1 specialty chemicals: the drive to maintain a leading position.(Cover story)

Obtaining or maintaining a top-three position in core markets is not getting any easier for specialty chemical producers, especially in highly competitive markets with little product differentiation. Some firms say it is necessary to make significant investments--in R&D, M&A, building new plants in high-growth markets, or forming alliances with other firms--to become a leading player, or, at least, to maintain current standing.

Several major companies have been doing that in the last year or so, investing heavily to grow in selected specialty chemical markets. Some of these investments, such as BASF's planned acquisition of Engelhard for about $5 billion, will better position the buyer in key markets. Others plan to invest in R&D, including Rohm and Haas (R&H), which will invest 4% of its total sales of $8 billion back into R&D to step up new product launches. The average percentage investment for the specialty chemical sector is 3%.

"From an M&A perspective, I think specialty chemical companies are all searching for scale or size to really dominate the market," says Tommy Mann, managing partner/chemical practice at Accenture. Companies are also acquiring firms with differentiated technologies that can add to their portfolio or help them yield higher margins across their portfolio, Mann says. However, only R&H and a small number of other pure specialty chemical firms are making significant investments in R&D, which is a trend that should be reversed, he says. "R&D is a lever that people should be pulling now especially, because we are at the top of the cycle," he adds. "Pure specialty companies ought to take advantage of their core R&D so that they can differentiate themselves with new products or new grades of products, because now is when they have the cash flow to do that." Companies also should consider collaborating with other firms that specialize in R&D, such as Avantium (Amsterdam) or Symyx Technologies (Santa Clara, CA), companies that specialize in high-throughput research for the chemicals and materials sector, Mann says. Accenture formed a partnership with Symyx last year.

R&H expanded via acquisitions during the late 1990s, buying at least six companies, four of which were electronic chemical makers. The company shifted its focus back to R&D in 2002, however. R&H formed a new R&D program during the last two years, under which executives monitor about six of the fastest-growing R&D projects. Those projects are creating new product lines for R&H, and will have combined sales of about $1 billion at maturity, says Gary Calabrese, v.p. and chief technology officer at R&H.

The company has not ruled out acquisitions, but "R&D is more sustainable for …