C&EN profiles Wanhua Chemical, a Chinese firm that made it big in urethanes
Wanhua Chemical’s managers like to talk about how their company entered the polyurethane business. It’s a good story. Back in 1978, when five-year plans still ruled China’s economy, the government ordered the state-owned firm, which then made synthetic leather, to start producing methylene diphenyl diisocyanate. Also known as MDI, it’s one of the key components of polyurethanes and a material China did not make at the time.
The technology for making MDI is tightly held. After some research, Wanhua managers licensed a process from Nippon Polyurethane Industry Co., now part of Tosoh. But the licensing contract was mostly for equipment and help building a 10,000-metric-ton-per-year plant in Yantai, China; it didn’t commit the Japanese side to much operational support.
As a result, the plant that opened in 1983 didn’t start to produce at full capacity until 1995. It took that long for Wanhua’s engineers to make the small facility run properly.
The setback proved a blessing in disguise. “Unlike other Chinese companies at the time, we were forced to get ourselves into R&D,” recalls Wanhua’s president, Zengtai Liao, who joined the firm more than 30 years ago as a plant engineer. “We were loss-making, our MDI was of poor quality, so we had no choice.”
For years, he and his colleagues tinkered with valves, pipes, temperatures, and ratios, trying to figure out how the plant they had imported from Japan actually worked.
Fast-forward to 2016. Wanhua is now the world’s largest producer of MDI, with facilities in Yantai and Ningbo, China, as well as Hungary. It has widened its product line to include specialty isocyanates. Gearing up to engage with multinationals, it is considering a major investment on the U.S. Gulf Coast where urethane players such as BASF and Dow Chemical are well entrenched. The former synthetic leather producer is proving the rare example of a Chinese company that emerged from obscurity to become a world player in chemicals.
The Chinese government is keen to create world-class multinational firms, says Kai Pflug, head of Management Consulting—Chemicals, a Shanghai-based advisory firm, and Wanhua is one of the few that is proving to be up to the challenge. “The interesting question is not whether they are a serious player—they are. The interesting question is more how they’ve managed to accomplish this.”
Indeed, because MDI manufacturing is hard to master, the market is difficult to enter, says Rachel Uctas, a senior consultant focused on isocyanates at the consulting firm Tecnon OrbiChem.
Moreover, not all MDI is the same. A grade called crude MDI is used to make polyurethanes for home insulation, whereas pure MDI goes into elastomers for shoe soles, Uctas explains. Another isocyanate, toluene diisocyanate (TDI), goes into flexible polyurethane foams found in furniture and bedding. To be turned into polyurethanes, both TDI and MDI need to be reacted with polyols.
For most of its history, Wanhua focused on MDI, Liao says. The MDI market is about double the size of that for TDI and is one where producers, in China at least, have traditionally enjoyed high profits. MDI is also a market where producers can differentiate themselves because MDI from different companies offers slightly different characteristics, Uctas notes.
Making the plant licensed from Japan work correctly provided Wanhua with a deep understanding of MDI chemistry, Liao says. Over the years, Wanhua engineers managed to boost the plant’s output to the point that it was making 220,000 metric tons per year when it was finally closed in 2014, he says.
Through this experience, Wanhua technicians developed a proprietary MDI process that has never been challenged for patent infringement in a court of law, Liao stresses. In Ningbo, Wanhua operates the world’s largest single-train MDI plant, with a production capacity of 800,000 metric tons.
It’s Wanhua’s decades-long MDI development journey that set the stage for its recent entry into the aliphatic isocyanate business. Last month, Wanhua opened a plant producing isophorone diisocyanate, a specialty chemical used to make durable industrial coatings. Before Wanhua, only a handful of Western and Japanese firms had mastered the technology.
Just as with MDI, the process to make aliphatic isocyanates took a long time for Wanhua to develop. In 2000, after one year on the project, the first R&D manager responsible for aliphatic isocyanates requested permission to quit after making “zero progress,” Liao recalls. The next manager made “a bit of progress” over four years, but he was hired away by a Western competitor before completing the project, Liao adds.
It was not until 2009 that Wanhua built an aliphatic isocyanate pilot plant. A few more years of experimentation passed before the firm was ready for commercial manufacturing.
It’s uncommon for companies to commit to long-term R&D projects in China, where making money quickly is the preferred strategy. Wanhua is also charting its own course with its approach to health, safety, and the environment. It’s a topic that Liao—who is well aware of the chemical industry’s negative image in China—discusses passionately. “We believe all accidents are preventable,” he says.
Throughout the 2000s, China’s chemical industry grew at a breakneck pace. Many companies were led by greedy managers who built poorly planned and unsafe facilities in their rush to earn money. Too many chemical plants in China pollute and are accident-prone, Liao says, giving the industry a dirty and dangerous image.
