The chemical sector in China is propped up by two developments: the Chinese are demanding more and more chemical goods as real per capita GDP increases and as big customers of the chemical industry—textile, car, electronics, etc. manufactures—are moving their operations to China.

What makes the chemical sector different from other sectors is that chemicals are used as an input in almost every product on the market, from cheap shoes to high tech electronics. Not every Chinese could afford a car, but every Chinese demands chemicals. As wealth increases in China, demand for certain chemicals increases along with demand for higher end products.

Ten to fifteen million people each year in China move from the country side into cities. It is well documented statistically that Chinese rural-to-city migrants become both more productive and command higher purchasing power. The result of this mass migration is a great change in purchasing power and consumer base for many products. Entrepreneurs who are able to correctly read the prevailing mega trend could profit immensely in the chemical sector.

Key Points for Entrepreneurs:

• Foreign chemical companies are facing very strong domestic competition as domestic companies improve efficiency and specialization. As a result, profit margins are thin and many inefficient producers get weeded out all the time.
• The chemical industry is a big contributor of pollution in China and now the government is cracking down. Many local chemical companies have been shut down for environmental violations.
• RMB appreciation, increasing cost of commodities, and government policies are adding a new layer of cost to Chemical companies in China.
• Recent international scandals brought the quality of chemicals produced in China into question. Chemicals exported to Western countries face very ridged rules. Entrepreneurs should differentiate themselves through quality and reputation, not price.