At present, China is the largest chemical product market in the world, accounting for 38% of global chemical product sales. In addition, its growth continues to be higher than the global chemical industry average. So far, Chinese chemical companies have mainly focused on their presence in China's domestic market. China's efforts to expand overseas are relatively limited, whether through organic growth or acquisitions of overseas chemical companies (Figure 2).

However, that may change. One of the main reasons is that the growth of China's domestic chemical industry is slowing down due to the slowdown of GDP growth and the shift of GDP growth from manufacturing industry to service industry. This has led to serious overcapacity in some chemical industries, especially in commodities. In addition, some labor-intensive industries, such as textile production, are losing competitiveness due to the increase of labor costs. These industries are important customers of China's chemical industry and are gradually withdrawing from China. If we look at the past situation, it means that the relevant chemical industries, such as textile chemicals and dyes, will also withdraw from China.

Another reason is that China's chemical industry is gradually turning to specialty chemicals, which are usually more profitable than bulk commodities and have higher growth prospects. However, the output of specialty chemicals is much smaller, and they are more knowledge intensive. Therefore, in order to make full use of economies of scale, specialized chemical producers need to supply global customers.

Finally, recent developments, such as the increase in trade barriers and the emergence of coronavirus, indicate the limitations of producing only in one location. The risk of a major disruption is too high.

In view of these changes, overseas expansion is a choice that any powerful and sizable Chinese chemical companies should consider. If done well, such expansion can bring additional overseas profits and improve the company's position in the domestic market. At present, with stock market valuations plummeting in the past few weeks, the acquisition of a foreign chemical company overseas is a particularly important option. In addition, acquisition is a faster way to enter foreign markets than organic investment, which provides additional advantages due to the material and intangible resources of the acquired company.

Chinese chemical companies should not buy foreign enterprises on the spur of the moment. However, there are several compelling reasons to buy overseas chemical companies, which will be discussed below. Although not all will be valid for every potential buyer, often several may apply to individual situations.

Access to technology or advanced products:

In many fields, especially in the field of special chemicals, the technology and products owned by foreign enterprises are better than those owned by Chinese enterprises. Therefore, the acquisition of such a company will bring obvious benefits, which can also be used in the domestic market. For example, Sinochem acquired Syngenta mainly because of its patented active ingredient portfolio, and Shaoxing Donghu acquired German company ehrfeld to acquire their leading micro reactor.

Entering the growth market:

Successful access to overseas markets depends on the right distribution channels, which may be obtained through the acquisition of existing enterprises. Kingfa, for example, has built a strong sense of presence in India by acquiring hydro, so it can now benefit from the long-term growth in Indian car demand.

To build a global business and provide services to global customers:

In order to provide timely services to global customers, it may be necessary to have production capacity close to their location. Wanhua, for example, acquired borsid, a Hungarian isocyanate producer, to supply materials to European customers.

Avoiding trade barriers:

Establishing production in multiple countries may help avoid trade barriers. For example, when Japan had to restrict its car imports to the United States in 1981, it established production in the United States to avoid these barriers. It is conceivable that Chinese producers of agricultural chemicals or active pharmaceutical ingredients will take similar steps to establish the production of these materials in the United States, preferably to take over the existing production facilities.