Recent announcements by some of the big players in chemical manufacturing are stunning in their magnitude and implication for our western hemisphere. Like the movement of tectonic plates, business landmasses are shifting and grinding their way to other parts of the world.

Last summer AstraZeneca announced that it will leave manufacturing all together. According to C&EN, Merck is downsizing its staff by 7000 jobs and reducing its number of sites by 20 %. Pfizer is reportedly closing or otherwise trimming off 29 sites.

Recently, Dow announced its departure from commodity chemicals with the upcoming US$9.5 billion joint venture with Petroleum Industrial Chemicals (PIC) of Kuwait.

Some of this migration to the far side of the world will place the companies in a better market position to compete with rising demand in the distant corners of the world. Many of the players are already multinational in structure and have existing units elsewhere, so changes amount to consolidation.

What concerns me is the extent to which R&D and product development is being transferred off-shore. Like the frog in slowly warming water, no alarm is noted because from moment to moment the comfort level changes only slightly. But eventually, the warm water becomes hot and the inattentive frog gets cooked.  It is hard to escape the notion the US and EU are the frog in a warming pot of water.

Outsourcing is a choice, not a law.  A company has to choose to outsource rather than find other options. But to be fair, a company has its hands tied in many ways by regulatory or competitive constraints that are hard to contend with economically. 

Compliance with the confusing web of overlapping jurisdictions and increasingly harsh regulations pertaining to the manufacture, transport, and consumption of chemicals is wearing down the willingness of US companies to continue to manufacture in North America. Instead, we export “Chemical Problematics”.

A chemical product can become problematic in several ways- 1) commoditization, 2) patent expiration, 3) liability blooming, 4) raw material scarcity, and 5) regulatory compliance costs. 

In the life cycle of a successful product, it is inevitable that competition will discover the market and find a way to supply competing goods and services. This is commoditization. Eventually, you will lose control of your market exclusivity and others will set up their lemonade stand next to yours and sell for a nickel cheaper.

A major issue for pharma is the near term expiration of patents protecting highly profitable products. High cost manufacturing can be sustained by suitably profitable products. Exclusivity is the keystone that keeps the entry from collapsing. But when the patents expire, the Huns storm the gate and take over with lower priced generics.

What I call liability blooming is a circumstance wherein an existing product suddenly becomes the focus of some liability problem. It can be a drug that suddenly starts showing bad side effects, or it can be a product that has come into the  radar of the regulatory agencies.  Materials that carry a penalty for their use in terms of liability exposure are difficult or impossible to continue using. If an end product carries a legal liability, it is probably dead as a product. But if materials used in its manufacture- but not final composition- develop liability issues, manufacturing under the current regulatory environment can become prohibitively expensive.

Raw material scarcity is becoming a widespread problem for US manufacturers. As outsourcing becomes more prevalent, key raw materials for a given product may become unavailable in the US. As long as one can source the materials, this is not such a bad problem. But what about strateging substances needed for national defense? I have spoken with government procurement people who are increasingly having to resort to off-shore vendors for defense-related products and materials. Electronic products have a high reliance on some rather exotic substances and national defense is increasingly reliant on such technology. Indium and neodymium are examples of elements that are becoming quite scarce and whose loss from the market would have a high impact on many products. 

For any growing chemical company, the first real expense of regulatory compliance is for staffing. Increasingly, regulatory compliance requires a staff of specialists who serve as internal watchdogs for non-compliance and manage compliance programs that trail documentation much like a cable ship pays out cable into the murky ocean deep. 

Chemical products vary in their regulatory compliance paperwork according to type. Chemicals that are not used by the public out in the open like pesticides may be generally less complex to manage. TSCA is for materials that do not meet the criteria for food, drug, or pesticide use. Compounds that are used in B2B markets and will never be darkened by the shadow of consumers are still subject to complex TSCA regulations. But TSCA registry is not forever.  The ever shifting sands of TSCA registry may place a product into further examination by EPA if a new application is contemplated.  The all-seeing-eye of compliance managers may be strained as SNUR’s affecting product use can show up in the Federal Register at any time.

There are lots of good reasons not to start a chemical business in the US these days. Public or private companies are increasingly in competition with nationalized business entities abroad. Petroleum, petroleum products, and defense in particular are markets where western companies are having to compete with nationalized organizations that can swing a big money stick as well as influence national policy.

The US and EU are sliding into a Nanny State mentality microgoverned by those schooled in the Precautionary Principle.  Timid acolytes shuffling along the hallways of regulatory agencies and cock-sure MBA’s strutting like roosters in their corporate headquarters are independently guiding US culture to an epoch of de-industrialization. 

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