Executive Summary: ISG Provider Lens™ Chemical Industry Services and Solutions - North America 2024
01 May 2024
by Swadhin Pradhan
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The chemical industry is undergoing a major shift in the usage of technologies to counter growing challenges
The chemical industry encompasses the transformation of various raw materials into a diverse array of products. Chemical products are used in almost all branches of industry and are highly crucial in a few, such as pharmaceutical and automotive. The chemical industry is complex and vital to the economies worldwide. The global chemical industry is amid a challenging year as geopolitical volatility, commodity price fluctuations and overall demand and supply chain issues plague the entire value chain.
Chemical companies face high feedstock and energy costs in Europe and increased competition from lower-cost producers in the U.S. However, the overall production costs in the U.S. may decrease because of falling energy prices. Demand is expected to be positive from key industries such as automotive, energy and electronics.
Chemical companies also face challenges around energy transition, carbon reduction, adopting new technologies and changes pertaining to the key end customer industries such as automotive, where the shift to electric vehicles (EV) is significant. Manufacturing operations in the chemical industry are asset-intensive and bound by regulations. However, the assets are aging, and the products produced are complex and demand better process control. While IT/OT/IIoT technologies are advancing, securing these legacy assets
is a major challenge because of the cost and complexity. Advanced analytics and digital twin implementations need a lot of groundwork. The TCO also deters customers from pursuing this journey at scale. Cybersecurity risks at all levels have increased dramatically as well.
Recently, customer experience has become a key focus area for chemical companies looking to serve end customers directly, and improving CX requires the support of a resilient and responsive supply chain.
This presents a slew of challenges when chemical companies are building applications or implementing solutions. Change management remains an issue when transitioning to new working methods. This landscape makes it difficult for chemical companies to choose the right solution and find system integrators with implementation experience, long-term support and other capabilities.
Automation, new cloud and analytics technologies and AI influence overall production processes and drive new materials production and development. Producers increasingly use digital technologies to develop new and sustainable materials, reevaluate supply chain structures, analyze portfolio rationalization and optimize processes. Stakeholders and consumers increasingly challenge manufacturers to adopt more sustainable and environment-friendly manufacturing practices across their value chain.
Chemical companies continue to look at technology investments in AI, AR, VR, cloud, digital twin, blockchain and others to reshape key operations and business processes. New technologies such as blockchain, quantum computing and high-performance computing (HPC) also impact digitalization in the industry in areas such as product innovation. However, data management remains a crucial challenge for chemical companies, particularly in R&D, which requires identifying relevant data among large volumes for quality research and
ensuring that it can used meaningfully. Mergers, acquisitions and divestitures also continue to create disparate or disjointed IT landscapes, and organizations must spend time and effort aligning them.
ISG notes the following trends in the global chemical industry for 2024:
Increasing infusion of AI into solutions: Chemical companies and IT service providers are working across key areas to gain operational benefits by implementing AI. Lately, GenAI, though at an early stage, has been gaining prominence in areas such as CX, supply chain, R&D and sustainability. While most solutions are at the PoC stage, the potential to scale is immense. AI can help chemical companies predict potential supply chain threats, thus allowing them to make required changes, resolve environment-related issues and prevent
future disruptions. With connected operations powered by AI and ML, further facilitated by cloud and 5G networks to move information to the edge, today’s chemical plants will likely be transformed into future plants, revolutionizing the ecosystem.
Aging workforce and talent shortage: Like most asset- and energy-intensive industries such as oil and gas and power and utilities, the chemical industry faces an aging workforce and knowledge retention challenges. The median worker age for the chemical industry, per the U.S. Bureau of Labor Statistics, is approximately 44 years, higher than the national average of 42 years. The industry also faces a worker skills
shortage in digital and new-age technologies such as AI and ML. Chemical companies in the U.S. may also face disruptions and issues around safety and costs in operations because of the workforce shortage.
