BEIJING/TOKYO -- China's top two chemical makers Sinochem Group and ChemChina confirmed Wednesday that they are discussing a merger that has put the global industry on edge over what would be by far the world's largest producer.
Ning Gaoning, chairman of the two state-owned enterprises that boast sales of $146 billion combined, announced the consolidation talks at a news conference in Beijing hosted by the State Council, China's top governing body.
"Both companies are going forward with the merger," Ning said. "It's highly necessary to collaborate on upstream and downstream technology and in markets at home and abroad."
This was the first time Ning has confirmed the two companies plan to merge. Up until now, the chairman would only say the two companies were "collaborating."
It has been long speculated that the two companies would merge, even more so after they consolidated agricultural assets this year.
A potential megamerger of the two chemical makers has the global industry bracing for a major disruption, as the combined sales of the companies dwarfs that of prospective runner-up BASF, the German competitor that took in $70.7 billion.
Japanese chemical makers have shifted to highly functional products for semiconductors and next-generation automobiles. But ChemChina and other Chinese rivals have broadened their business domains through acquisitions and invested copiously into semiconductor materials.
"It would be a threat if the Chinese grew larger and expanded into functional chemicals," said an executive at a major Japanese chemical manufacturer.
Another industry insider saw a bigger effect outside Japan.
"If the two companies merge, China will move further into local production of generic petrochemicals for local consumption and this will impact chemical makers in South Korea and Thailand, which are highly dependent on China," said the source.
If the merged company is able to raise its competitive advantage, the industry would be forced into a shake-up depending on how the Asian market changes.
Yet prospects for both companies are clouded by uncertainty. Sinochem's business portfolio spans from chemical and energy to finance. Due to the novel coronavirus pandemic, however, net profit in the first half of the year plunged to roughly half of the year-earlier result.
ChemChina has embarked on a string of acquisitions, including that of Italian tire company Pirelli and Swiss agrochemical major Syngenta. The group does not disclose earnings, but it is assumed that 2019 sales underperformed the previous year, and that the company has been slow to improve earnings as of late.
The companies are also caught in the crossfire of the U.S.-China trade war. On Friday, the U.S. Department of Defense named 11 more Chinese enterprises determined to be owned or controlled by the Chinese military that operate directly or indirectly in the U.S. Both Sinochem and ChemChina are on the list.
The designation has already been applied to telecom company Huawei Technologies and security camera manufacturer Hikvision, among other enterprises. Although no penalties were announced with the Defense Department's list, U.S. President Donald Trump is empowered to impose banking restrictions and other sanctions to companies on the list.
Ever since President Xi Jinping became the general secretary of the Communist Party in 2012, the government has been busy merging state-owned enterprises to build up competitive advantage on the world stage. That policy has given birth to train car heavyweight CRRC and China Baowu Steel Group.
However, the consolidations have not necessarily led to a boost in competitive advantage or expansions of global share.
Although Chinese operations are expanding in countries party to the Belt and Road initiative, Xi's cross-border infrastructure vision, U.S. Secretary of State Mike Pompeo has repeatedly raised alarms about Chinese enterprises. More than a few countries face surging external debt as a result of Chinese-led infrastructure projects.
Xi hosted a forum in July that invited business executives worldwide. During the event, Xi indicated China will continue to open up its economy, and urged participants to further the technical prowess of their companies.
Ning was present at the forum, and he seemed to have kept that message in mind.
"Chinese enterprises in the future will generate technological innovation and fulfill key global roles," Ning said Wednesday.
Ning's resume includes stints heading up multiple state-owned enterprises, such as the conglomerate China Resource Holdings and food maker Cofco. He was appointed chairman of Sinochem in 2016 and chairman of ChemChina in 2018.
Although Chinese companies have taken the lead in terms of scale in several industries, they are still generally outdone on the technical front. It remains to be seen if Chinese enterprises will switch to prioritizing technology over scale.