Bridge skill, technology gap to tap opportunities in chemical industry

The chemical industry is key to the world economy with typical sales–to–GDP ratio of 5% to 6%. Globally chemical sales have more than doubled in last 10 years, with sales of about Rs 215 lakh crore in 2012 as compared to about Rs 93 lakh crore in 2002. The global chemical industry is witnessing a gradual eastward shift to leverage manufacturing competitiveness of the Asian economies. India, with its inherent competitive advantages, offers a good alternative manufacturing base in Asia for the global players outside of China.
 
India was the tenth largest chemical manufacturer in the world during FY2013 accounting for about 3% of global chemical industry, with an estimated size of around Rs 6.5 lakh crore.  Basic chemicals accounted for the largest share of the Indian chemical industry at 49% followed by knowledge chemicals at 26% and specialty chemicals at 25%. In the recent years, growth of knowledge chemicals has been driven by the pharmaceutical industry, which has evolved as a major player in production of bulk and generic drugs. India’s exports of chemicals reached Rs 1.5 lakh crore in FY2013 registering a Compound Annual Growth Rate (CAGR) of 17.9% for the period FY2009-13. Despite this sharp increase in exports, India remains a net importer of chemicals.
 
India: An attractive destination for investments
India’s per capita chemical consumption is about 1/10^th of the world’s average, indicating high domestic demand potential, making it attractive for global players to strengthen their presence here. Increasing per capita income, growth in end user industries, viz foods, construction, automobile, FMCG, etc, along with agriculture are strong demand drivers for the three segments of the chemical industry in India.

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The industry has also delivered a steady financial performance during FY2009-13 with EBITDA margins ranging between 14 and 17 per cent along with Return on Equity of around 14-15 per cent.  The industry has also witnessed consolidation during this period with around 60-70 M&A deals every year. There has been an increase in the PE/VC activity with 20 deals happening in 2013 as compared to 14 in 2009. However, capacity addition has remained muted because of the global economic slowdown.
 
Cost competitiveness and challenges
India is comparable to its peers in terms of some of the hard costs such as power, cost of borrowing, logistics and fuel costs. India also has one of the lowest import duties on chemicals in the world. The drug discovery cost in India is estimated to be around $ 10 million as compared to $ 100-200 million in the US. In addition, contract manufacturing is also highly prevalent in India leveraging on its low operational costs.
 
However, the industry is adversely impacted by issues related to quality of infrastructure, business facilitation and related transaction costs. World Economic Forum ranked India at 87 among 144 countries for quality of infrastructure in 2012-13 rankings. In World Bank rankings 2013 for ease of doing business, India is ranked at 132, faring poorly in terms of starting a business (rank 173), dealing with construction permits (rank 182), and enforcing contracts (rank 184) amongst 185 countries.

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In addition, the industry also needs to address several other challenges like availability of raw materials and active ingredients for value added products to remain competitive in the global scenario. On the one hand, the industry is completely dependent on imports for some of the raw materials like monomers used for manufacture of specialty chemicals and, on the other hand, it has failed to leverage the strong base of herbs and other natural ingredients like gaur gum etc, that are used for manufacture of additives and other specialty chemicals.
 
The regulations governing the global chemical industry will increasingly impact the Indian industry. Global regulations such as REACH, Oeko-Tex Standard 100, ETAD, Restricted Substance Lists (RSL's), and Global Organic Textile Standard (GOTS), which are related to export of chemicals and supply to export-oriented domestic industry, would have significant impact on the operating and financial performance of the Indian chemical industry.
 
Access to technology and R&D spends is another key challenge for Indian companies given that the industry comprises of a large SME population. However, in the past, Indian companies have adopted the inorganic route of acquiring technology and products/brands in order to gain global market access. Although India has large, English-speaking, relatively inexpensive talent pool, lack of cross-functional skills significantly impacts employability of this workforce. The industry could probably address the skill development needs by establishing a ‘Chemicals Sector Skill Council’ to put in place the necessary ‘Occupational Standards and Certification Mechanisms’ with support from National Skill Development Corporation (NSDC).

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On the industry specific infrastructure front, Government of India has made certain policy interventions including allowing 100% FDI and setting up of PCPIRs.  These PCPIRs are being set up in Andhra Pradesh, Gujarat, Odisha and Tamil Nadu, which are expected to attract investment of about Rs 4.8 lakh crore. The primary aim of establishment of PCPIRs is to improve attractiveness for investments, enhance economies of scale and promote downstream chemical development for the petrochemical and plastic industry and promote investment in the chemical industry. However, progress on this front has been very slow and projects are either delayed or yet to take off.
 
In summary…
The Indian chemical industry has registered consistent and profitable growth in the last decade. India’s low per capita chemical consumption coupled with rising income levels offers significant growth opportunities for the industry. However, for capitalising on these opportunities, the industry needs to address the challenges of appropriate skilling of the workforce, bridging technology gaps, securing access to raw material, ensuring compliance to global standards and creating industry specific infrastructure. The industry in the past has addressed technology gaps and market access through inorganic route of acquisition. Going forward, long-term sustainability and competitiveness of the Indian chemical industry would depend on its ability to adapt itself to meet these challenges.
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The author is the Head - Corporate Advisory at ICRA Management Consulting Services Limited (IMaCS), a multi-line management and development consulting firm. Email: rajesh.bv@imacs.in
*This article is based on a presentation made on the topic by the author during the recently held 15^th Chemical Weekly Annual Business Outlook Conference