China Joins the Global Agrochemical Industry Revolution

The global agrochemical market landscape has changed tremendously. China, an important member of the industry, is gradually shifting from pure raw material production to formulation production and becoming part of the development of industry giants relying on a strong capacity advantage and well-ordered competition for sustainable supply and growth.

M&A Reshapes the Global Agrochemical Industry’s Competitive Landscape

Global agrochemical giants have unleashed a wave of mergers and acquisitions (M&A) since 2014 to cope with the impacts of decreasing commodity prices, weak economies, and climate change. The industry, which is dominated by four large companies coexisting with a number of medium-sized players, has become highly monopolized.

Figure 1: New market dynamic builds up after the latest round of M&A activity

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Source: AgbioInvestor, Rabobank 2019

With the completion of large-scale M&A and the subsequent business optimization, the Matthew effect1 generated by this activity is becoming increasingly prominent and stimulating small- and medium-sized enterprises to accelerate the pace of M&A, cooperative alliance, and business restructuring. Since 2017, the number of M&A deals of small- and medium-sized enterprises has been three to five times that of large enterprises. Compared with large-scale M&A, the M&A deals of small- and medium-sized companies are more focused on targeting products, technologies, brands, markets, and channels to pursue synergies.

So, this is not just a wave of M&A among long-dominant multinationals, but a shake-up of the entire industry. One can expect that, in the next few years, M&A among small- and medium-sized enterprises will become a norm of development in the agrochemical industry and the fastest way for enterprises to complete transformation and upgrading. Industry concentration is expected to be further improved.

Figure 2: M&A is still ongoing in the global agrochemical industry*

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*Note: Tier 1 represents BASF, Bayer, Dow, Dupont, Syngenta; Tier 2 represents Adama, FMC, Nufarm, Sumitomo, UPL.
Source: AgbioInvestor, Rabobank 2019

Figure 3: Tier 1 players cope with competition by building up the industry ecosystem via acquisitions

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Source: AgbioInvestor, Rabobank 2019

China's Role Is Expanding

As the largest agrochemical producer and exporter, China has played a noteworthy role in the industry’s M&A activity. China is no longer simply a supplier of active ingredients and raw materials. It is becoming a partner or strong supporter of global giants to ensure future growth.

Multinational Companies Ally with Chinese Firms to Optimize Their Value Chain and Channel

Looking back at two rounds of M&A several years ago, Chinese companies were not in the game of large-scale consolidation, but things have changed. China's nationwide environmental protection inspections are gradually changing global agrochemical product supply. Production restrictions have become normal, due to stricter supervision. Consequently, prices have soared because of supply shortages. Leading global players are facing challenges in securing supplies of intermediates and active ingredients, and these challenges are urging multinational enterprises to seek resource conformity actively. Moreover, through M&A, multinational corporations can obtain registration and enter the Chinese market quickly. Acquiring Chinese manufacturers ensures sustainable growth via supply chain expansion, product portfolio optimization, and channel expansion. For their part, domestic manufacturers in China are consolidating their leading position through M&A. This is not just policy pressure, but also a response to the reduction of overseas clients resulting from global M&A activity.

Figure 4: China's production of active agrochemical ingredients sharply decreased, beginning in 2018

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Source: National Bureau of Statistics of China, Rabobank 2019

Leading Manufacturers Use M&A to Enhance AI Production, Relying on Scale, Process Improvements, and Cost Advantages

In the past, Chinese enterprises were mainly positioned to provide international giants with AI and OEM products. This model will continue to be maintained in the future, not only because of China’s access to raw materials and its complete chemical production value chain, but also because increasing labor and production costs in western countries are urging global giants to seek manufacturers who can provide customized products, especially products whose patents are about to expire. Doing so enables leading global players to reduce production costs and continue to make profits through R&D and formulation sales, thus facing the impact of generic products with relative ease. Leading Chinese manufacturers, especially those with sound environmental protection facilities, will monopolize the production of intermediates and AI products. Through M&A, leading players in China will dominate the production of specific products.

Domestic Manufacturers Extend Production Value Chains to Ensure Sustainable Supply and Improved Profitability

Environmental protection policies and administrative pressures have seriously affected China’s agrochemical enterprises. Formulation enterprises are striving to find the corresponding AI producers to ensure a sustainable supply of current products. Meanwhile, they are also trying to expand their product portfolios by acquiring small enterprises in order to enhance their position and grab market share during this wave of market reform. At the same time, in order to get more profits, AI producers are extending their activities to include the corresponding formulation enterprises in order to monopolize the value chain of AI and agrochemical products. The production of generic AI products will likely consolidate into an oligopoly that targets both China and overseas markets.

Compared with the M&A of global giants, the scale of M&A in China is not large, but it has a profound impact on the market. In the past few years, China has played an important role in supplying the market, relying on a complete chemical supply chain and low labor costs. With policy pressure and integration deepening, superior resources are further concentrated, and low-price competition no longer exists. Instead, value competition will become mainstream in China’s market, which will drive sustainable and healthy growth in the domestic and global agrochemical markets.

However, Chinese companies should pay attention to India’s rising capabilities. Although resource shortages and incomplete industrial chains still hamper India’s agrochemical development, China's relatively high manufacturing costs give Indian manufacturing a cost advantage, making investment of more capital into this field to meet Indian domestic demand an attractive option and an alternative for global multinational corporations.

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1 The Matthew effect, or accumulated advantage, is the principle that those who already have more also have an advantage in acquiring more.

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