Chinese fine chemical firm finds a second home in Inner Mongolia

You could say that it’s blue skies all around for Join King Fine Chemical, a Chinese producer of fine chemicals largely used in the agrochemical industry. The firm’s new plant in Inner Mongolia sits under cloudless skies for most of the year, sales are soaring, and the company is seeking acquisition targets.

Go back to 2011, however, and few people at the firm could imagine such a rosy scenario. The company, then named Chemphy Fine Chemicals, was facing a cash crisis after the death of its CEO. Unable to pay suppliers and staff, the firm stopped production. After months on the verge of bankruptcy, Chemphy was acquired by Jointown Pharmaceutical Group, China’s largest private distributor of drugs and medical equipment, with annual sales of about $10 billion.

As part of Jointown, Join King has thrived. The larger firm injected essential cash and introduced a corporate culture focused on growth—both organic and through acquisitions. In addition, Jointown managers encouraged Join King to build a second production base, in Wuhai, Inner Mongolia. The move made Join King a pioneer in Wuhai, a former coal mining town that is now luring the drug and agrochemical industries.

Chemphy came to life in 1996 as a for-profit subsidiary of Dalian Institute of Chemical Physics, one of China’s top chemistry research outfits. In 2003, then-CEO Chu Dong and other managers took it private and modernized its operations. The firm produced custom chemicals used by customers in a range of industries including agrochemicals and contract research. Its production assets mostly consisted of a large complex in Dalian.

Chemphy expanded its U.S. sales under the direction of Aaron Shen, a Chinese-born chemist who got his Ph.D. in the U.S. Now chief strategy officer at Join King, he spends about half of his time in China but he calls Delaware home. To this day, Join King’s key customers include some of the largest U.S. chemical firms.

During its crisis, Chemphy was burdened by too much debt. But the cash crunch wasn’t the result of poor operations, says Stephen Wang, the general manager of Join King for the past two years. Wang is one of five managers whom Jointown dispatched after the acquisition.

“The company had no shortage of customers, and both the technological abilities and production infrastructure were fine,” he says. Join King managers say they still aren’t sure where the missing funds went. They suspect embezzlement but haven’t been able to prove it.

As a unit of Jointown, Join King seems to have recovered and grown stronger. According to Wang, Jointown managers saw the firm as a high-margin business providing entry into a sector related to pharmaceuticals. Jointown has so far injected $60 million in Join King and will invest more in the future, Wang says.

Satisfied customers include Paul Wei, president of the Delaware contract research firm Affinity Research Chemicals. Wei has been a customer of Join King for several years, relying on it to scale up molecules that his firm synthesizes for its customers. Affinity settled on Join King after trying out a few other Chinese suppliers. “They aren’t the cheapest we tried, but the others were disappointing,” Wei says.

Join King’s decision to build a second base in Wuhai was bold at the time. In 2013, when construction of the plant started, fine chemicals producers in Wuhai were few and far between.

Wuhai and Dalian are a study in contrasts. An arid interior city of about half a million surrounded by sandy deserts, Wuhai is a newly built frontier town with wide boulevards. The port city of Dalian, with a population of about 7 million, is a cosmopolitan hub that is home to numerous South Korean and Japanese factories.

But for Join King, Wuhai was compelling. Electricity in the city costs about one-third of what it does in Dalian. “Wuhai is a large producer of electricity, but it’s not connected to the national grid,” Shen explains. The area is also endowed with large salt deposits, enabling the production of chlorine on a vast scale. The liquid chlorine is distributed by pipeline in the Wuda industrial zone of Wuhai, where Join King is based.

Also compelling, Shen adds, is the presence of large hydrogen fluoride producers within a two-hour drive of Wuhai. “This makes it a perfect base for fluorination,” Shen says. Finally, a railway runs though the city, easing delivery to customers in China and abroad.

The government of Wuhai is eager to attract investment from chemical companies, according to an official from the Wuda industrial zone who asked for anonymity because he doesn’t have permission to talk to the media. Traditionally, he says, industry in and around the city consisted mostly of heavily polluting mining operations and basic processors of natural resources.

In recent years, the official says, the Wuhai government has ordered the closure of the city’s worst polluters while attracting investment from chemical producers, both Chinese and foreign. U.S.-based Cabot Corp., for instance, is building a $60 million fumed silica plant in Wuhai.

The result is that, in the past five years, Wuhai’s economic growth has averaged 8% annually while air quality has steadily improved, the Wuda official claims. Officials from China’s Ministry of Environmental Protection spent 40 days in Wuhai last summer during their national crackdown on pollution, he says. “No local company was shut down, so I think we’re doing a good job monitoring them.”

Join King will use its new plant in Wuhai to produce feedstock for its facility in Dalian. The Wuhai site will also enable the company to start producing agrochemical active ingredients—rather than just starting materials—for the Chinese market.

Many of China’s agrochemical producers aren’t cost competitive, says Xiao Lifeng, Join King’s general manager of agrochemicals. Noting that China has about 400 producers of agrochemicals, he expects that the time is ripe for a rationalization that leaves only the best ones in business. “We will acquire other Chinese facilities producing bulk actives or agrochemical formulations.”

Expanding into agrochemicals active ingredients could boost sales rapidly, Wang, the general manager, says. Overall, he expects Join King’s sales to double to about $210 million in the next three years. By then, agrochemical active ingredients and formulations will account for 40% of sales.

One challenge facing Join King as it expands in Wuhai is a shortage of local people with the expertise needed to run a plant doing hazardous reactions such as chlorination and fluorination. To close the skills gap, the company has dispatched senior technical staffers from the Dalian site who agree to reside in Wuhai for one or two years. They usually come without their families.

“I try to come here as often as I can to try to keep their morale and motivation up,” Wang says. This human resource challenge is one Join King would not be facing if it had not expanded into China’s hinterland. But it seems like a small price to pay for a company that only a few years ago was in crisis.