Indian specialty chemicals: An unfolding growth story

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1 Indian specialty chemicals: An unfolding growth story Continued high growth in domestic demand that is likely to be sustained, along with investment in R&D and manufacturing augurs well for India which is emerging as a global specialty chemicals hub. However, the Indian market is different and presents a unique set of challenges. Local companies and MNCs alike are gearing up to surmount these through innovative strategies to effectively participate and win as this growth story unfolds, say Pratik Kadakia, Abhishek Nigam and Ankur Singhai of Tata Strategic. April, 2008 Nirmal, 18th Floor, Nariman Point, Mumbai , India. Tel , Fax URL: spchem@tsmg.com 1

2 Indian specialty chemicals: An unfolding growth story When it comes to defining specialty chemicals even the players in the industry find it difficult to agree on a common definition. We have defined it as a group of relatively high value, low volume chemicals known for their end use applications and/ or performance enhancing properties. Globally, the specialty chemicals industry was estimated to be ~USD 500 billion in revenue in 2007, consisting of approximately fifty segments including construction chemicals, electronic chemicals, polymer additives, textile chemicals and oil field chemicals. The market is concentrated largely in the US, Europe and Japan but future growth is expected to come from the emerging Asian markets. The high growth rates in these economies are ushering in prosperity and improved life style which mandate a greater usage of productivity and performance enhancing materials. An unfolding growth story The Indian specialty chemicals market including knowledge chemicals is likely to double to ~USD 40 bn by 2011, registering a 17% annual growth rate. Typically this industry grows twice the GDP growth rate in emerging economies, which further strengthens the projected estimate. The industry is driven by twin growth engines: domestic demand (consumption in end user industries) and exports based production (India becoming a preferred destination to build global presence). The growth in domestic demand is attributed to both, growth in the end user industries and to the increased usage of specialty chemicals. For example, the textile industry, one of the most significant consumers of specialty chemicals is expected to grow at 20% p.a. over the next five years. Additionally evolving customer needs like dirt repelling, wrinkle free, impact resistant textiles have resulted in demand for new applications driven specialty chemicals. (Refer Exhibit 1) Exhibit 1: Domestic demand based growth of specialty chemicals 2

3 End use industries in India are at an inflection point from where they are looking to compete on the global stage. There is an increased awareness about the role specialty chemicals can play in providing a distinct competitive advantage. Preferred destination as a supply base Global specialty majors are establishing base in high growth Asian economies not only to participate in their growth by offering products and services tailored to meet the exact needs of the local customers but also to leverage their low cost advantage. Much of this investment till now has been in China, a trend likely to be altered in the future with India establishing itself as a reliable and cost effective supplier. India is establishing itself as a major hub for manufacturing and R&D. The erstwhile cost advantage of China with respect to India in manufacturing is becoming insignificant. Besides providing access to a rich pool of knowledge workers, India provides a robust legal and regulatory framework for research based development. India became a signatory to TRIPS in A lot of companies are getting their products patented in India. All these factors have contributed to India evolving into an attractive investment destination. (Refer Exhibit 2) Exhibit 2: Evolution of India as an attractive investment destination Foreign Direct Investment ($Bn) ROIC (Foreign Investment) (%) CAGR 50% India China E Thailand 13.4 Source: Reserve Bank of India Source: Bloomberg, US Dept of Commerce Increased domestic availability of raw materials will support the growth of the Indian specialty chemicals industry. Capacity additions in petroleum refining by major players will generate necessary feedstock. Projects amounting to addition of ~ 100 MMTPA of refining capacity have been announced/ are under implementation. Also, India has a vast bio-resource potential to support the global trend of using sustainable agri-based raw materials for production of green specialty chemicals driven by evolving consumer preferences and regulations to conserve the environment. For example glycerin, a by product during bio-diesel production, is used in manufacturing polypropylene glycol, an important input for polyurethane foam. 3

