The Indian chemicals industry is switching its strategy to value creation, rather than chasing volumes at reduced margins.
by Mitalee Kurdekar
Worldwide, the chemicals industry is currently going through a metamorphosis of sorts. There are some significant challenges in achieving significant business development, at a time when economies around the world are experiencing low GDP growths, with consumer demand not picking up as one would like it to. As a result, many global majors are looking towards fast-growing economies like India to market their products. However, they do not intend to compete on volumes alone, but are instead resorting to capturing market share by introducing specialty chemicals in niche segments of the market. It is interesting to note how this strategy is helping India’s own focused initiatives in this space.
The Indian Scenario
According to a recent FICCI report, the chemicals industry in India has seen a growth of 13-14% during the last five years, while the petrochemicals sector registered a growth of 8-9% in the same period. The margins, though, were not attractive enough to draw sufficient investment, although falling crude oil prices did allow petrochemical companies to improve their cost economics and also show improving margins. They key issue, however, remained that of creating new demand from down-stream industries dependent upon general consumption levels in the economy.
The situation is changing now, with the Government of India making definitive interventions, and the Indian market drawing global players, who are exploring it for their own benefit as also in response to the Indian Government’s call. Shilip Kumar, country president, Henkel Adhesive Technologies India, acknowledges this opportunity when he says, “India holds an important position for Henkel. It is one of the key countries contributing to the company’s growth both as a domestic market as well as a manufacturing base to serve other international markets.”
In its achievements report published in January 2017, the Department of Chemicals and Petrochemicals of the Government of India has suggested that the chemicals industry in India is an important contributor to the Indian economy, sustaining a variety of downstream industries such as textiles and pharmaceuticals. The report claims that the Indian chemicals industry – with a market size of $145 billion – is the seventh largest producer of chemicals, worldwide, and the third largest producer in Asia, after China and Japan. It goes on to suggest that India is the third largest producer of agro-chemicals, globally. Also, the specialty chemicals market has been growing at 14% over the last five years, due to domestic consumption. Its market size is expected to touch $70 billion by 2020.
BASF, which has been present in India for a number of years, is keen to expand on its footprint. Nilotpol Kar, business director, construction chemicals, BASF South Asia, explains, “We expect to be a part of India’s growth story and this massive push and focus on infrastructure. Our strategy is to keep an eye on material and machinery technology and with key stakeholders. By remaining agile and quickly adapting to changes in the market, we will be able to take on opportunities. Through the combined power of our people, processes and products, we expect to maintain and grow our presence across various segments.”
Favourable Trends
India presently offers a host of growth drivers for the chemicals industry to benefit from. The most important among these is the fact that India is a growing market of 130 crore-plus people, with a positive shift in the demographic pattern of an increasing middle-income group. An increase in the disposable income of this group translates into an increase in the purchasing power of the consumers. In addition, India is also witnessing a trend of increasing urbanisation with a growth in the number of small cities and towns as well as old cities turning into megacities. This is driving the consumption demand for textiles, construction, automotive, paints etc., which in turn fuels the demand for chemicals.
Kumar is optimistic about these favourable conditions, and sees many possibilities for the future. He forecasts that, “While talking of market, we include both the existing market as well as the latent untapped market, which can be tapped into with innovative solutions replacing existing products. The challenge here is to translate such opportunities into actual sales. We see India as a market with high growth potential, and as market leaders we intend to take on the challenge of converting the latent potential into actual market sales.”
He points out that India, as a market, has high growth potential; and as a market leader, Henkel intends to take on the challenge of converting the latent potential into actual market sales. Elaborating on their plans, he adds, “The replacing or reduction of mechanical fastening with adhesives is just one such example. Structural adhesives offer many advantages over conventional joining technology. These advantages include joining dissimilar substrates, plastics, composites, etc.; corrosion resistance and higher reliability. To convert non-users to users, awareness needs to be created through seminars, trade shows, promotions, white papers/articles on technical benefits in relevant publications.”
The Indian chemicals industry is also omnipresent in all segments of the sector due to efforts from both private and public sector players in the past, and hence boasts the availability of highly-trained technical manpower. Together with equally competent managerial skills, the industry offers a good platform for easy adaption of new initiatives and technologies. To aid its own cause, the industry has a captive consumption rate of almost 33%. Also, the export potential of the industry has traditionally been very strong, with exports in the areas of agro-chemicals, pharmaceuticals, dyes etc.
