Abstract
Over the last eighteen years the Indian chemicals industry has moved from manufacturing principle chemicals in a highly regulated market to being a mature industry in a liberalized economy. Until 1991, with the domestic chemical industry enjoying protection in the form of differential import duties on raw materials and finished chemical products. Chemical manufacturing was largely controlled by licensing regulations.
The Indian chemical industry, 12th largest in production, is growing at an average rate of 12.5%. However, sector modernization of existing technology through foreign collaborations could further enhance growth.
The report researches the characteristics of the Indian chemical industry and the segments which, as a whole, make up this dynamic machinery of growth. The massive globalization and consolidation strides taken by the industry as explained in the report with the requirement of heavy capital investment that brings in more competition and the overall focus of the industry to meet the environmental challenge.
[Word Count: 153]
Globalisation in Indian Chemical Industry: 1991-2008
Overview of the Indian Chemical Industry
Indian chemical Industry is approx USD 35 billion in FY 2007. This constitutes of approximately 3% contribution to the GDP. It contributes to about 13-14% of the total export and 8-9% of the total import (Quarterly Performance Analysis of Indian Chemical Industry, n.d.).
The Industry can be divided into three segments such as: Basic Chemicals, Speciality Chemicals and Knowledge Chemicals (Planning Commission of India, 2006, June). The Sector wise contribution is as shown in the chart below.
Figure 1-Contribution of various Segments[Source: Indian Chemical Council]
Basic Chemicals
The basic chemical consists of Agro-chemicals, Organic and Inorganic Chemicals. The Indian basic chemicals account for almost USD 20 billion of revenue annually.
Speciality Chemicals
Speciality chemicals are fine chemicals, dyestuff and Intermediates. The speciality chemicals account for almost USD 9 Billion annually.
Knowledge Chemicals
The knowledge segment is mainly R&D related chemicals such as Pharmaceutical products. It is valued at approximately USD 6 Billion.
Key Players in the Indian Chemical Industry
Figure 2-Key Players of the Industry[Source: Cygnus Business Consulting & Research, 2008]
SWOT Analysis
The SWOT analysis of the Industry vis-à-vis the Globalisation has been presented in the figure below. The main concerns of the Indian Chemical Industry are unfavourable Policy Framework and Poor Infrastructure in the country. The positive sides for the Industry are the opened up developed markets, Quality Human Resource and diversified manufacturing base.
Figure 3-SWOT Analysis of Chemical Industry[Source: Authors]
Effects of Globalisation on Chemical Industry
The chemical industry has been traditionally been developed in protected environment. The globalisation posed several challenges to the Indian Chemical Industry. The Indian Chemical manufacturers were not globally competitive and hence they struggled to deliver quality as the import quality chemicals (KPMG, 2004). Another challenge Indian Industry faced is the environmental regulations forced by the policy makers due to the International pressure (Gopalkrishnan R., 2008).
Entry of Foreign Players like Dow Chemicals, Akzo Noble and BASF has made the Industry more competitive. As explained by Mr. P.N. Shah, GM, Larsen & Toubro Ltd., (Personal Communication, January 15, 2009) the foreign players use the world-class technology which gives both, Cost effective as well as better quality products.
The import duty has been reduced after opening the economy. This has made Indian producers suffer. Especially, the smaller players were affected adversely. The earlier years of 21st Century saw closing of many small scale players in India. This hinted Government of India to take up initiatives such as Cluster Development approach for the Development in India (Sachitanand, 2009).
Prof. R.N. Shukla (Personal Communication, January 16, 2009) stressed upon the point that Indian Chemical Industry faces the challenge of dumping which is also a result of Globalisation. This has made the import cheaper and local producers less competitive. This also resulted into shift of focus towards export markets for the Industry.
The Lower Capital and Labour cost make Indian Exports competitive. The stringent environmental regulation in USA and Europe, the exports market for dyestuff has opened up. Indian dyestuff industry has hence seen tremendous growth in the past few years. The rise of so many small scale export oriented manufacturers can be attributed to this fact.
An opportunity for Pharmaceutical Sector
Traditionally, chemical companies were organized along commodity and speciality chemical lines with some hybrid companies in between. The emergence of Life science has created new business opportunities. Many chemical companies have reinvented themselves as life science companies in at the start of 21st Century. The industry has also seen many companies changing character from commodity players to service providers working very closely with their customers to serve the final end user. In any case, the character of chemical industry has been different in the last decade. As Mr. Mukesh Ambani said at the India Chem 2006 “The challenge is the inflexible attitudes, concentration as core skills, assimilation of new skill sets and capabilities and working with customers in a partnership made. I believe that the chemical industry is at the doorsteps of a new technology revolution that will dwarf earlier information technology revolution, the world has seen.” He also noted that the chemical industry adapted physics in the 20th century. It will embrace biology in the 21st century (Ambani, 2000). Hence, the most exciting opportunity for the chemical industry has been in life sciences and notably biotechnology as well as molecular science. Chemical industry has the opportunity of using the biotechnology platform to bring about new products, energy efficient and pollution free processes and alternative bio routes to conventional products in the coming years.
The developed countries are facing problems like Declining R&D productivity, shrinking R&D pipeline, famous drugs losing patents, competitive pressure & scarcity of new breakthrough molecules. These factors present significant opportunities for low cost destinations like India. The cheaper and cost competitive talent pool of India has attracted the outsourcing of R&D sector for global pharmaceutical companies. This has led the inception of concept called Contract Research Organization (CRO). In fact shift of R&D base to India has been a growth driver for the Indian Pharmaceutical Industry.
