ADNOC Is Closing in on Its Acquisition of Covestro, Begging the Question, Can European Manufacturing Thrive without Outside Investment to Fund Digital Transformation?

Abu Dhabi National Oil Company (ADNOC) is looking to acquire Germany chemical company Covestro AG for around US$15 billion, having been in talks since September of 2023 and currently in the process of finalizing due diligence. This compounds ADNOC’s wider acquisition portfolio that has seen the company consistently expanding into adjacent markets and the wider oil & gas value chain, with ADNOC stating that it looks to spend US$150 billion by 2027. In 2023, ADNOC purchased Netherland-headquartered, OCI Global’s majority stake in Fertiglobe, and in February of this year, ADNOC closed on its acquisition of 24.9% of OMV AG, an Austrian energy and chemicals group.

Covestro, one of the largest chemical manufacturers in Germany, has faced stiff competition from Chinese chemical producers, which are selling to the market at lower prices, creating a more challenging fiscal outlook for the European manufacturer. The potential acquisition continues to shed light on the competitiveness of European manufacturing in traditional industries going forward. While the continent looks to see glimmers of hope in the production of emerging industries such as green hydrogen and Electric Vehicle (EV) batteries, established bastions of success such as automotive, chemicals, and machinery are struggling to maintain competitiveness against foreign manufacturing markets. The German automotive industry is a prime example of a market, alongside chemicals, that is struggling against international competition, even on the domestic front. While Volkswagen (VW) faces factory closures, there is notable Chinese expansion of its manufacturing footprint in Europe, with BYD, Geely, and Great Wall Motor looking to construct plants within the region in an effort to avoid high tariffs.

While European governments and industry would undoubtedly like to drive the success of domestic industries through internal development and investment, the political environment looks to be grudgingly accepting that greater investments from foreign sources into flagging industries to boost productivity might be necessary to maintain future competitiveness. Ownership of Covestro by ADNOC will likely bring much needed investment and improvement to Germany’s chemical industry. The cornerstone of this will likely be digital transformation, as this remains one of the few realistic ways to drive competitive production against low-labor cost manufacturing nations.

The damaging market conditions seen in Germany and other European manufacturers following Russia’s invasion of Ukraine in 2022, with the subsequent spike in energy costs, served to highlight and deepen the reality of the region’s manufacturing position; in many ways, it is simply not as productive as other leading manufacturing regions. The combination of high labor cost, a focus on “premium” products (with ever tightening margins), and increasing compliance requirements with environmental regulation drives up final product prices, and in the face of many nations’ challenges with inflationary pressures, leads consumers to look elsewhere for cheaper options. ABI Research’s survey of German manufacturers, Industrial and Manufacturing Survey 1H 2024: What’s Top of Mind in Germany? (PT-3322), corroborates this market sentiment, with wage expectations of staff and ability to attract talent, rising price of components/materials, and keeping track of regulations as some of the top 10 challenges that manufacturers are facing.

Theoretically, European industry could ride out these “short-term,” black swan events; however, the reality is that the geopolitical climate and market state seem unlikely to stabilize over the coming years. The region needs to take drastic action to redefine its position in manufacturing and underlying production processes. Its production has always been seen as some of the most technologically advanced from a global perspective; however, if European manufacturing wants to survive, let alone succeed, in the coming years, manufacturers need to double down hard on their digital transformations to create a competitive edge. Foreign acquisition and investment are likely one of the main ways in which manufacturers will find the capital for such transformation.

To revolutionize European manufacturing, companies need to invest in technologies that will dramatically change production processes and workers’ everyday roles and impact. Digital twins, Artificial Intelligence (AI) & Generative Artificial Intelligence (Gen AI), and energy management software are three examples of solutions that can make such an impact. ABI Research’s survey of manufacturers in Germany (PT-3322) demonstrates that these technologies are high on the minds of companies. When asked “what technologies is your company using/planning to use in the next 5 years,” the median of respondents answered that for digital twins and energy management system software, they were in the stage of devising implementation programs for the technology. For Gen AI, manufacturers were slightly earlier on in the journey, with the median respondent still in the process of evaluating suppliers and Proofs of Concept (PoCs).

• Digital Twins: These enable the real-time visualization of production assets through the creation of a digital backbone, integrating data from simulation and Computer-Aided Design (CAD) models, Machine Learning (ML) algorithms, sensor data, and enterprise software (Manufacturing Execution System (MES), Quality Management System (QMS), Product Lifecycle Management (PLM)) inputs. The solutions support a wide range of applications such as virtual commissioning & production simulation, asset maintenance & equipment Overall Equipment Effectiveness (OEE) management, and effective workforce training. The visual digital environment provided by the twin can help drive collaboration, with stakeholders from across the organization, who can easily engage with the data, improving coordination on optimization initiatives and project scaling. Overall, the digital twin dramatically changes the way that manufacturers engage with their production data and visualize operations. Notable providers of the range of technologies needed to be brought together to construct digital twins are Dassault Systèmes, Hexagon, Mitsubishi Electric, Rockwell Automation, and Siemens.
• AI/Gen AI: AI models can be applied to production processes, identifying points of efficiency and optimize them, alongside even being used for demand forecasting to streamline production output. Other near-team use cases include generative design, Computer Numerical Control (CNC) machine adjustments, correction of bugged software code, predictive maintenance scheduling, and creation of frontline worker documentation (see ABI Research’s Generative AI Use Cases in Manufacturing presentation (PT-2763) for a full evaluation). Copilot solutions, in particular, have seen significant interest from the manufacturing industry, allowing companies to augment workers’ analytical processes and production tasks by providing easy access to information and training. This is essential for manufacturers with high labor costs, which really need to maximize the productive efficiency of their workers to justify and maintain wages. The industry is just beginning to scratch the surface of the potential of AI and Gen AI, and while there remains a lot of hype in the market, European manufacturing really needs to position itself as a leader in adoption of this new technology. Key AI/Gen AI providers include Amazon Web Services (AWS), Microsoft, NVIDIA, and OpenAI.
• Energy Management System Software: With the cost of energy being a dramatic stress on the bottom line of European manufacturers, alongside the increased presence of stricter environmental regulation, energy management software represents an obvious low-hanging fruit for companies to adopt. Such solutions provide significant energy transparency across operations, allowing manufacturers to identify points of inefficiency and wastage, alongside ensuring easy compliance with emissions regulations and efficiency goals. In sum, the software provides an easy way for manufacturers to rapidly cut costs, shore up production security in the face of volatile energy costs, and earn consumer and government approval for sustainable operations. Prominent providers of this software are ABB, Eaton, Emerson, GE Vernova, Honeywell, Schneider Electric, and Siemens.