'Glocal' colours

Asian Paints' overseas ventures show what it takes to be truly global and local

Until 1999, the Asian Paints group derived just 2 per cent of its revenues from its overseas global investments. Last fiscal, the global business accounted for 20 per cent of the group's

Rs 2,263-crore revenues, that too when the Indian operations have been growing at 10 to 12 per cent a year.

Despite its presence in 22 countries, Asian Paints might not be considered a global giant in the accepted sense of the term. Indeed, its name barely figures in the overseas products.

That's because globally, the paint business tends to be fragmented and every local market has its own leaders. As Jalaj Dani, vice president, international, puts it, "Paints is a 'multi-domestic' business and it's not necessary that one will find a global leader across markets."

The only comparable giant is Jotun Paints, which also is strong in decorative paints and focuses on emerging markets. But it is primarily present in the west Asian markets.

Even as a "multi-domestic" player, however, Asian Paints has not fared badly in the six years since it started globalising in a major way. It leads in 10 countries "" Bahrain, Barbados, Fiji, Jamaica, Nepal, Samoa Islands, Solomon Islands, Tonga, Trinidad & Tobago and Vanuatu.

In the other markets, the company either figures in the top five paint firms in each or is on its way there.

The noteworthy point is that most of the units that Asian Paints acquired in the past five years were loss-making and have now either become profitable or are close to it.

In effect then, Asian Paints had to master the complexities of a "multi-domestic" business, of being global and local "" or "glocal" "" like few other multinational businesses have had to. What does it take to establish a strong presence in markets as diverse and fragmented as those in the paints business?

Let's examine Asian Paints' "glocal" strategy.

It stemmed from Asian Paints' realisation in 1999 that it needed to reorient its strong India focus. Export, however, could not be an option in achieving this for a variety of reasons. One was the heavy freight costs "" in India alone, they account for Rs 40 a litre.

The second was the need to calibrate marketing plans to extremely localised markets. And third, as Dani explains, "If you want to have a stronghold in these markets, you have to be physically present there."

Setting the palette

It's one thing to acquire the global cachet; planning the process is another, and crucial to this is the selection process. How did Asian Paints choose its markets?

First, given the nature of the business, Asian Paints decided to acquire capacity rather than put in fresh investment so it could build on ready-made distribution, brands and factories and control the cost of acquisition.

For instance, in Egypt, its largest overseas market, Asian Paints paid Rs 24 crore to acquire SCIB Chemicals. A greenfield venture here would have cost roughly Rs 40 crore. An even more compelling example is the acquisition of Berger Paints for Rs 58 crore.

Berger gave Asian Paints access to 11 countries. Greenfield investments in each of these countries would have carried a price tag of Rs 165 crore, at roughly Rs 15 crore a plant. (The exception was Bangladesh, where Asian Paints set up a Rs 10 crore greenfield venture because there was no good company or brand to buy.

Painting the world red

Once the acquisition strategy was in place, the challenge was identifying the targets markets. For Asian Paints, the basic criteria was that each market should offer more than 6 to 8 per cent growth and be relatively competition-free (that is, no committed multinationals should be present).

Further, there should be an opportunity to be among the top three brands within three to five years of entering that market.

Why these parameters? Dani explains that emerging markets tend to be fragmented and have low per capita paint consumption, so the potential to grow is vast "" this, in fact, was the primary motivation for Asian Paints' overseas business strategy.

Also, in emerging markets, the distribution model is similar to that of India, where the supply chain is not consolidated. So, says Dani, the company knew how to manage supply chain and distribution models and implement its India learnings in other markets.

Importantly, too, since all these are small countries, the money needed to buy a market leader in them is far lower than what would have been required in a big country.

Thus, the company has been able to generate funds from internal accruals to fund its acquisitions and pay off its debt. The debt:equity ratio has improved to 0.13:1 in 2003-04 compared with 0.9:1 five years ago. The company has spent Rs 115 crore on acquisitions so far.

Initially, Asian Paints identified six "growth" markets "" Egypt, Dubai, Sri Lanka, Bangladesh, Thailand and Malaysia "" each of which is growing at 10 per cent.

It began with Sri Lanka in October 1999, where the company acquired the second largest player, Delmege Forsyth & Co. This was followed by an acquisition each in Egypt (in August 2002), Australia (Pacific Paints in November 2002) and Fiji (Taubmans Paints in September 2003).

The largest acquisition was of Berger International in Singapore in September 2002. This move gave Asian Paints access to 11 countries where Berger has operations. Berger International currently contributes around 70 per cent revenues of Asian Paints' international operations.

Mix and match

Instead of applying a standardised global template to the markets it entered, Asian Paints segregated countries according to the strategies that would be followed in each: growth, leadership, niche and turnaround.

For instance, the "leadership" markets, mentioned at the start of this article, were small island countries that are basically going to be cash cows for Asian Paints. The task here is to re-construct and redefine leadership and evaluate the yardstick for leadership in these markets.

"Niche" markets are those that may be large but too competitive for Asian Paints to be among the top three. For instance, in China, Asian Paints has decided to focus on the protective coatings segment because Berger always had a substantial presence in that market.

Flexibility, however, was the key, and Asian Paints was particularly circumspect about this when it came to branding, which was retained or changed according to the nature of the market.