4 Presenting unique challenges The Indian market is unique and presents its own set of challenges and opportunities. Indian customers look for value propositions and may not require all standard features offered in products. This necessitates adapting to local requirements and providing necessary technical support through exact understanding of customer needs. This also opens up opportunities to bundle services along with products, giving customized solutions to business challenges, creating a win-win situation for all. For example, buildings in South India require construction chemicals to enhance both water proofing and thermal insulation properties to protect against the heavy rains in the monsoons and scorching heat in the summers. There may be a good opportunity to bundle application services too with this product. India as a market for specialty chemicals needs to be viewed differently. Demanding customers and distinct performance requirements in end user industries will require renewed focus on providing product and application know-how to end use customers. An approach to solve business challenges through innovative solutions will become a key differentiator for increased market share. Also, the emergence of alternative green feedstock and changing supplier profiles will necessitate a rethink of sourcing strategies. Need for innovative solutions Companies present or having decided to participate in the Indian market have adopted innovative strategies to gain a competitive advantage such as: Strategic tie-ups/ Partnerships: Rohm & Haas has signed an MOU with a leading petrochemical player for the joint construction of a world scale acrylic monomer complex inline with the latter s expansion plans. Ciba Specialty Chemicals entered into a JV with a leading Indian pharmaceutical company to upgrade its Triclosan manufacturing technology. Local solutions for disruptive innovations: BASF made a significant contribution towards development of Tata Nano, the cheapest car in the world, by developing solutions for specialty polymers and adhesives required by Tata Motors. Product modifications: India faces an increasing shortage of water coupled with growing environment concerns. Dow Corning, a global specialty chemical major in silicones, developed new products for the textile industry in India which has led to improved productivity and less effluent generation. The company has emerged as one of the leading suppliers of specialty chemicals to the textile industry in India. Process technologies: Innovative processes/ technologies are being deployed in the end user industries which utilize scarce resources more efficiently by companies e.g. Clariant for the textile industry. It has designed a No Rinse process for discontinuous bleaching, with benefits of saving time, water and energy and has received enthusiastic response to its first introduction of the process. Marketing: DuPont, a producer of Nylon filaments, has collaborated with FMCG majors in research and development for producing tough bristles with better retention and low moisture absorption property. The end products carry the logo of the specialty chemical company making a case of ingredient branding for the consumer product. It has helped the company to come closer to the end customer and establish market leadership in India. 4

5 Financing: The spectacular growth of United Phosphorus Limited, an Indian agrochemical major, has been largely through its strength in acquiring companies across the world and quickly integrating the benefits within the group. This is a clear example of industry foresight and successful execution which was largely made possible by its innovative cash flow management and financing methods making funds available at the opportune time and place to acquire its targets. Breakthroughs with technology: One of the next frontiers in material sciences is Nanotechnology and various specialty chemical companies are exploring the space to benefit from its potential for innovations. A global player is using nanotechnology to improve the functionality of textiles through specialty chemicals that help provide easy release, quick wick and rare care finishes that enhance water/ oil repellence, hygiene and odor free properties. This has enabled it to command higher premium through differentiation in an otherwise highly competitive market. Differentiation through service: A certain specialty chemical manufacturer for the textile industry has started offering custom-engineered standards to assist along the entire supply chain. From development of a new shade through its communication to all its global supply partners until consistent bulk production, it ensures superior color management, a key performance parameter. Service support will increasingly become one of the most significant differentiators in the industry. Can you afford to miss the bus? India s specialty chemicals industry is at an inflection point which is being driven by discontinuities in end user market, technology disruptions and regulatory dislocations. It is witnessing unprecedented growth (Refer Exhibit 3) characterized by entry of large MNCs, domestic players gearing up for increased competition and more than its fair share of mergers and acquisitions. However changing feedstock scenario, demanding customers, need for wider customized product range and on ground technical support service pose challenges. How do companies best address these? The challenge of participating successfully might be daunting but can you afford not to? Exhibit 3: Specialty chemicals at an inflection point Indian specialty & knowledge chemicals industry growth ($Bn) CAGR 17% CAGR 11% E Tata Strategic has worked extensively with chemical companies to provide strategy for India entry or business growth in India. 5