This article is based on a GCiS multi-client report: China Sealants Market Research Report.
Steady growth and medium-term opportunities make this a market worth paying attention to. Despite challenges from domestic companies, there are still opportunities to be had by expanding to high-growth end-user industries, and producing high-quality products.
Sealants are used all over the world in a variety of industries. They are primarily used to fill in gaps, and keep things like rain, sound, heat, and cold from getting in or out. They range in performance, with some possessing properties similar to medium strength adhesives. Sealants are usually split into one- and two-component sealants, which differ in terms of materials used, complexity of use, reaction to moisture and curing time.
The SR sealant market is predicted to be worth USD 20 Bn by 2019, and the majority of demand and growth is in China. There are five categories of sealant products made in China: silicone (SR), polyurethane (PU), polysulfide (PS), acrylic (AC), and other. Out of the RMB 12.7 Bn, or USD 2.06 Bn (2014 RMB 6.2 = USD 1), market, the SR and PU sealants are the most frequently used in China, while AC and PS have low growth and small market size.
There are no replacements for sealants in China, and market growth is set to be stable. But one doubt lingers: How will the sealant industry fare in the face of a slowing Chinese economy?
Green Tide Rising
One of the major trends in the sealant industry is for environmentally friendly products. The government uses both carrots and sticks to promote green products. In the sealant industry the most obvious example of this green drive is the slow decline in the growth of PS sealants, which are seen as too polluting.
For SR sealants, one of the main green features is longevity. The longer the product lifespan, the less often it has to be replaced, saving manpower, money, and materials. The base material for silicone sealants, polydimethylsiloxane, breaks down into non-harmful chemical and minerals, and it can be easily recycled. Polyurethane sealants are also highly recyclable and after reaching the end of their lifecycle, can re-bonded, chemically recycled, mechanically recycled or incinerated for chemical recovery. They are also lightweight, therefore using less energy for transportation and use. Both of these products contain very low VOCs (Volatile Organic Compounds).
Demand for green products puts foreign companies at an advantage, as green products require more technology investment, and foreign products have already achieved a high standard in this area. There are currently only a small handful of Chinese companies that can make products that meet international standards like the EU ETAG002 product specification for silicone structural sealant.
Mr. China Still Applies
Despite the publication of Mr. China over a decade ago, and its warning to all that read it about doing business in China, companies still haven’t learnt their lessons when it comes to the Middle Kingdom. Due to poor management of distribution networks in China, foreign companies have been left facing the prospect of a huge number of fake products flooding the market. This severely damages brand reputation - one of the key strengths of foreign companies - who are seen as producing high-tech, reliable products. Fake products are prevalent in the construction industry, as opposed to the automobile or electronics industry. This is because products are easy to fake in the construction industry, and in the latter two industries consumers directly purchase and use products, so quality control standards are somewhat higher.
Foreign companies sell almost all their products via distributors, and less than a tenth by direct sales. Also, distributors provide a range of services for suppliers including marketing and after sales service. As such a high amount of revenue is generated through distributors, if there is poor distribution management; fake sealants can appear in any of the end-user industries.
Henkel, the market leader for sealants in China, is a prime example of how a good product, being early to market, and a strong distribution network equal success.
Figure 1: Foreign Companies Channel Player Revenue Breakdown (2014)
Momentive is another company taking the right steps to ensure strong channel sales, and reduce the number of fake products on the market. They recently designated a Shanghai based distributor as their master distributor, thus ensuring a more streamlined sales network.
The takeaway from these suppliers and our interviews with channel players is clear: Manage sales channels well to eliminate fake goods, and boost brand reputation.
Competition is Getting More Intense
Unlike some industries where foreign companies still dominate the market, in the sealant market the level of foreign market share by output and revenue is low. Despite this, foreign and domestic companies sell to different markets, but the extent to which this applies differs by segment. Foreign companies are targeting the high-end market, and pricing their products accordingly. Most market demand is for non-high end products which favors domestic suppliers. Foreign products are popular in the automotive and transportation markets, and to a lesser extent, the electronics assembly industry. Foreign products are sold in the construction industry, but only make up 14% of total products sold by revenue in that industry. Domestic companies are particularly strong in the manufacturing, infrastructure, and construction industries. The SR segment is a maturing segment, meaning that growth is slowing and domestic companies have narrowed the technology gap between foreign companies. Average product price per ton is also decreasing. Foreign companies have a much stronger position in the PU segment, which is due to see the highest growth. In addition, many companies have a large amount of excess capacity; the industry average is 67% utilization rate. This means oversupply in this market and that prices are not likely to increase soon. Demand, while growing, is not increasing fast enough to raise prices in the short term.
