript small-business premises, while others seek the companionship of like-minded people in collective coworking spaces. The dream of the young entrepreneurs who are our new heroes contrasts with the feeling of being subjugated by strict rules laid down by corporate headquarters and the demands of shareholders, regulators, and activist groups. And this dream persists, even though most startups’ real achievements are often minuscule and don’t justify the corporate value and expectations we generally associate with them.

The power of this new development can be seen on the stock market, where bold newcomers are pushing well-known companies out of the stock indices. It’s also evident in the competition for talented young people, with new companies being acclaimed as popular employers and enticing qualified employees away from time-honored industrial groups.

In the chemical industry, we’ve been largely unaffected by major upheavals so far. In our sector, we still haven’t had an Elon Musk directly attacking well-established companies. Nor can we expect existential shocks like those that have turned the media and the music industry upside down. So can we lean back, relax, and watch the turbulence in other sectors from a safe distance?

Why has the chemical industry so far remained unaffected by the upheavals caused by disruptive business models? In my opinion, there are four main reasons:

1. The chemical industry is profitable and extremely capital- intensive. In the entertainment, news, and music industries, there are low entry thresholds for digital business models with disruptive potential. That’s because the initial investments are often relatively affordable, and as production quantities increase the marginal costs of the production and digital marketing of texts, videos, and songs approach zero. By contrast, the scale-up costs are high in the chemical industry, and every increase of production requires additional capital.

2. Regulation, security, and liability: The chemical industry is strictly regulated, its products must go through complex authorization processes, and its supply chains require extensive guarantees. These obstacles also make it hard for newcomers to start up companies in this sector.

3. Long years of training and specialization: The high degree of specialization of skilled workers in the chemical industry results in the mutual dependency of employees and employers.

4. Patent protection: Patent protection of a company’s own products for 20 years is a central strategic tool. In the pharmaceutical industry, patent durations are in fact one of the most important valuation metrics for determining a company’s corporate value and capacity for action.

The barriers discussed above are obstacles as long as capital-intensive business models offer advantages. But the low-interest policy that was introduced after the financial crisis of 2008 has made it much easier to enter a capital-intensive line of business. The seemingly stable pillars of the chemical sector thus turn out to be weak points, because they encourage companies to be sluggish and offer attractive fields of action to agile new market participants.

As a result of digitalization, manufacturers of electronic hardware long ago forfeited the dominant position they used to occupy. The development of operating systems was the basis of software suppliers’ advancement. Today the operators of social networks are defining the business. It’s not possible to draw a simple analogy with the chemical industry, but I believe it’s worthwhile to think about whether similar upheavals could also happen here.

The corporate structure of our sector today is defined by a few big companies, gigantic production facilities with a high degree of specialization, and access to sources of raw materials such as oil and gas deposits and mines. The transition to cyclical raw material use and recycling processes, as well as the use of locally sourced energy and raw material components, are creating an entirely new business environment. As a result, the size and cost advantages of large facilities are disappearing. The key drivers of this development include the consumers’ increasing desire for more transparent production and supply chains, so that a product’s journey can be traced more accurately. In parallel, producers’ and suppliers’ technical capacity to create this transparency is also growing.

Until today, the strategic considerations of the chemical industry have been dominated by familiar chemical processes and product attributes. However, the decline of prices for computing and communication services is leading to increasingly affordable programs for modeling. There has been a similar decline in the prices for the analysis and synthesis of nucleic acids, and an enormous increase of the capacity of biological methods. This is opening up a multitude of new opportunities for synthetic biology. The convergence of these two developments could lead to a situation where even complex chemical products will be produced decentrally in the future. Large production facilities with long transport routes may be replaced by small decentralized units that produce specific products as needed, using local starting products. The only thing to be transported would be the information that defines the production processes. And the costs of this transportation would be practically zero. That would create a cost structure like the one that already exists in the world of the Internet and IT technology.

Chemical products will always remain important ingredients. But if the chemical industry continues to encounter new developments as passively as it has done so far, it runs the risk of losing its significance as an industry and retreating into the role of a supplier and provider of service functions. This development will be likely if other industrial sectors continue to push their way into the chemical industry’s traditional areas of business, and if the chemical industry is no longer presented in social contexts and education as an independent discipline but rather as a contributing concept that has only subordinate importance.

If that happens, chemical companies would also become less attractive employers on the labor market. Young professionals now have a multitude of opportunities to shape their future. They can choose to become employees in a large company or to take a bold step and start their own business. The obstacles to entrepreneurship are much lower than they were 20 years ago, and access to capital is easier—for example, through crowdfunding or as a spinoff from a university. The most innovative and motivated young talents are more strongly attracted to entrepreneurship than are university graduates with rather average degrees. As a result, major companies are facing the challenge of either developing attractive job offers or having to recruit employees from a shallower pool of talent. Innovative approaches for major companies might include enabling greater participation for their employees—in other words, enabling employees to more quickly become shareholders of the company they work for.

The transformation of the world of the 20th century—which was characterized by major companies, massive marketing expenditure, and long-term investment planning—into a new world that is still undefined in many areas is both challenging and exciting. This new world is one in which critical customers have considerable influence on the structure of supply chains, with network-based opinion-making and low capital costs. All of the attempts made by major companies—including companies in the established chemical industry—to maintain the status quo as long as possible are not a promising way to deal with this fundamental transformation. Instead, what we need is much more openness to new ideas and the courage to entrust entrepreneurially minded young managers with greater responsibility for shaping this future.

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