The world urgently needs to bring revolutionary change to the chemicals industry, both to meet the needs of rapidly changing global communities and to take advantage of the unprecedented speed of technological development. Each of these challenges requires significant innovation—from, for example, plant-based chemicals and biodegradable polymers to advanced battery materials and ionic liquids.
The chemicals industry has achieved remarkable innovations in many areas, such as lithium batteries, metallocene linear low-density polyethylene (LLDPE), and organic light emitting diode (OLED) displays. Now that the industry enjoys an ecosystem of incumbents, start-ups, and venture capital investors, it can—and should—innovate further to help address global challenges.
To understand the chemicals industry’s obstacles to innovation and to help determine a way forward, we surveyed over 200 senior leaders of North American chemicals companies, including executives of industry-leading companies, investment firms, and start-ups. We examined the key challenges that the industry faces; the barriers preventing collaboration; how the industry is responding to disruptions; the actions that are being taken; and, finally, we identified various enablers that can underpin scale innovation in the sector.
The survey revealed a need for greater collaboration in the industry to align on future innovations and foster a more vibrant innovation ecosystem. Key findings include:
- Innovation in the chemicals industry occurs across the whole value chain with industry leaders and start-ups both addressing it.
- Across the breadth of all survey respondents, we found that chemical process innovation is generally considered to be the biggest challenge by the industry.
- Chemicals industry leaders and start-ups face similar challenges in scaling innovation. Both have complementary strengths that can—and should—help mitigate each other’s weaknesses, yet barriers remain that prevent them from collaborating more effectively.
In this article, we suggest how industry leaders, start-ups, and investors can jointly focus on critical activities to overcome obstacles to effective collaboration, and allow an ecosystem of innovation to flourish so that the industry can play its part in the next phase of the materials revolution. We further detail how they individually can take action to help create this ecosystem while growing value.
Disruptive trends challenge the chemicals industry
The chemicals industry faces many global disruptors. Market behaviors are evolving as customers demand ever-increasing levels of ecological sustainability and the replacement of traditional synthetic materials (such as detergents and polymers) with more sustainable alternatives.1
Global decarbonization efforts are accelerating, with tightening environmental regulations being imposed due to governments’ carbon-reduction programs. The chemicals industry will have to decrease its overall emissions by approximately 60 percent by 2030 if global warming is to be reduced in accordance with the 1.5° pathway.2
The industry has been experiencing soaring inflation and supply chain disruptions since 2020.3 These conditions have created unprecedented challenges for all chemicals companies and particularly for global companies with energy-intensive operations.4 The opportunity to transform chemical manufacturing processes to drive cost efficiencies from digital transformation could not have come at a better time. In addition, the rise of e-commerce as a preferred mode of exchange has caused customer interactions and requirements to shift alongside their digitalization.
All of these changes (and many others) have created a vital need for technological change as the industry pivots to embrace the advantages offered by the evolving chemicals economy. However, despite the need for transformation, there has been little discovery-led innovation in the chemicals industry this century. In fact, all of the top-ten chemical products were developed over 50 years ago.5
Fortunately, this is starting to change. Survey results indicate that investments are coming into the space from both long-standing industry leaders and far-sighted investors. Chemical start-ups are stepping up as they see a golden opportunity to bring new chemistries onto the market—although they often underestimate the time, cost, and effort required for successful adoption and scale-up.6 Collaboration could, and should, be part of the answer here. However, as we have observed from our survey, too often industry leaders, investors, and start-ups have shied away from collaboration, often viewing each other as competitors rather than partners.
Three big challenges to innovation
Our analysis—validated by the survey—highlights 11 emerging innovation themes across five value-chain steps: discovery, production, delivery, application, and management (Exhibit 1).
Chemical process innovation and AI-assisted chemical discovery are the two most important themes
According to our survey, industry leaders, start-ups, and investors agree that chemical process innovation and AI-assisted chemical discovery are the top two most challenging and important themes, with the consensus that they hold the most potential for near-term growth (Exhibit 2).
