Chemical Attraction

Germany’s chemicals sector is the largest in Europe and also one of the most innovative in the world. While its strength lies in producing basic chemicals efficiently, it also has a few lucrative secrets up its sleeve.

March 2020

The global chemicals business faces challenges ranging from international trade tensions to slowdowns in the automotive and construction sectors. But the German industry has a number of advantages, including the efficiency of its chemical parks, its skilled labor force, its central location in Europe with proximity to end customers and, last but not least, the hearty German appetite for research and development (R&D).

“The German economy basically lives from high-end engineering and intellectual property in the automotive and chemicals sector,” notes Christoph Gehse, managing director of Dymax Europe, a subsidiary of the U.S. Dymax Corporation, a world leader in light-curable adhesives. “And although Germany now produces fewer chemicals than some other countries [China and the U.S.], we are still one of the most innovative.”

High level of investment

Around 10 percent of the almost half a million people in the German chemicals workforce are engaged in R&D. And the chemical and pharmaceutical industries have devoted more and more money to this area every year since 2005. In 2018, the German Chemical Industry Association (VCI) announced a record-breaking EUR 11.8 billion in investment. That level of spending is equal to over five percent of the sector’s total revenues of around EUR 203 billion, and 16 percent of all R&D spending in Germany. No surprise then that German companies file the second most chemical patents at the European Patent Office. Moreover, the VCI predicts that investments will rise to EUR 16.5 billion by 2030.

Dymax light-curable adhesives are solvent-­free and form strong, highly stable bonds to plastics, metals and glass. Dymax Europe in Wiesbaden is a subsidiary of the U.S. company Dymax Corp. © DYMAX

Potential for chemicals start-ups

Interestingly, most of the innovation takes place within Germany’s Mittelstand – its often family-owned small and medium-sized enterprises, which account for 90 percent of Germany’s 2,200 chemicals companies. There’s also a new emphasis on chemicals start-ups which offer less conventional products and services. In Berlin, for instance, local authorities and the city’s technical university are putting EUR 11 million into an incubator for fledgling chemicals companies.

The most promising areas for future innovation in this field are digital development and sustainability. The German government is legislating emissions reductions, and the chemicals sector’s most important customers, including the auto industry, are desperately seeking solutions to deal with the new rules. This generates opportunities. For example, in October 2019, Japanese-founded company Sunstar opened a new 20-million-euro headquarters in Bavaria for its engineering wing. The company, which already supplies Nissan and Toyota in Asia, will work on exciting new projects such as novel structural adhesives that respond to the changing needs of European carmakers. As the company explains in a statement: “The Bavaria region is particularly attractive due to the strong presence of premium car manufacturers such as BMW and Audi.”

Valuable industry secrets

One of the most intriguing aspects of Germany’s chemical sector is that increasingly innovation is hidden. While the industry still relies on know-how in basic chemicals, it also harbors scores of potentially lucrative secrets – exciting interest from investors. Globally, the number of chemicals patents coming out of industrialized nations has been falling since 2010, explains Martin Erharter, partner and chemicals specialist at consultancy Roland Berger, but that’s not due to a lack of innovation. Instead, some firms, particularly those in specialty chemicals, are not necessarily patenting the new processes they develop but rather keeping them in-house to maintain a competitive edge.

Smaller companies are “more likely to use their specialist know-how about certain materials for very specific applications,” Erharter explains. “They’re shifting into more differentiated products, and they make very good money by adding value. It’s an extremely risk-resilient area. It’s also relatively easy to defend your niche.” He concludes: “What is also really interesting is that a lot of these companies are privately held and therefore have high investment potential.”

»Know-how in basic chemicals is advanced«

Interview with Martin Erharter

Germany’s chemicals sector is predominantly basic chemicals. Despite market challenges, it continues to do well. Why?

For a number of reasons. Firstly, the production facilities this sector has. These are extremely well maintained in state-of-the-art environments. Investment in them is high. Know-how in basic chemicals is advanced, and companies are putting effort into making what are essentially small improvements, using digital technology or data analysis. If you can improve output by a tenth of a percentage point, that has incredible monetary impact. And the supply of raw materials in Germany is very economical. Key production sites – the famous chemical parks – are all supplied by a pipeline network which is highly efficient and very competitive.

That doesn’t sound very exciting.

It’s not something that is necessarily very exciting, or even something that gets written about a lot. It’s more of an ongoing process. But it is a very solid business and it remains the cornerstone of the chemical industry in Germany.

Martin Erharter is a partner in the Chemicals & Pharma Competence Center at the Roland Berger consultancy. He began his career at the Sandoz/Novartis Group and has worked as a management consultant (notably in the manufacturing, engineering and auto sectors) since the mid-1990s.

Photo: Tom Pingel