Indian Players Acquiring Foreign Companies
It is not long since Indian Chemical players have started acquiring foreign companies from US. Aditya Birla group, GHCL and Atul Ltd have been front-runners in these acquisitions (Changing Face of Indian Business, 2007). GHCL acquiring London based firm Dan River Global and Aditya Birla Nuvo acquiring Egyptian player Alexandria Carbon Black Company S.A.E. are some of the examples of it.
Tainted Image of Indian Chemical Industry
In light of globalisation, Indian Chemical Industry has grown with the introduction of new products. However, this growth has also caused the environment pollution. Chemical Industry deals with a lot of products, by-products and effluents which are harmful for the environment. The emission of gases like NOx, SOx, Carbon Dioxide and Carbon Monoxide has also been a cause of concern. The presence of number of small players in the industry can be assigned as the reason for these effects. The small players cannot afford the best of practises in terms of manufacturing.
Globalisation has caused Indian players to benchmark the global manufacturing practises and adapt the latest technology. The resultant is better quality product due to efficient and cleaner production techniques. The advent of ‘Clean Technology’ can be attributed to the globalisation in the Indian Chemical Industry. However, these technologies has been restricted to larger players only as small scale units, due to financial constraints, cannot incur the capital costs required in the process said Prof. R.N. Shukla (Personal Communication, January 16, 2009).
Mr. Gopalkrishnan, VC, Tata Chemicals, attributed this to the fact that most of the chemical industry products are not directly consumer facing, but are used by other industries. “Since the effects of chemical innovations are often only indirect and the lay person is not aware of the industry’s contribution, it usually goes unnoticed.”
The new EU legislation like REACH (Registration Evaluation Authorization of Chemicals) will also enforce smaller exporters to increase their rigour in the environment safety. However, this would hurt the exporters in the Global competition if proper support by the government is not provided. The legislation would enforce smaller players to adapt clean technology, failing which the companies would lose orders to other countries like China.
Clean Development Mechanism: An Opportunity for Indian Chemical Industry
Clean Development Mechanism (CDM) is put into practise under the Kyoto Protocol. Under this mechanism, firms of developing countries can claim the credits (Carbon Credits) for reduction in their emissions. The concept can give them an extra opportunity to earn revenues. The developed countries are under obligation of buying certain amount of Carbon Credits each year. By this mechanism, companies can take care of environment as well as increase the efficiency of their Bottom line (United Nations Industrial Development Organization [UNIDO], n.d.). For example, Reliance Industries ltd has done afforestation activity near their Jamnagar refinery. This creates a sink for the emissions by the refinery. Due to the activity, Reliance also earned Carbon Credit, which is the extra revenue for the company. Many Indian companies are holding Carbon Credits like this and it has been a good opportunity for the Indian players said Mr. P.N. Shah, GM, Larsen & Toubro Ltd., (Personal Communication, January 15, 2009).
Cluster development approach
We have looked into possible ways of improving the competitive strength and commercial viability of small-scale units in the changing context. While liberalisation is exposing these units increasingly to market competition, globalisation is intensifying the market competition. The only way for these units to withstand competition is to improve the productivity and quality, and to reduce the costs given higher qualities. This means substantial improvements in the various dimensions of technology, namely, Automation, organisation and information, which is known to be dependent primarily on the scale of operation (Bhavani, n.d.). The existing policies on small scale units created perverse incentives to remain small and operate in an isolated manner Bhavani (n.d.) also emphasizes that it is high time that policy measures be revamped so as to encourage the growth of small units through collective efforts.
Such collective efforts are cluster development of the industry. The Government of India along with United Nation and the World Bank has started such initiatives. Soft loans are given to a cluster of similar product industry by the World Bank by the accreditation of Government of India and United Nations. Additionally GIDC (Gujarat Industrial Development Corporation) has also started Common Effluent Treatment Plants (CETP) concept. A small player individually is not capable of maintaining an Effluent Treatment Plant but on collective basis, several players can jointly operate such plant. This results into cleaner environment and better productions (Industry Commissionaire, 2004).
Future Outlook
Indian Chemical Industry envisages being USD 100 billion in size by 2015 as per “Call to Rebrand Chemical Industry” (2008). While the Pharmaceutical sector has been relatively unaffected by the global slowdown, other factors are facing a challenge due to low demand as Prof. R.N. Shukla said (Personal Communication, January 16, 2009). To realise the vision, the key imparatives are suggested by KPMG. The authors have tried to analyse these parameters. The Knowledge Chemicals require aggressive growth strategies to grab the exciting business opportunity that has been put forward. It also requires high investment in Research and Development. The speciality chemicals must sought after colloberative strategies such as Cluster Development and institutional recreation. Significant focus on cost reduction in Basic Chemical segment is desired. All the segments also need to focus on Consolidation to leaverage on Economies of Scale.
Chemical Industry must also adhere to stringent Health and Safety regulation required by the foreign players for colloberation and trade. The infrastructure support from the government is also sought for the impetus to the industry. A massive brand revamp is also required for acheiving the vision of USD 100 billion turn over. Mr. Gopalkrishnan at the India Chem 2008 urged FICCI to treat entire industry as a brand and adapt product branding strategies of consumer products.
Figure 4- Key Imperatives for Chemical Industry
[Source: KPMG]
Conclusions
The chemical industry is facing some challenges as well as new business opportunities. The globalisation has increased India’s foreign trade and also forayed new avenues in Pharmaceutical industry. The growing numbers of expiring patents have increased the importance of Research and Development. While basic chemicals segment is facing a declining demand, it needs to focus on cost reduction tactics. The growing competition from China and implementation of REACH agreement are the challenges faced by the industry. The entrance of foreign players has witnessed technological advancement in the industry for the larger players. The smaller players have suffered due to lack of funds and hence collaborative strategies such as Cluster Development is required.
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