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How does market power impact on the company?

DSS operates in a highly competitive market. One of the biggest challenges is coming from the growth of competitors in countries such as China. The Chinese are developing increasing competence in the chemical industry and with their lower labour costs, they are a major source of competition.

To combat this, Degussa has bought into the Chinese chemical industry. In buying a controlling share in Lynchem, Degussa aims to transfer some of the larger volume manufacturing with low margins to China. This then frees up plants in Europe (including Teesside) to focus on more complex, higher value-added production. This has higher margins and requires high levels of skill and expertise that exist at DSS. These skills will be retained at Teesside.

Part of the problem for a firm like DSS is that in setting up in countries like China, the local labour acquires skills and knowledge and can eventually break away, setting up their own operations. They then become a competitor to DSS.

By buying a controlling share of the Chinese plant but leaving the original owner and management team in place, Degussa are able to offer a controlled transfer of processes on behalf of existing and hopefully new customers. This takes the risks involved in such transfers away from these customers.

The new strategy will help Degussa to generate cheaper exports of some products from its Chinese operation. However, as the site manager pointed out, salaries in China will rise eventually, and the competitive advantage of lower wages will reduce. As a result, the industry will then look to move elsewhere - possibly to a country like South Africa.

The changing global market might mean new changes and challenges for DSS but its success will depend on how it is able to adapt to those changes. Images: Courtesy of Degussa AG. Copyright held by Degussa AG.

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