However, when it comes to the next most challenging theme, there are split views. While both investors and start-ups rank CO2 to chemicals as the third most challenging theme, industry leaders place higher emphasis on new applications of specialty materials for sustainability (for example, electric vehicle production or insulation) or other applications (such as space travel or medical grade plastics).
CO2 to chemicals was viewed as slightly more challenging than important to growth, while AI-assisted discovery was perceived as slightly more important to growth than challenging.
Significant interest to invest in and scale innovations in the industry
Both industry leaders and investors are already making material investments into the themes they deem most important to growth, with over 70 percent of the survey participants planning to invest an average of over $50 million across most of the innovation themes in the next five years (Exhibit 3).
Overall, industry leaders showed more bullish views to invest more across themes than investors: on average, 94 percent of industry leaders and 71 percent of investors plan to spend more than $50 million.
Investors are most interested in discovery- and production-related themes, and industry leaders focused most on delivery- and application-related themes.
Industry leaders are ready to make bigger bets, 35 percent of whom plan to spend more than $500 million, with digital platform and e-commerce (75 percent), biofeedstock and bioprocesses, and specialty materials for new applications as the top choices. Investors, on the other hand, are more conservative, with 10 percent planning to spend the same amount, with specialty materials for new applications, circularity of chemicals, and traceability of chemicals attracting highest interest.
While investment interest varies by theme, it is generally aligned with the theme’s perceived importance. These include:
- Chemical process innovation is perceived to be the most critical theme by respondents, with 90 percent of investors and 97 percent of industry leaders planning to invest more than $50 million.
- AI-assisted discovery, although not seen as the most important innovation theme, is still being aggressively pursued—43 percent of investors and 75 percent of chemical industry leaders are proposing to invest over $100 million in AI-based product development.
- Decentralized chemical production is seen as the fourth most important theme for investors, with 69 percent of respondents considering investing $100 million to $500 million. While industry leaders do not see this theme as equally important (ranked ninth), they consider this to be the third most difficult theme, with 89 percent of the respondents planning to spend more than $100 million, out of which 33 percent are considering spending more than $500 million.
- Circularity of chemicals sees the widest dispersion—despite its relatively low rating (bottom three across survey respondents), 100 percent of investors plan to spend less than $50 million, while 88 percent of industry leaders are considering investing over $50 million in it over the coming two years.
Given the complexity of the chemicals ecosystem, the actual investment required will likely be higher than planned, which makes it critical for industry leaders and investors to collaborate to support the innovation and scaling of such innovations.
Industry leaders and start-ups have complementary strengths to balance the weaknesses
The good news is that industry leaders and start-ups have complementary strengths that can mitigate one another’s weaknesses. Industry leaders’ strengths in R&D, capital access, and go-to-market resources, for example, can help start-ups scale breakthrough technology. They can further aid start-ups with customer access and validation, which would improve start-ups’ credibility and enable scaling up.
Both industry leaders and start-ups face challenges to scale innovations. According to our survey, resourcing, organization, and operating models are common hurdles for both. Industry leaders face gaps in factors such as fit-for-purpose design, C-suite conviction, and expertise, while start-ups struggle with feedstock, funding access, and navigating the value chain. Start-ups also often don’t realize how difficult it is—and how long it takes—to scale up and successfully commercialize the innovation, despite initial laboratory success (Exhibit 4).
Industry leaders surveyed revealed that the top criteria cited for an ideal partnership with start-ups are strategy alignment and effective proof of concept. For about half of them, the benefit of partnering with start-ups is leverage for technology development.
In turn, start-ups can assist industry leaders to access new technology and accelerate incubation with greater agility. As motivation for partnerships, start-ups cited the available capital to support scaling from industry leaders and their access to other industry players. Further, 63 percent of start-up respondents seek to leverage industry leaders’ go-to-market and R&D access.
Collaborative partnerships are already perceived to be important for growth—60 percent of both start-ups and industry leaders view each other as potential value chain or R&D partners, rather than as competitive threats (Exhibit 5).
