Evolution of China Agrochem Industry & Resistance to Involution

Jinlong Zhang (JZ), an independent industry researcher, gave a lecture about the Evolution of China’s agrochemical industry and discussed how to resist the current involution, based on his observations at the recent 15^th AgrochemShow-Brazil organized by CCPIT-Chem and Allierbrasil. 

Considering the high interest of the participants, JZ was interviewed exclusively by AgroPages to further communicate with our readers.

JZ has 19 years of experience in the agrochemical industry, covering Sustainable Supply Chain, Registration & Marketing, and Manufacturing Management based in China.

Jinlong Zhang spoke at 15^th AgrochemShow-Brazil

Challenges & Understanding the Evolution

In the past 18 months, many foreign friends have been keen to understand the happenings in China’s agrochemical industry. Firstly, let us briefly highlight current industry challenges into four keywords:

Capacity: From unpredictable shortages due to lockdowns of HSE or the pandemic to severe overcapacity for almost all products;

Price: Dramatically declining, breaking down historic bottom endlessly;

Sales: ″Go Abroad″, apply for registrations and setting branches overseas;

Product: Overlapping investments in new off-patent products, unsure who will be competitive and survive;

As China’s agrochemical industry plays a vital role in the global industry, to understand the current situation in China, we will review how China’s agrochemical industry has co-evolved with the global industry.

According to JZ’s personal view, the industry has experienced three stages in the last two decades and has now entered the fourth one.

From 2000 to 2008, the global industry was consolidated into the Top 6. Supply Chain was relocated from the US/Europe to China. China’s industry was still developing during this period and had only a few of qualified suppliers. CMO/CDMO was the most attractive business, raising leading companies such as Nutrichem, Lianhe/Suhua, etc.

In the second period, from 2008 to 2015, the global industry received a lot of new off-patent A.I.s. At the same time, China industry was increasing its categories and capacities for various products. However, the total industry was growing too fast, while HSEQ was not developed to a matchable level. Hidden troubles were to be exposed.

Companies with a long-term vision started seeding overseas, investing registrations in open markets, including Argentina, Brazil, etc.

From 2016 to 2022, the industry was fluctuating. The World’s Top 6 were consolidated into the Top 4. The US-China trade conflicts led to the decoupling and relocation of the supply chain from China to India. In China, the new Pesticides Registration Decree went into effect in 2017 and hugely increased the registration costs. The fragile supply chain was repeated and impacted by many environmental and safety accidents, followed by three years of Covid control. During this period, supply shortages caused many opportunity sales, allowing Chinese companies to make good money, which also led to irrational investments and severe overcapacity appearing in the fourth period starting from end of 2022.

However, along with the sudden disappearance of COVID-19 and the global demand for agrochemicals, China manufacturers are struggling under a zero to negative margin. 

The above graphic briefly explains how current overcapacity came from and how the market reacted to the supply chain. Overlapping investments burned super-profit from opportunities. On the other hand, Panic-buys eventually hurt strategic purchase, and broke loyalty. 

In the end, there was no winner.

The current situation is commonly called in Chinese ″NEI JUAN″, translated into English as ″Involution″.

Approaches to Resist the Involution

When discussing the approaches to resisting the current involution, we shall first analyze the manufacturing segment that Chinese companies typically target, then turn upstream to R&D and downstream to market access and distribution by dividing the industry value chain into four segments.

1. Consolidation of Manufacturing:

To be the most competitive player to ensure not being kicked out of the game, Chinese companies are desperately consolidating their manufacture by expanding capacity to keep scale advantages, back-integration to basic raw materials and/or thermal power. Taking Glufosinate and L-Glufosinate as a typical case, without a doubt, we will witness a long-lasting competition among current leading producers, Chengxin, Lier, Yonong, Sevencontinents etc, and a potential key player, NHU, who is expanding from pharmaceuticals based on its integrated supply of ACA as a critical intermediate of Glufosinate.

Mergers & Acquisitions are everyday actions that are taken during the consolidation of Manufacturing. Leading companies like Lier, Limin, Qilu etc have launched significant M&As in China’s agrochemical industry in recent years. There will be more in the next few years, and JZ suggests that companies with limited resources embrace this change when proper opportunities arise.