As Kar proclaims, “You will find BASF in almost every sphere, right from biodiesel, smart energy, insulants, sealants, admixtures, renovation, and CNG to e-mobility solutions, and water & waste management to pedestrian walkways. We have proven ourselves in Dubai and Singapore, and we aim to continue our success story in India by providing value to all our stakeholders.”
Government Push
During the past few years, the Government of India has announced a series of measures that would help the chemicals industry to grow faster than ever before, something that seems to be working well with the favourable trends enumerated above. Post the policy announcement to delicense industries, the chemical industry no longer requires industrial licenses, other than in the case of the manufacture of hazardous chemicals. It is also free to attract 100% FDI for chemical manufacturing units. This is great relief for players in this arena, who can now chart out their own future with the hope of growing their businesses.
Kumar confesses that, “India is as an extremely attractive market, with adhesives, sealants and functional coatings being used in almost every sector, including renewable energy, automotive, aviation, construction, packaging and healthcare, among many others. In India, Henkel has manufacturing sites spread across the country. We have been strengthening our manufacturing and innovation footprints in the country as well as enhancing our product development resources. Some of these developments include the setting up of our India Innovation Centre in 2013 at Pune, with an aim to develop products for various adhesive technologies across multiple industrial applications, and a Flexible Packaging Academy at Mumbai to provide training on lamination technology.” In 2016, the capabilities of Henkel’s Innovation Centre were expanded to include an Acoustic Laboratory and an MRO (Maintenance, Repair & Overhaul) Centre of Excellence.
In terms of specific initiatives announced as part of plan proposals, the Government is targeting to increase the share of chemical manufacturing to 25%, from the current 16%, by the year 2025. Attracting investments, including FDI, in this sector, therefore remains the Government’s priority. The Government is also committed to set up a special technology upgradation fund of $80 million for chemicals, in order to help attract and implement successful embedding of appropriate technologies. Simultaneously, the Government is also setting aside 10% of the national innovation fund to promote pioneering efforts by domestic players, who demonstrate hunger for innovation. Recent measures of rationalising indirect taxation within the country are also going to help this industry.
Kar is in support of this focus on innovation and explains BASF’s contribution by stating, “BASF has innovative, user-friendly technologies, which are instrumental in enabling higher productivity and faster construction. Our products are critical as inputs in all aspects of Smart City development. From water management to energy and waste management, construction chemicals play a key role. Our focus is to position new technologies to accelerate
development.”
Through Chemexcil and other industry associations, the Government’s Department of Commerce promotes the export aspirations of the industry. Kumar agrees that, “The Make in India initiative has further given a boost to the sector, placing India on the world map as a manufacturing hub. Henkel plans to consolidate its position as the largest industrial adhesive, sealant and functional coatings supplier in India. We manufacture for India, largely in India, and even use India as an export hub for countries in close geographic proximity.” The company has made an investment of $36 million (in Phase I) to set up India’s largest adhesive manufacturing unit at Kurkumbh, near Pune. This multi-technology, state-of-the-art manufacturing facility will be commissioned in 2018.
Generating Value
But it doesn’t stop there. With stiff competition in traditional segments, industry players are getting imaginative by looking for options to generate value for their efforts. It is very rare to see any company achieving profitable growth through traditional products, where only volume drives growth, but at low margins. Players are thus resorting to different strategies as a way to deal with these challenges.
Many companies are looking at their operations more carefully to study where the ‘waste’ lies. By resorting to supply chain excellence, they are trying to unlock the hidden value in such operations. Still others are reviewing the ‘staleness’ of their portfolio and working on partnerships with others, who can complement their portfolios through the efforts of mergers and acquisitions. But most importantly, many of them are looking at the market requirements and trying to enter niche segments of these markets, with specialty chemicals that can command a premium price and therefore create extra value for relatively low effort.
Kar elaborates on this aspect, saying, “Custom-made performance-based construction chemicals have a sizeable niche market in India, which is similar to the trend overseas. These chemicals are required in the construction of iconic buildings such as in Dubai, Singapore and other South Asian countries. Therefore, they are in a good position to sustain for years to come.”
He goes on to add that their customers want innovation and custom-made differentiation technologies. As a result, they aim to provide this through these chemicals. “These construction chemicals take into account environmental factors and ease of application, have sustained a comfortable market share in India over the last decade, and we hope to maintain our position and edge by the right placement and positioning,” he concludes.
Looking at all the opportunities available and changes that are engulfing the market, it is clear that the chemicals industry is set for a bright future, provided it invests in the right product portfolio by using the available feedstock, while also exploring options to invest in drawing overseas feedstock sources.