The chemicals, pharmaceuticals, and rubber and plastic products industries can be characterised as mature industries. Particularly the chemicals and pharmaceuticals industry is characterised by large firms. Being science-based, traditionally key innovations in the sector originate from the research labs of large firms in collaboration with university labs. For the pharmaceuticals industry biotechnology has become a crucial sector, that is driven by smaller, innovative start-ups compared to the chemicals industry. However, the costly clinical trials and economic power of the large firms means that often smaller, innovative firms are bought by the large firms when it comes to the commercialisation of new products.
Research and innovation as source for competitive growth
Unlike emerging competitors in the Middle East and South-East Asia, Europe cannot base its future growth on cheap natural resources or abundant cheap labour. Knowledge and a strong
research basis are essential to create knowledge-based competitive growth (HLG, 2007a).
R&D intensity of the European chemicals industry has slightly decreased over the last ten years, at a level which is considerably lower than in Japan but similar to the US, being close to 2% of sales. The R&D intensity of the pharmaceuticals industry is much higher, with often firms spending as much as 20% of sales (Pedersen, 2007). Due to the international activities of the large European firms and the tendency to relocate development activities close to customer markets, European firms have tended to gradually move closer to the large emerging markets (EMCC, 2005). According to the High Level Group on the competitiveness of the chemicals industry one important reason behind the relatively low R&D intensity is the fact that even today base chemicals – which require a rather low investment in research – represent almost 60% of sales of the European chemicals industry. The fact that base chemicals have a considerable weight in sales of the European chemicals (broadly defined) industry as a whole masks much higher R&D investments in fine chemicals, advanced materials and other higher-tech sub-sectors (HLG, 2007a, p.9). Other sources see the focus on financial performance, frequent restructuring and increasing regulatory costs as limiting R&D spending in industry (SusChem, 2005). At the same time the EU is relatively weak in bringing innovations to the market (HLG, 2009).
Differences in R&D and innovation activities between sectors
Historically, the chemicals sector and particularly the pharmaceuticals sector are science-based sectors, relying on innovations originating from basic research carried out in universities, public research organisations and corporate research centres (Pedersen, 2007).
R&D investments are hence seen as a crucial factor affecting future competitiveness. R&D spending varies substantially between sub-sectors. In 2003, chemicals and chemical products accounted for 8% (€7.9bn) of EU manufacturing R&D of €98.5bn. The pharmaceuticals sector however is spending twice as much on R&D (€15.6bn) while the rubber and plastic products sector only spent 2% (€2.2bn) of EU manufacturing R&D (CEFIC, 2007a). The pharmaceuticals sector therefore takes a special role in terms of R&D investments and intensity. Furthermore, these statistics only include R&D investments by firms with pharmaceuticals manufacturing as main activity. Research carried out by independent research institutes, such as spin-off laboratories of universities, are classified separately.
Actual R&D investments are therefore higher than official statistics would tend to suggest (Eurostat, 2005).
Importance of biotechnology for future innovation
Bio- and nano-technology are crucial for the future innovation potential of the chemicals, pharmaceuticals, rubber and plastic products sector, and particularly so the pharmaceuticals sector. Biotechnology is a research intensive activity spending one thirds of its resources on R&D (EMCC, 2005). This does not only mean that the sector provides important growth opportunities and high skilled employment but is also important for the traditional chemicals sectors providing higher performance products and more efficient processes. Both factors are important for market success. Examples of biotechnology sub-sectors relevant for the manufacture of chemicals are white biotechnology and green biotechnology:
• white biotechnology: industrial and environmental products and processes, such as bio-cleaning, bioremediation, environmental and industrial diagnostics, water and effluent treatment, as well as recycling; (EMCC, 2005)
• green biotechnology: veterinary healthcare, bio-pesticides, plant agriculture, food technology and processing; (EMCC, 2005).
Innovations in white biotechnology will change the chemicals industry structure and output, by enabling production minimising hazardous materials, waste and emissions and operating at more benign conditions of temperatures, pressures, pH as well as using novel auxiliary materials and solvents. Currently, biotechnology already plays a significant role in the pharmaceuticals sector (red biotechnology), to which statistics on biotechnology normally refer to. For white biotechnology, however, there are only single examples with most publications referring to the future potential in the sector (Suschem, 2005). This has to do with large differences between sub-sectors applying biocatalysis in industrial production processes, such as the production of fine and bulk chemicals, detergents, textiles, pulp and paper, and bioethanol. Adoption rates of biocatalysis vary between 100% for individual textile finishing steps and certain fine chemical compounds, and 0.4% for polymer production (Papatryfon, 2008). This also means that aggregated data for the sector is available.
But one of the challenges for implementation is the much slower development of biotechnology than envisaged by experts at the turn of millennium (EMCC, 2005). The frequently cited McKinsey study forecasted a 10-20% penetration of biotechnology processes in the chemicals sector by 2010, with fine chemicals the most important growth sector (up to 60%) (Bachmann, 2002). Today it has become clear that this take longer to be put into practice, but this does not reduce the potential impact of biotechnology on the sector.
Product development and innovation – links with user industries
Research and development (R&D) is of outstanding importance in the chemicals and pharmaceuticals industry, particularly for the downstream industries such as the fine chemicals, advanced materials and other higher-tech sub-sectors. Chemical products are intermediate goods that are incorporated in client industries products, from semi-finished metal products, consumer electronics and machinery and equipment, to domestic appliances and furniture. The stimulus for innovation comes from the development of products, as well as from joint R&D projects with client companies in other industry sectors (ZEW/NIW in EMCC, 2005). However, this close interaction with downstream users means that over time production may tend to follow user industries in relocation movements, followed by development and research activities. This could have important consequences for employment, production and future development of the sector. Examples from the past are the textiles and electrical components industries.
Commoditisation of specialty chemicals
An important strategy of European firms over the last decade to counteract competitive pressures from South-East Asia and the Middle East was to focus on specialty chemicals.
Specialty chemicals are research intensive and provide higher value added. Higher value added provides European firms a chance to compete on performance attributes rather than costs, where Europe is at a structurally competitive disadvantage. However, specialty chemicals frequently become commoditized over the product life cycle and hence loose their advantages for European firms. Furthermore, retailers and consumers demand constantly lower prices (CCIC, 2007). This creates a constant pressure for specialty chemical firms to innovate and provide better performing products to sustain the high value added ratios.
Additionally, innovation also in specialty chemicals benefits from close interactions along the supply chain. For the future of specialty chemicals the presence of basic chemicals development and production in clusters is therefore perceived of vital importance for the competitiveness of the European chemicals industry.