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Leader or follower? The future of the chemical industry in Europe

Luk Van Wassenhove

A survey has found that an overwhelming majority of managers of chemical firms in Western Europe hold negative views about new regulations governing the industry. However, according to Baptiste Lebreton, postdoctoral research fellow at INSEAD, and Luk Van Wassenhove, who holds the Henry Ford chair in manufacturing, the latest EU directive can be used to create value and increase competitive advantage.

Baptiste LebretonLebreton and Van Wassenhove presented their research on European chemical companies at a conference in Budapest recently. Together with Management Engineers, a German-based consultancy firm, they developed a questionnaire which was targeted at the European chemical industry’s top managers. Firms with sales greater than 1billion euros in 2005 were approached. Some 47 executives from 34 companies took part, giving the study a response rate of 75 per cent,” Lebreton says.

Unlike previous reports which were based on “the consultants’ vision of the industry with no real link between what the people/managers say, and their view of the business,” this study took a novel approach. It used “direct feedback from individuals actually involved in the industry,” Lebreton says. “From this we could develop a scientific study that addresses the issues managers really believe will shape the industry’s future.

Managers were asked for their opinions on trends related to economic, technological, regulatory and market sector developments for the next ten years within the European chemical industry.

Lebreton says that while the overall outlook from the study was positive, with firms seeing opportunities in the rapid growth of emerging markets, the researchers were surprised that some 80 per cent of interviewees gave negative responses regarding recent European regulations in the industry, notably the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). He adds they consider the new regulations a threat to their profitability and feel they will “hinder future innovation.”

The EU directive came into force at the start of June this year. Under the new regulations, enterprises which manufacture or import more than a ton of a chemical substance each year will have register this in a central database administered by the new EU Chemicals Agency. Lebreton explains that “each chemical product has a different molecular structure and needs to be registered, tested and documented to ensure the substance is safe.”

The new rules have been brought in “to protect human health and the environment, while maintaining competitiveness and enhancing the innovative capability of the EU chemicals industry,” Lebreton says. The directive replaces 40 existing pieces of legislation that have been passed since the creation of the European Community 50 years ago.

There are concerns that costs will be high for the additional testing and registering of chemical substances and these, in turn, will affect profitability, he adds. Some in the industry also fear that the new rules will lead to reduced innovation as new product development will be easier and cheaper outside Europe - ultimately leading to Western European chemical firms being at a competitive disadvantage. However, Lebreton says, “there are many materials where the costs aren’t actually that high.”
“Companies should also develop strategies for positioning products as value added for customers and users because they have been proved to be safe.” With REACH, carcinogenic products like asbestos would have been systematically filtered out before they would have hit the shelves, thus saving many lives and legacy costs. By using REACH-compliant chemicals, companies drastically reduce their liability risk.

The new regulation could initially be considered a financial burden for companies, but it could bring benefits. “People want to have confidence in the chemical industry – it does not have a great reputation and many skilled engineering and business graduates therefore prefer to work in more ‘glamorous’ industries, which is a great risk in the long-term. In addition, it is only a matter of time before the rest of the world adopts similar legislation to Europe with regards chemical safety,” he says.

Chemical companies have long been fighting against the adoption of REACH, rather than trying to develop “something that can work for both parties.” Lebreton says. “These businesses should rather be concentrating on how (the directive) can be used to their advantage. One reason, however, it is still considered a threat is because the real costs are not yet clear. This is one of the many focuses of our future research – to find what the real cost to the industry will be of REACH. Our task as researchers is to provide a neutral cost assessment.”

One other research focus at the INSEAD Social Innovation Centre under the lead of Van Wassenhove will be to analyse whether European environmental legislation puts in place the right incentives to achieve its initial purpose: protecting people’s health.

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