Bargain hunt by West no formality McKinsey - investment opportunities in Asia

Business Asia, July 5, 1999

Assuming the crisis in Asia's chemical industry is a golden opportunity to buy assets at bargain prices is a "dangerous oversimplification", according to the authors of a new McKinsey study on the chemicals sector.

While they agree that some opportunities exist, particularly in Chinese commodities, the environment for Western companies in the industry is tenuous.

The report suggests Asia's chemical companies face a long road to recovery (see main story this page).

"Political and economic uncertainty in many parts of the region and the tack of financial transparency in the reporting procedures of many of its companies make it difficult, if not impossible, to evaluate assets accurately," the report said.

"In such difficult conditions, with competitors fighting hard for scarce business, a Western company with a single Asian asset and relatively low market share would be extremely vulnerable.

"The prospects are no less daunting for Western companies that might be tempted to enter the region to consolidate assets -- in most countries and for most chemical products, the fragmentation of the industry is so extreme that many takeovers would have to be undertaken simultaneously and in an environment of great uncertainty."

The report's authors suggest those chemical commodities with an unusually high degree of concentration have better prospects as they can be regionally restructured in a short time.

"This category includes certain products (for example, acrylic acid, acetic acid, and certain polyurethane intermediates, such as methylene diphenyl disocyanate, also called MDI) for which technology is not easily available," the report said.

"For such Western companies, the crisis may represent a once-in-a-lifetime chance to restructure and control regional companies by executing a manageable number of swaps, mergers and acquisitions, and alliances."

In regards to commodity products, the report said the most attractive strategy was to secure growth options in promising areas such as China.

"Yet even though China has remained relatively untouched by the crisis, it would seem unwise to start building new capacity there now," the report said.