Growing cybersecurity threats: The chemical industry faces a wide range of cyber risks as digitalization becomes mainstream. The increasing integration of IT/OT has led to increased data and information security
vulnerabilities. Issues with higher cybersecurity risk for the industry include supply chain attacks, increased connectivity and disruptive digital technology, the IoT, malware and ransomware.
Raw material or feedstock price volatility: Due to rising costs and supply chain disruptions because of geopolitical situations, key supply and demand centers are pressing the need for digital technologies to hedge prices and control volatility. In industries such as paints and coatings, companies are facing cost
pressure from increased raw material prices. Chemical companies are also facing operational challenges due to fluctuating commodity prices, logistics and shipping costs and volatility in feedstock prices. Therefore,
companies must invest in a trusted supply chain, strong market intelligence and digitalized inventory and order management to overcome the abovementioned challenges.
Tightening industry regulations across geographies: Chemical companies are overwhelmed by increasing scrutiny and rising compliance needs resulting from international standards and frameworks. The companies are looking to dedicate significant resources to reporting and need better and faster analytics to drive decision-making. Environmental, social and governance (ESG) influence is a global phenomenon, and organizations must comply with local laws and global mandates. Managing economies of scale and being carbon neutral is equally crucial but costly.
Sustainability and ESG reporting: Increasing government and investor pressures have forced companies to consider sustainability across the chemical value chain. Global financial institutions and banks want to see their portfolios aligned with chemical organizations that take their sustainability and ESG goals seriously. Moreover, as energy efficiency, circular economy, smart manufacturing technologies and optimization of plant design and operations become critical, integration with sustainability and environment goals is fast becoming the need of the hour. Enterprises are increasingly investing in tracking Scope 1 and Scope 2 emissions necessary to decarbonize their internal value chain. Scope 3 emissions (from the value chain) are the most significant chunk of overall emissions. The emissions from activities outside organizational control can be
complex to measure and manage. Companies can reduce their carbon footprint by focusing on the right energy mix.
Challenges in supply chain optimization and logistics: Lack of standardized methodologies and frameworks and the limited influence of suppliers are key challenges. The chemical industry should integrate operations using big data analytics into supply chain management (SCM) to address them. Other challenges
include the lack of visibility, process complexity and unpredictability of demand and supply. As a result, the chemical sector should prioritize continuous improvement in technological advancements. Managing logistics is another significant concern due to geopolitical volatility and regulation uncertainties. This was particularly evident with increased delivery difficulties due to the COVID-19 pandemic. Therefore, a well-functioning chemical logistics system is a priority for suppliers, manufacturers and customers. Cybersecurity and sustainability are other challenges that providers assist companies with, as supply chain vulnerabilities can lead to a cyberattack, disrupting warehouse and manufacturing operations and sites.
Green chemistry and circular economy: Chemical companies constantly try to replace traditional processes with optimal alternatives that minimize waste, water usage, emissions, energy consumption and environmental impact. They increasingly focus on recycling and upcycling materials to manage waste. The
R&D function is open to leveraging new digital interventions such as cloud, AI, ML and IoT to improve its working process.
Legacy systems and lack of integration: Most industries, such as chemical, don’t have the infrastructure to adopt new technologies. The chemical industry is competitive and requires large data and IT infrastructures that increase the CapEx for legacy systems modernization and achieve IT/OT integration.
Legacy systems are not yet set up to report the specific metrics needed for ESG analysis and reporting. Converting these systems, adding new sensors, managing disparate data streams and homogenizing data into coherent analytics pose a significant challenge for all enterprises, especially those with high emissions, high risk and direct material usage.
The high cost of acquiring new technology into the organization and increasing user adoption among the chemical value chain stakeholders is a constant challenge. Companies have moved from IT/OT to IT-OT-Engineering Technology (ET) convergence, creating the need for engineering capabilities to drive factory automation. As manufacturing companies such as chemical producers drive digital transformation initiatives, product lifecycle management (PLM) and digital twins are becoming important for discrete and process manufacturing companies to enable better designs, optimize processes and accelerate engineering.
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