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Ed: How big is the global adhesives industry, and how large is North America’s share?
Broxterman: Adhesives, on a global basis, is about a $20-billion industry. North America and Western Europe account for more than 60% of the industry worldwide (Figure 1).
We estimate that North America accounts for roughly 38% of industry share, whereas Western Europe has about 28%. One of the reasons North America outranks Western Europe is packaging, and as such adhesives that find use in packaging, which plays a far more important role in North American industry than in Europe.
Our estimate of the size of the adhesives industry in the United States is approximately $8 billion (Figure 2). This translates into roughly 5.7 billion dry pounds of raw materials that find their way into the adhesives industry, which has an annual growth rate of approximately 3% per year.
Ed: How fast is the industry growing?
Broxterman: Adhesives is a very old industry. One is almost tempted to say that it is older than time. For example, the unearthing of King Tut’s tomb revealed generous use of adhesives. So, the industry dates back a long way.
Against this backdrop, we have always considered it somewhat interesting that the adhesives industry is still growing faster than the GDP, although it is clearly moving toward maturity. Part of the reason for the enhanced growth rate is the many portions of the adhesives industry that are growing at the expense of mechanical fasteners. For this reason, perhaps it is unfair to look at adhesives as an isolated industry, but instead, as a component of the fastening industry. When you look at the adhesives industry this way, it is easy to see how adhesives are still capturing market share from other forms of fastening such as nails, screws, bolts and rivets. Clearly, there is an economic advantage if you can use a drop of adhesive to replace a screw, a bolt or rivet. So, we see the adhesives industry continuing to grow for some time.
Ed: Can you explain how you position captive vs. merchant-market adhesives in your analysis?
Broxterman: One important aspect of the U.S. adhesives industry is the amount of adhesives produced captively. What we mean by captive is that companies will purchase raw materials, formulate the adhesives in-house and then use them in-house. In our estimate of the size of the U.S. adhesives industry at $8 billion, we have assigned a value to captive adhesives as if they were sold in the merchant market.
When you talk to different people within the adhesives industry about its size, you will always come up with different estimates because everyone tends to define the industry slightly differently by including or excluding different market segments. Without a lot of comment, we have tried to indicate in Figure 3 the amount of adhesive that is, in fact, made captively, separating nonpressure sensitive adhesives from those that are pressure sensitive. We have also further subdivided the merchant market into those adhesives that are sold directly (through the sales forces employed by adhesives companies) or indirectly, which, in most cases, reflects distributor sales.
Ed: In what market sectors are adhesives used?
Broxterman: One of the problems in dealing with this complex industry is that adhesives literally find use everywhere. In fact, it is difficult to find a segment that makes up the U.S. GDP where adhesives are not used. So, it is hard to wrap your arms around an industry like this one.
The manner in which we have attacked this problem is to first define the industry in terms of strategic market sectors. Figure 4 identifies seven sectors that we have routinely used in this classification.
Within these sectors, construction is fairly straightforward and includes many market segments that range from adhesives used to install resilient flooring, to those used to glue down carpeting, to those that are used in flooring underlayment, all the way to those that are used in roofing applications.
Transportation is the next sector. Here we are considering adhesives that find use in the automotive industry and also in the aircraft, railroad and marine industries. To a certain extent, the aircraft industry has led the automotive industry for quite some time in its use of adhesives. This is due to the recognition that removing a mechanical fastener and replacing it with an adhesive not only saves money but also saves a considerable amount of weight that is on the aircraft every time it takes off and lands. With pressure on the automotive industry to increase mileage, the automotive companies have been looking for ways to reduce the weight of automobiles, and adhesives are one way of doing that.
The automotive adhesives market has many applications that are structural in nature. They are generally higher performing vs. those that might be used to bond interior trim or even exterior trim, such as a bumper strip. While trim applications are important, they are not as important or high-tech as structural adhesives.
Rigid bonding is a broad sector that includes many product-assembly applications, from those that are found in bonding wood objects such as furniture and mill work to those that might be used in manufacturing washers, dryers, toasters, small hand tools and a variety of other applications.
Packaging is the fourth sector that we use, and it is, by all means, the largest within the industry. On a dollar basis, the film-lamination market as a subset of the packaging market is about 10%. Without question, film lamination is probably the most sophisticated and highest-value market subsegment within the packaging industry.
Nonrigid bonding includes adhesives that are used in apparel manufacture, carpet manufacture, shoe adhesives — soles as well as insoles — and many other applications that involve the bonding of one nonrigid substrate to another.
Consumer adhesives are the sixth major topic, which includes all adhesives that move through consumer distribution channels.
Lastly, the tape sector includes only pressure sensitive tapes.
Figure 5 attempts to break down the seven strategic groups into individual market segments. They are not only fragmented by market segment (and then within each market segment by smaller subsegments down to individual applications) but also by the formulative technologies and various raw materials that compete for attention.
Ed: How much adhesive goes into each strategic group and what are the dollar values?
