Refinish coatings, a new ray of hope for auto paints manufacturers?

Domestic automotive consumption is likely to grow due to recent signs of GDP stabilisation and increase in purchasing power of Indian citizens. The market is expected to bounce back and growth occur at a Compound Annual Growth Rate (CAGR) of 10% by 2017; although 2012 and the early part of 2013 did not see the automotive sector witness the growth as predicted.
 
Globally, after facing a significant downturn due to lowered vehicle production during 2009-2012, the automotive coatings market recovered slightly during the base year (2012-13). While the North American (NA) market has recovered to pre-slump period, the European market is still struggling. Furthermore, the recovery in vehicle production remained disproportionate, with higher growth rates occurring in some developing countries, particularly in China. This trend has exacerbated the ongoing shift in the manufacturing base from NA toward Asia Pacific. While production is shifting from western to Eastern Europe, overall vehicle production in Europe is expected remain fairly constant.
 
ALSO READ: Coatings industry paints big picture with pick up in rural demand

Automotive OEM paints and coatings are used by automakers during vehicle production and include all paints applied to the body structure and components of the vehicle. Refinish paints and coatings are used for repainting automobiles.
 
Current scenario
Total automotive coatings production in India stood at 76.1 kilotonnes (KT) in 2012-13 and is forecast to reach 134.7 KT by 2017-18. Although the OEM coatings segment accounts for 75% of the total market share in terms of volume, the refinish coatings segment is expected to witness higher growth rates.
 
The auto OEM market is highly consolidated, with multinational coating manufacturers capturing over 95% of the market. These multinationals operate via joint ventures or marketing collaborations with Indian majors. Traditionally, the OEM coating market has witnessed long-term contracts between coating suppliers and OEM participants. The trend in the industry is having these contracts between participants belonging to the same country of origin. For instance, Suzuki (Japanese) has Kansai Nerolac Paints Ltd (KNPL, Japanese) as its major supplier. Similarly, Toyota (Japanese) has KNPL and Nippon Paint (NP, Japanese) as its major suppliers, and Hyundai (South Korean) has KCC Chemicals (South Korea) as one of its major suppliers.
 
The automotive refinish paints and coatings market stood at 19.6 KT in 2012. The market is considered a high growth one in India and represents 25% of the total automotive paints and coatings market. The refinish market is highly fragmented: various small manufacturers compete with each other.
 
Slowdown in auto sales impacting coatings market
Automotive coatings market replicates trends prevalent in the automotive industry, primarily the passenger vehicle and commercial vehicle segments. Domestic volume sales of passenger and commercial vehicles grew at 1.5% during FY 2012-2013, as against 7.6% and 28.3% during the previous two fiscal years. Production, showed a drop registering negative 0.3% during FY 2012-2013, much below the 8.9% and 26.3% in the previous two fiscals. Automotive coatings segment closely followed growth trends observed for passenger and commercial vehicle segments, whereas the refinish segment reflects growth specific to used car sales and repair services.



The entrance of major auto makers such as Maruti (Maruti True Value), Mahindra & Mahindra (Mahindra First Choice) in the sales and service market is driving the used car segment, increasing its reliability and value proposition. Again, due to persisting pessimism about the economy in FY2012-2013, consumers’ preference changed towards used cars over new cars. Both these factors pulled up the used car market in the organised segment by over 20% during FY2012-2013, which in turn is driving the demand for refinish coatings.
 
ALSO READ: Auto fuel policy to fuel emission control catalyst demand in India

Furthermore, growth in auto insurance is supporting the refinish market with an increasing number of consumers claiming insurance for accidents, prompting a rise in demand for refinish coatings in recent years. Additionally, emergence of Multi-Shop Operators (MSO) chains such as My TVS, Carz, Bosch, etc in the service and repairs segment is propelling the demand for refinish coatings.
 
Raw materials challenge
The major challenges faced by the automotive coating manufacturers are raw material prices and sourcing. High-quality raw materials such as resins, pigments, additives, and titanium dioxide are supplied by certain chemical companies, and their prices fluctuate with the international oil price. Furthermore, the automotive paints and coatings market uses more than 500 different raw materials, both imported and locally produced.
 
As a result, the price fluctuations of raw materials largely affect the price of paints and producers’ revenue and profits. This is aggravated by the fact that paints represent a miniscule fraction of the raw material market, thus, fluctuations in other markets that are not directly linked to paints can also have a great impact on the paints market.
 
Technology trends
As against the technologies prevalent in the US, EU and in some of the leading economies in Asia, the Indian coating market is still primarily solvent-based.
 
Water-based coatings account for a mere 8% of the total coatings market in India, the rest is solvent-based products. It is both capital-intensive and time-consuming to shift to water-based coatings from the current solvent-based production lines; therefore, there has been minimal effort toward shifting. However, coating manufacturers have made considerable R&D investments to improve the performance of coating products.
 
ALSO READ: AkzoNobel opens coatings plant in Gwalior

The main technology trends include a compact coating process that involves fewer coating layers, waterborne coating systems, and an effective spray process. Such new technologies are instrumental in driving the demand for coatings applied on large auto surface areas and components with complex shapes.
 
With increasing environmental awareness and stricter legislations, coating manufacturers have started investing in waterborne, UV-curable, and powder coatings; all of which have lesser volatile organic compounds (VOC) emissions during production. For example, Toyota has introduced waterborne coatings at one of its OEM facilities in India, in partnership with Nippon Paints.
 
For refinish coating, the market trend is moving towards PU-based products because of their superior price, performance, finish, durability, and exhaustive shade choices. The popularity of the PU segment has driven the expansion of this category. The market is further witnessing the entry of a ‘Low Tier PU’ segment priced between economy PU and alkyd products.
 
Upbeat on used car segment
With increasing consumer awareness on product quality, and focus on high performance, cost ratio and VOC compliant products, manufacturers need to start positioning their products differently in the next few years. This is also expected to increase innovations in overall product quality, environment-friendly products and ingredients. Use of solvent-borne products has been reduced drastically in most western countries, and regulations regarding this are anticipated in India, as well.
 
Though the volume of coatings used per car is expected to decrease due to the progress of coating processes, overall growth rate will sustain due to growing automotive production. With expansion plans of existing players and addition of new players, the refinish coatings market in India is expected to witness an increase in the share of organised participants. This will help in establishing more body shops and effective distribution channels, which has been a challenge for the refinish segment.

Indian automotive refinish coatings segment: Technology share by value, 2012-13

Types of coating technology	Share by value (in %)
PU	85%
Alkyd	10%
Acrylic	2%
Nitro cellulose	1%
Other (1 component solvent-based)	2%

Source: Frost & Sullivan
________________________________________________________________________________________________
The author is the Associate Director, Chemicals, Materials & Foods Practice, Frost & Sullivan