Investing in overseas manufacturing could efficiently balance geopolitical risks and strengthen capacities. Currently, several cases of investing by China’s companies in overseas formulating assets have been reported. Producing technical products abroad will soon become realistic for CDMO such as Lianhe, which disclosed a Malaysian project last year. Other leading Chinese manufacturers followed this. Considering the geopolitical relationship and comprehensive conveniences, SEA, Central, and Southern America, and even Europe will be mostly evaluated, according to JZ.

2. Bet on R&D

Besides the simple duplication of capacities, Chinese manufacturers are also betting on technical and engineering upgrading, expecting overwhelming superiority against their competitors. Let alone the competition on novel processes of rising products, including (L-) Glufosinate, Chinese Chemists and Engineers are working enthusiastically on advanced reactions and equipment, for example, the flow reaction (Tubular, microchannel reactors). Desirable results have been obtained for Ethephon, Clethodim, and intermediate Chlorantraniliprole. 

The R&D on new off-patent products are the traditional skill of leading Chinese manufacturers. To date, however, R&D resources are more centralized on several new A.I.s. To Brazilian companies, JZ lists some representative A.I.s of which the compound patents will expire within five years. Taking Saflufenacil as an example, more than five companies have announced more than 3000mt/y of summed capacity although global demand might be no higher than 1500mt/a by 2022, according to JZ.

If R&D on generic products cannot avoid homogeneous competition, why not R&D on new A.I.s? In fact Chinese companies have done well in this regard. Almost 50% of new chemical A.I.s published in past four years are from China. Among these, HPPD and PPO herbicides, and (Meta-) Diamide insecticides are leading segments researched by Chinese companies or institutes.

It's worth noting that some new Chinese A.I.s, led by JS-T205, have shown great market potential. A License-out and partnership with MNCs or leading regional companies should be a win-win solution to meet potential challenges from overseas registrations and promotions.

JS-T205

3. Market Access

There is a popular saying in current China, ″Abroad, or Out″ （不出海就出局）.

As for the agrochemical industry, access to overseas markets is the most crucial way to digest Chinese excessive capacities. Subject to the regulatory requirements, Chinese agrochemical companies are going abroad and starting with holding their own registrations. 

From JZ’s investigation, China’s Top 20 agrochemical companies, except those CDMO and dealers, have all invested in their registrations in Brazil. From the angle of the local market, 83% of the top applied products in Brazil have been registered by at least one Chinese companies directly or through an agent. 

Top Agrochemicals Applied in Brazil (2022)

To hold the registrations in leading markets like US/EU/BR is a game of money and/or time,  requires long-term strategy, and continuous investments, and market and regulatory intelligence (especially for formulated products). JZ suggests companies must cooperate with reliable parties, irrespective of whether they are Chinese or overseas but with complementary resources or values for end-users, and also avoid overlapping or ineffective investments.

To date, holding the registrations in the country of destination does not imply Chinese companies are directly accessing the market, but broadening the access to B2B clients in the first place. Only a few Chinese companies may take one step forward, proceeding with B2C or Model C business in selected markets. 

4. Distribution

2C business seems very profitable to Chinese manufacturers. However, when analyzing cash flow, inventory, collection, exchange risk, taxes and duties, operation costs etc, only some Chinese companies could satisfy the requirements on those factors and meet the challenges. 

Even simply considering the basic factors of products and end-users, we could recognize the differences between the product by a chemist and a product by an agronomist, demands of micro farmer and demand of a mega grower. 

JZ suggests that companies that have registrations approved in key markets partner with local experts, before setting up a complete organization and going independently.

It is worth encouraging that Chinese pioneers such as DK, RB, ZS, ZX, KS, have launched or will deliver Chinese agrochemical products and services directly to Brazil, the world's largest agriculture market. Precious experience will inspire extensive cooperation among more parties in global markets.

Synergy instead of Involution

As discussed above, leading Chinese companies strive to compete in all value segments. Resistance to Involution will accelerate flattening the global industry value chain. On the other hand, it promotes the consolidation of manufacturing, innovation of Technology & Engineering and novel A.I.s, and potential globalization of Chinese products and services.

Global industry expects an upgraded Chinese agrochemical industry and welcomes competition and/or partnership based on respect to value of each segment.

JZ said there is a lot of synergy between China and the global industry.