Broxterman: In Figure 6, we have indicated the seven strategic groups and tried to provide an appreciation for the relative size of each one in terms of dollars as well as pounds. Packaging, which is the most mature and also the largest in the industry, actually accounts for roughly 45% of the pounds, but only 29% of the dollars. By contrast, transportation, which is a relatively small market segment by pounds, representing only roughly 5% of the volume, actually accounts for approximately 14% of the value. Clearly, the bulk of the adhesives that find use here are higher-value adhesives than those that find their way into construction, packaging or rigid-bonding applications. Many transportation applications are specialized. In fact, many require structural bonding adhesives, where the adhesive contributes significantly to the structural soundness of the part being bonded.
One example is the adhesive/ sealant that is used to bond the automotive windshields to the body of the vehicle. These adhesives are of such quality that they actually allow the windshield to become a structural component of the vehicle.
We see packaging more as a commodity market, whereas transportation offers more value-added.
Ed: What effect has the recent activity in mergers and acquisitions had on the adhesives industry?
Broxterman: A careful inspection of Figure 7 shows the impact of acquisitions on the major players over the past 10 years. National Starch & Chemical Co., H.B. Fuller Co. and Henkel Adhesives are certainly among the three largest adhesives manufacturers in the United States. Henkel’s position was enhanced significantly when it acquired Loctite Corp. several years ago. National Starch and H.B. Fuller were also highly involved in making acquisitions during this period, but none with the impact of Loctite. Within the past two years, National Starch was acquired by the ICI Group. Bostik is a unit of Total, the large French oil company, which is in the process of acquiring Elf Atochem, the parent of Ato Findley (formerly Findley Adhesives). Ashland Specialty Polymers & Adhesives is a division of Ashland Chemical Co. and has also been highly acquisitive.
ITW (Illinois Tool Works) has become very aggressive in the adhesives market, with quite a few acquisitions over the past several years. The most recent of these took place in the last half of 1998 when it acquired TACC. Sovereign Specialty Chemicals is without question the fastest growing of any of the companies on the list. Three-and-a-half years ago, Sovereign Specialty Chemicals was a company of two employees. Today, it is in the region of $225 million — most of which has occurred through acquisition, but also through organic growth. Borden Inc. was a very broad supplier of adhesives at one time but sold off its industrial adhesives to National Starch over a decade ago. However, Borden is still a leading supplier to the consumer market through its Elmer’s Glue line. 3M is both an important user of adhesives in the manufacture of its tapes and also a supplier of liquid adhesives to the merchant market.
Rohm and Haas has acquired Morton International. Morton had achieved an excellent position in the adhesives industry, with a focused approach, by concentrating on the packaging and primarily film-lamination market on a global basis. Morton was not only able to establish a market-leadership position in that market, but it also established a dominant market-leadership position. Morton’s packaging-adhesives business, which is primarily involved in sales to converters, is heavily dominated by film:film and film:foil lamination. In the United States, we believe its market share is in the vicinity of 60% in film lamination and close to that in other regions of the world.
Rohm and Haas has traditionally been a supplier of raw materials to the industry. It has, for the most part, refrained from moving downstream by becoming an adhesive formulator because it never wanted to compete against its customers. It has crossed over that line to a certain extent in that it does supply some finished pressure sensitive adhesives to a very narrow number of market segments. As noted earlier, it acquired an excellent business from Morton with not only an industry-leadership position in the United States in the narrow area that it is in but also a global industry-leadership position. When the Morton sales are added to the existing Rohm and Haas sales of adhesives, Rohm and Haas emerges as one of the major suppliers of adhesives in the world.
Reichhold entered into adhesives supply through its acquisition of Swift Adhesives more than 10 years ago. Reichhold is now owned by Dainippon. Dow Chemical entered the adhesive formulating business through its acquisition of Essex Specialty Products, Inc., which is narrowly focused primarily but not exclusively on the automotive market. Franklin International is a privately held company that focuses very heavily on the wood-bonding market, in pressure sensitive adhesives and also to a certain extent in the consumer market through its wood-glue products.
The primary companies involved in the structural bonding in automotive include Dow Chemical and its Essex subsidiary, which is probably the largest. H.B. Fuller and EMS Togo entered into a joint venture and formed a company called EFTEC, which is also an important player in the market. Other important suppliers include Ashland, Henkel, Lord Corp. and 3M. These are the primary players in structural bonding. In automotive trim, 3M, Bostik and EFTEC, as well as Avery Dennison, are key players. You will also find companies like Morton, Sovereign, Ashland and National Starch in trim applications.
Ed: What are your predictions for the future growth of the industry?
Broxterman: We continue to see adhesives growing faster than the GDP. However, the market is maturing. In 1998, it grew roughly 3%, or perhaps a little bit higher taken as a whole. We think that is expected in 1999. In 1998, inflation was held in check and raw-material prices were flat to declining over the year. Similarly, adhesives manufacturers had a difficult time raising prices. In 1999, we saw pricing on some raw materials bottom out, such as hydrocarbon tackifier resins, which are derived from oil. In the second half of the year, oil prices increased due to OPEC restriction on production. As a result, raw-material prices and adhesives prices increased.
The ChemQuest Group, Inc., is a management consulting firm to the chemical industry, specializing in adhesives, sealants, coatings and automotive. For more information, contact the company at 8170 Corporate Park Dr., Suite 317, Cincinnati, OH 45242; 513-469-7555; fax 513-469-7779; Web site www.chem quest.com/