The coatings industry is worth more than USD 100bn globally. In terms of market share, as Third Bridge gleaned from one specialist’s estimates, the architectural segment is the largest, making up at least 40%. Industrials accounts for 20-30%, automotive 10-15% and marine and aerospace are each about 5%. Although the industry saw a strong performance post-financial crisis, peaking in 2015-16, the North American and Chinese markets are decelerating. In addition, raw material prices have been edging up since 2014. On the automotive side, cars are changing size: although it is increasing in the US, other countries are seeing smaller builds come out. Meanwhile, the refinish business has been affected by lower accidents rates, and there are concerns that collision avoidance technology in AVs could see this segment decline in future.
Axalta Coating Systems is one of the leading players in coatings: “in many of the market segments where Axalta does choose to participate, they’re often number one or number two.” The Philadelphia-headquartered company produces liquid and powder coatings for the industrial and automotive industries, among others, and is “number one globally in refinish”. In June 2019 the company announced it had initiated a strategic review, which included forming a board committee to investigate a potential sale of the company.
One specialist deliberated over Axalta’s potential suitors. Although nothing has been announced by these companies, there are some that would make sense as partners – one example is PPG, Axalta’s main competition. Merging could allow synergies to be realised; even though consolidation wouldn’t boost purchasing power, as both companies are substantial already, the areas that could see benefits are technology services, manufacturing and R&D. However, owing to Axalta’s market reach in refinish, “the crown jewel of [its] business portfolio”, there could be regulatory issues: “I think with PPG in particular, you’ve got to look at the antitrust issues and how that would shake out in terms of a combined share in each country.” Two Japanese companies, Nippon and Kansai, are other potential options, as both “are interested in extending their geographic footprint beyond their traditional base.” Nippon made a proposal to buy Axalta in 2017. Meanwhile, Kansai has “been making some acquisitions, extending westward from their traditional Japan/Asia base into India [and] Africa.”
Regulations are shaking up the paint industry in China. In 2018 the country enacted stricter environmental standards for coatings. However, according to Third Bridge research, companies are not keeping up: “about 49% of all produced coatings in China are environmentally friendly, 8% less than the proportion specified in the 13th Five-Year Plan, namely 57%, and even far less than the percentage in developed countries.” Producing more environmentally friendly coatings, such as water-based and high-solids rather than solvent-based, requires companies to upgrade production techniques. The tightened measures put smaller, domestic companies at a disadvantage to multinationals, as there is a “technological gap”. One of the biggest difficulties is dispersing the raw materials in water-based formulations. A specialist predicts that “many small coating manufacturers will find it hard to survive, leading to industry reshuffle”.
On the automotive front, there are varying needs for passenger and commercial vehicles. Approximately three-quarters of paint is consumed by passenger cars owing to high total production. They also are painted with higher-quality coatings, which is required by both environmental and production standards. However, as an admittedly rough estimate and dependent on various factors, commercial vehicles need three times as many coatings than passenger cars. Moreover, painting commercial vehicles costs about 20-30% more, partly owing to lower demand – “less procurement amount will lead to a higher procurement price”. And even though there is fierce competition in this sector, complex business models keep the price high.
Road markings are another application seeing growth and, in one specialist’s view, “it’s a really exciting time in the space.” One of the key drivers for this buzz is AVs. They rely on clear road markings, requiring stronger colours and thicker lines. This means that “there’s been a re-emphasised commitment to maintaining roads and the lines that are on the roads.” New markings don’t only benefit this new technology: “A lot of studies have been done that say when you have good, strong lines that you can see there are less accidents, and obviously less accidents leads to less deaths on the road.” In the US, California and Kentucky have already committed to wider lines, moving from 4 inches to 6 inches. In the long term, road markings are a stable, almost “recession-proof” business, whereby general maintenance is being bolstered by preparing for AVs.
Another factor the sector needs to take into consideration is seasonality. Depending on the location, there are times of the year paint can’t be applied. The most commonly used formulations are water-based and therefore won’t dry in freezing conditions. However, some technologies have been developed to withstand cold weather. This allows companies to extend the amount of time that products can be applied and, as they are highly formulated, be charged at a premium. One such product is thermoplastics, which are also more durable.
Ennis-Flint has historically been one of the market leaders in road markings and produces thermoplastics. The strategy of the founder was finding value in scale, allowing the company to quickly deliver and execute for its customers. But it has competition. A new player, Ozark, emerged in the past decade, run by ex-Ennis employees, but it “is the low-price, low-quality manufacturer in the space”. A pioneer in preformed thermoplastic, Geveko, is Denmark-based. Two individuals from Denmark saw a market gap for preformed thermoplastic in the US, formed a licensing agreement with Geveko and started a company called Flint Trading, which was eventually bought by Ennis. The licencing agreement prevented Ennis-Flint from trading in Europe, but has now ended. Consequently, Ennis-Flint is expanding into Europe, and Geveko into the US. Geveko is Ennis-Flint’s biggest threat and could take market share from them.
The ongoing developments in this industry aren’t anything to brush aside. Various factors are complicating supply and demand patterns, but, as a vital ingredient for many other industries, the future still looks bright.
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