The New Normal
The most important question that needs to be asked is: How will China’s economic slowdown affect the sealant market’s growth? The drop in overall economic growth impacts several major end-user industries for sealant products. More critically, these end-user industries are the top-three in all product segments. However, slow growth in different industries will affect some segments more than others.
Figure 2: End-User Market Share by Revenue 2014 and 2019
The automotive industry - the main end-user industry for the PU segment - has seen drops in demand. Growth rates for sales and output of commercial and passenger vehicles during January-May 2014 were 9.37% and 8.97%, for the same period in 2015 this fell to 3.19% and 2.12%, a drop of 6.2% and 6.8% respectively.
Both good and bad news exists in construction market. With the advent of buildings that use structural steel or reinforced concrete as the main means to bear a building’s load, the need to have the outer façade bear strong loads was removed. Nowadays exterior walls can be non-loading and use materials like glass that could not be used in the past. Sealants play a key role in ensuring these facades are weather proof, and hold together well.
These glass-covered office blocks standing tall in every one of China’s cities don’t just reflect light, they reflect the size of the construction industry. The construction industry is the backbone of China’s economy, and accounts for almost 3/4 of the total sealant market size.
However in recent years the construction industry has been slowing down dramatically. Despite rises in house prices, overall growth is a lot lower than in the early 2000s. Completed project area was 0.59 Bn m² in 2015 Q1, a cumulative growth rate of 9.3%, down of 5.6% from 14.9% in 2014. The equivalent figure for new construction area was 0.9 Bn m²in 2015 Q1, a decrease of 11.2% from 2014 Q1’s 1.02 Bn m². New areas under construction are relatively small in 2014 and most construction projects are those begun in 2013. This trend is part and parcel of the ‘new normal’ Chinese growth rate. This slowdown in construction affects the SR segment in particular, as construction is the largest end-user industry for SR sealants by far.
Those paying attention to the PMI index have seen that manufacturing companies are not doing well. The official manufacturing PMI remains unchanged at 50.2. This does not mean all manufacturing is growing slowly, just the industry as a whole. Growth areas in the manufacturing industry for sealants include telecommunication, which grew by 11.8% in 2014, electronic manufacturing grew by 12.2%, and consumer goods increased 8.4%.
Transportation is the fourth largest end-user industry by revenue for sealant products. China is seeing national investment in high-speed railways and other track projects. The recently announced Beijing-Tianjin-Hebei railway construction project valued at RMB 100 Bn is one of many new railway projects being undertaken by China. Total capital invested into railway construction for January-April 2015 increased by 22% year-on-year. Another major project is the ‘New Silk Road’ a plan to connect China with neighbors near and far by rail and sea trade routes. This will mean an increase in train car and ship production, both of which make use of sealant products. Even though government investment plan is less predictive in the past, in facing the slower GDP growth, Chinese government are more likely to invest in infrastructure and transportation projects to avoid an economy hard landing.
The electronics assembly industry refers to electric power components, PV panels, and LEDs. According to GCiS’s analysis, the electronics assembly industry was the fastest growing end-user industry. Based on government statistics, output for LEDs grew by 30% in 2014 due to government energy saving initiative and support of the LED industry. Other drivers of the electronic assembly industry include electronic PCB, which saw sales increase by 8.7% last year, and the PV industry which saw sales increase by 18%.
The first response may well be to switch to producing different types of sealant products, like polyurethane or acrylic sealants. This is a good strategy for polyurethane sealants, but acrylic sealants have stagnant growth and small market size.
Another option is to look outside the construction industry for growth. It is also worth bearing in mind: these options are not mutually exclusive. A company could change end-user industry, as well as sealant product. Fortunately, GCiS predicts high growth in several industries in the next few years. These are likely to enjoy growth beyond the short term, due to the “Made in China 2025” policy.
Issued by the State Council, it focuses on the development of 10 major industries which will be vital to transform China into a manufacturing superpower. Relevant industries to sealant suppliers are: aerospace equipment, high-tech ships, railway equipment, and new energy vehicles. Although this may cause some protectionist measures in manufacturing industries, upstream suppliers should be unaffected. This policy also prioritizes green products and high quality, both of which align with foreign companies’ products.
A version of this article was originally published in the October 2015 issue of Coatings World.