Chemicals offer a compelling example of the way China can drastically alter the competitive dynamics of a global industry. With long-term demand expected to grow by 6 to 8 percent a year—compared with 2 to 3 percent in North America and Western Europe—the country is the world's most attractive market for commodity and specialty chemicals alike. Demand comes from both rising domestic consumption and the country's thriving exporters. Like companies in other industries, the world's biggest chemical makers are focused on exploiting this rich market's potential.

While these companies ponder when and how to engage with China, their biggest customers at home—manufacturers of textiles, electronics, and automotive vehicles—are rapidly moving production capacity there to take advantage of lower costs and the big domestic market. Once established in China, these manufacturers will start to reconsider their chemical providers. Chinese producers are maturing, and many of them can offer the quantity and quality of chemicals needed to serve the domestic market, including the factories of Western companies, in diverse product categories. And in some niche chemical markets, the Chinese already compete globally.

Where does this leave the multinational chemical players? They must not only continue to look for growth opportunities in China...