As Dani says, "In the end, it's customers who value a brand. We change the brand name only if the existing brand in the other market is not strong. Or if we think that Asian Paints can be a much stronger brand."

For instance, in Sri Lanka, Asian Paints changed Delmege's brand name to Asian Paints because Delmege was not a strong brand there.

In Egypt, however, the brand name SCIB was retained because of its strong institutional reputation. Later, the brand name was extended to the retail side of the business as well.

Overall, Asian Paints has decided on four corporate brands that will be used across the world "" Asian Paints, APCO Coatings, Berger and SCIB. This does not mean that growth of other best-sellers will be restricted.

Colour coordination

Crucial to the success of Asian Paints venture was to get the nuts and bolts "" supply chain, inventory, raw material costs and so on "" right. This is important because it minimises fresh investment.

To understand this better, consider Asian Paints' approach for Egypt "" one of the three big markets for the company outside India, besides Jamaica and Dubai.

When it acquired SCIB Paints, the biggest problem was controlling inventories. Production was often duplicated with SCIB making two different products for the institutional and retail markets where one would have served as well.

Asian Paints merged the two by rationalising the product and the brand portfolio "" SCIB's product portfolio was reduced from 36 to 19 after Asian Paints acquired it. This helped reduce inventory levels down by 40 per cent "" in a span of just five months.

At the same time, Asian Paints also started outsourcing functions such as security and freight. It released around Rs 3 million of non-productive fixed assets that were sold and helped reduce non-productive labour by about 10 per cent.

Asian Paints also reduced SCIB's company-owned and operated showrooms from 20 to five and franchised the rest. This was driven by strategic considerations as much as the need for cost savings.

By operating showrooms the company often ended up competing with its own dealers and franchisees, and sending conflicting messages in the market. The move also helped reduce administrative expenses by about 2 per cent.

But all these cutbacks came with investments in new packaging and identity. SCIB's problem was that the earlier identity and packaging did not clearly communicate that the company sold paints.

Explains A S Sundaresan, chief executive, SCIB Paints, "For the market to acknowledge the change, we had to announce that we were doing something different."

Thus the company positioned itself as a "clear range provider" "" offering institutional as well as retail products. This was important because historically, SCIB has been strong in the institutional segments, where margins are traditionally low.

Say Sundaresan, "SCIB failed to penetrate the retail segment and it became our focus area after the acquisition because Asian Paints' strength lies in retail."

SCIB has trebled its reach in direct and indirect retail outlets put together and is now present in the top 25 per cent of retail outlets. As a result of these initiatives, SCIB has jumped a notch to number four in the Egyptian market.

Such rationalisation was not limited to Egypt. Throughout its worldwide operations, there have been efforts to rationalise raw materials with some innovative use of R&D.

This is important since the overseas operations, which come under the wholly owned subsidiary Asian Paints International, account for 25 per cent of the company's capital employed.

Its progress in raw materials is a case in point. If the company was earlier using 20 different grades of titanium dioxide (a critical raw material for making paints, sourced from DuPont, for all the partner countries), Asian Paints was able to standardise the product such that it uses three or four grades.

The company also studied processes in detail and has been able to cut the time taken to convert raw materials into finished goods from five to two days, thereby reducing inventory by three days.

Some of this work has been done in parts of the Caribbean and south-east Asian units that Asian Paints has acquired. This has helped improve the company's working capital across the globe from 200 days to less than 150 days at present.

Inventory levels, too, have fallen 30 per cent across the globe. This was done by consolidating vendors for key raw materials. Earlier, each company had different vendors for different markets.

For instance, pre-acquisition, Berger had 100 vendors for key raw materials. After Asian Paints acquired it, the number of vendors was brought down to 15.

The impact of exercises such as these helped Berger International turn around in two years. For financial year 2003, the company reported profit of Singapore $ 2.2 million "" for the first time in the last six years "" against a loss of Singapore $ 1.1 million for the corresponding year-ago period.

Multi-cultural hues

As with any globalisation strategy, merging work cultures has proved a major issue. As Dani puts it, "Asian Paints genetically changes every time we do an acquisition. That's something we have to accept.

When you acquire, it's not only accounting due diligence that you need to do. Human resource due diligence is equally important."

For instance, he says, Egypt is a market where people shy away from responsibility. "They also believe in living for the day instead of having a long-term vision. That, in turn, means zilch planning," adds Sundaresan.

The company tackled this issue by putting in procedures that made people think for longer horizons. For instance, the company now plans for a quarter instead of a month and holds monthly reviews as well.

As things stand, markets like Egypt, Dubai and Sri Lanka have started to make money for themselves and require no fresh investments from Asian Paints.

"Most of our loss-making units have started yielding returns now. We expect the contribution from these units to increase significantly in the future," says Dani

However, in Thailand and Malaysia, operations are still sub-scale. As Dani says, "Though we've improved the position there, we have not yet reached where we need to be."

Certainly Asian Paints has some way to go "" it weighs in at 10 in the global rankings still. But the confidence that it can improve is showing clearly.

As Dani says, "The aim is to be among the top three players in each market that we are present in as of now. But three to five years from now we would like to be a leader in all emerging markets."