To help avoid accidents at its plants, which process hazardous chemicals such as phosgene and carbon monoxide, Wanhua hired DuPont Workplace Safety Consulting in 2003 to promote a culture of safety. Wanhua builds its facilities with safety in mind, Liao says.
Providing some examples, he says phosgene generators at Wanhua plants are both enclosed in steel-reinforced walls and protected by walls of steam and caustic that can be activated if a leak occurs. Pipes carrying dangerous chemicals are double-layered.
As for the environment, Wanhua’s goal is “no smell, no emission, no noise,” Liao says. The firm endeavors to collect all air emissions, including the smelly but harmless vapors from the biological ponds at its wastewater treatment plant. The investment in health, safety, and the environment is apparently paying off. Wanhua has yet to be involved in a major industrial accident, and its plans to expand facilities have so far not attracted the ire of protesters.
If Liao, who speaks only Chinese, sounds like a manager at a Western firm when discussing health and safety, it’s partly because he has brought on several Western-trained executives. Since it was privatized in 1998, Wanhua has hired Westerners and foreign-trained Chinese for key positions.
One significant recruit was Robin Grieve, a veteran of the U.S. polyurethane industry, who advised the company on building up its overseas sales between 2002 and 2010. Wanhua also hired several Chinese-born scientists trained in the West. Some of them, Liao notes, had to be offered higher salaries than his or that of Wanhua’s chairman.
Foreign-trained chemists and engineers contributed to Wanhua’s technical prowess. But the firm was also helped by the rapid growth of the Chinese economy over the past 20 years, acknowledges Peter Huo, who holds a Ph.D. in polymer physics from Massachusetts Institute of Technology and heads Wanhua’s sales and marketing team. Over the past two decades, Wanhua’s sales have boomed on the back of the insatiable appetite for raw materials by local producers of shoe soles and home insulation, Huo says.
Reliance on the Chinese market can be risky, however. About two-thirds of Wanhua’s sales are to customers in China, and as the Chinese economy has slumped in the past two years, so has Wanhua’s financial performance. Despite the addition of new facilities in 2015, profit fell 29% to $452 million during the year compared with 2014. Sales fell 12%. Wanhua managers are aware of their firm’s overdependence not only on China but also on MDI. In recent years, the company has invested billions of dollars to broaden its portfolio and expand geographically.
In China, Wanhua is leveraging its expertise in phosgene chemistry to expand into the production of polycarbonate, a tough plastic often used in bus and greenhouse windows. A 70,000-metric-ton-per-year polycarbonate plant, implementing a process developed by Wanhua, is under construction in Yantai.
Partly because polycarbonate requires extensive product customization and technical support, Wanhua is also beefing up its R&D capabilities with new facilities in Shanghai and Yantai that will employ hundreds in both cities.
At the same time, the company is intensifying its commitment to polyurethanes. Last spring, it began the construction of a 300,000-metric-ton-per-year TDI facility and started up China’s largest propane dehydrogenation plant. The latter will enable Wanhua to produce the propylene oxide required to make polyols.
Geographically, Wanhua’s expansion is well under way. The firm paid $1.7 billion in 2011 to acquire the Hungarian polyurethane producer BorsodChem, gaining a foothold in Europe. From offices in the U.S., a Wanhua team is now studying the construction of a major urethane complex on the Gulf Coast, not just a facility to purify imported MDI as the company had first announced two years ago.
Having an MDI plant in the U.S. will convince local customers that Wanhua is really committed to North America, Liao says. “U.S. customers remember that Japanese MDI suppliers came to the U.S. and then left,” he says. Production costs in the U.S. will be higher than in China, he anticipates, but not having to pay for shipping across the Pacific Ocean will partly make up for that.
Expanding geographically and into new product lines should benefit Wanhua, agrees Tecnon OrbiChem’s Uctas. Prospects in Europe are promising, she adds, because governments are issuing new regulations requiring homes to be better insulated.
But Wanhua’s diversification comes at a cost. In March, the credit rating agency Moody’s warned that it was reviewing Wanhua for a possible downgrade. Moody’s noted that Wanhua’s short-term debt burden rose in 2015 while its ability to repay diminished because of falling MDI prices in China.
“Prices have begun to recover this year,” Liao counters, but he recognizes that profits on MDI will not be as high as they were before the slowdown that began in 2013.
Liao sees Wanhua’s future success more tied to its ability to supply specialty isocyanates, polyurethane chemical systems, and customized materials such as polycarbonate. In that regard, the company is learning from the experience of its multinational competitors. “The multinationals are larger than us when both MDI and polyols are considered,” he says. “They are our role models.”