Barriers to increasing collaboration: Lack of transparency and trust comes out tops
Several barriers, however, currently hinder alignment between start-ups and industry leaders for increasing collaboration.
Lack of transparency is a major concern for start-ups and industry leaders—both view it as a key risk to partnerships and collaboration. Seeking alignment on target outcomes, downside protection, and rules of engagement could help address this.
Industry leaders prefer developing innovation themes internally—for example, through in-house R&D or creating new business units. The exceptions are circularity of plastics and e-commerce, which industry leaders prefer to develop externally (likely due to a lack of internal capability or the need for ecosystem collaboration). When innovating internally, industry leaders come up against barriers on resources, organization, operating models, and technology.
Meanwhile, start-ups take a slightly more competitive view toward industry leaders for select themes, such as digital platforms and e-commerce, CO2 to chemicals, and specialty materials for sustainability applications. At the same time, they struggle to scale their operating models with sufficient resources such as capital, feedstock, and organizational capabilities, and they have difficulty navigating the value chain.
Overall, 22 percent of industry leaders perceive technology failure and 15 percent perceive lack of transparency as main risks. Meanwhile, 21 percent of start-ups see lack of speed and transparency as a risk, while 15 percent regard lack of technology expertise as a problem. To derisk partnerships, then, increasing transparency and alignment is a must (Exhibit 6).
Key actions to cultivate an innovative economic ecosystem
The task ahead might appear daunting, but we have identified various actions that can be taken to nurture a more collaborative and vibrant innovation landscape in the chemicals industry for the future.
A case for change: An opportunity for collaboration
Many industry leaders and start-ups see the benefits of collaboration and, despite the barriers, opportunities for partnerships abound. The sooner the silos are broken down, the better. The capital and time required to successfully commercialize technology are outside traditional venture investors’ timelines. However, the gap can be bridged by collaboration, seeing that incumbents are both expert and experienced at large-scale capital deployment and market growth. Emerging success can already be seen in a few partnerships within the plastic waste arena, with collaboration between recycling start-ups and incumbents encouraging much-needed circularity.
Chemical process innovation and AI-assisted discovery are the important themes in which start-ups and industry leaders show mutual willingness to partner. Additionally, while start-ups take a slightly more competitive view toward industry leaders, they both view each other more as potential partners than competitors.
And, individually, industry leaders, start-ups, and investors can take steps to make a change for collaboration, innovation, and growth value within the chemicals industry:
- Industry leaders: The most important consideration for industry leaders is to signal their areas of strategic interest and make corresponding investments—both early (venture investment) and late stage (acquisition). This could, in turn, assist start-ups to prioritize their innovation development roadmaps, which could help create the most value. Direct investment in or the acquisition of start-ups that are at commercialization stage could help provide the necessary talent, expertise, and resources to help such innovations scale up and succeed.
- Start-ups: Start-ups, on the other hand, could develop a good understanding of industry leaders’ needs and priorities, and focus on areas that would make significant differences to the incumbents. They could set realistic and tangible near- to mid-term goals and leverage the agility to accelerate to achieve the critical commercialization milestone, which could increase the likelihood of successful exit.
- Investors: They could “be the bridge” by acting as independent and credible advisors to assimilate the differences between start-ups and industry leaders—and thereby facilitate collaboration. Successful examples of such collaboration have already been observed in the aviation sector, where investors have helped broker third-party deals, uniting investor capital with start-up technology and industry leader assets to develop and commercialize biofuel.
The chemicals industry has a critical role to play in addressing the world’s energy and sustainability challenges and needs to find a way to deal with its lagging innovation. Historically, industry leaders, investors, and start-ups have tended to see each other as competitors rather than partners and have avoided collaboration. Luckily, though, there is a large degree of overlap between the main players and they concur on what are most important challenges to innovation progression. By overcoming barriers with bold actions, the chemicals sector is in a position to solve its innovation equation.
Now is the time for the chemicals industry to grab the opportunities, move past its fragmentation, and start collaborating to realize growth value and play a meaningful role in the global sustainability journey.