Can elephants dance?

10 March 2003 00:00  [Source: ACN]

Mega problems such as unfriendly government policies, weak and ageing infrastructure and the high cost of capital have slowed down the Indian plastics- processing industry. But Malini Hariharan and John Richardson find out that technological innovation and a greater emphasis on quality can yet pull India’s polymer industry out of the rut that it’s in

Most visitors to Plastindia 2003 must have left New Delhi with mixed feelings.

On the one hand, the huge crowds thronging Pragati Maidan, the exhibition venue, ensured that the event was a success. The organisers claimed that the exhibition was a close second to the K fair held in Germany.

There was much talk of the immense potential of the Indian market. It is hard to ignore a population of over 1bn and a large and growing middle class. Per capita polymer consumption in 2001 was only 3.6 kg compared with 15.1 kg in China and the global average of 21.5 kg.

Polymer consumption is expected to hit 12.3m tonne by 2010, up from 3.3m tonne in 2000. India will then rank third behind the US and China (see table below).

Even a 1% extra GDP (gross domestic product) growth in India was projected to result in 4.1% additional growth in PP consumption.

Industry players are confident that the consumer goods, automobile, infrastructure and healthcare sectors would drive growth. Raffia industry players point out that the Indian government's decision last year to relax the packaging norms for foodgrains and sugar would result in a significant addition to volumes in the coming years.

But a closer look reveals that all is not well with the Indian processing industry. The dip in polymer demand growth rates during the last six months (ACN 23 Dec, p11) has cast a pall over some quarters.

According to one industry veteran, PP demand growth is expected to be below that of hdPE in the year ending 31 March 2003 - the first time in over a decade.

And demand for most other polymers is also expected to be below projections made at the start of the financial year.

There is a growing awareness that a large population does not guarantee growth. And realising the potential of the Indian market will not be an easy task.

With a fall in tariff barriers, the processing industry is wilting under the heat of competition from China. At last year's Guangzhou fair, more than 10 000 Indian traders were scouting for import opportunities.

 
'The butter has disappeared from the bread,' says M Taparia of Supreme Industries.

But before we move on to the problems, here is a brief profile of the Indian processing industry. An estimated 20 000 processors were operating 53300 machines in 2000 with an investment of Rs100bn (US$2.1bn). The installed capacity was 10.3m tonne/year. Virgin and recycled polymer consumption totalled 4.8m tonne last year.

The industry is extremely fragmented and most players do not enjoy economies of scale. A number of units have been forced to close shop in the last two years. According to one source, fewer than 15 000 units are currently operational.

Many of the problems confronting the industry can be traced to government policies. By reserving some products, such as toys, for small-scale units, the government has ensured that the companies cannot compete in global markets.

These and other drawbacks were raised at the Ascend forum organised by the Plastindia Foundation where top executives from the Indian polymer and plastics industry spent over three hours brainstorming on how to double plastics growth in the coming decade. This was the first time that such a meeting for senior members of the industry had been organised in India.

According to Sujit Banerjee of Reliance Industries, who is also the chairman of the Plastindia Conference Committee, another purpose of the meeting was to understand the prospects and challenges relating to business and technology.

Concerns about weak and inadequate infrastructure were expressed at the forum and in other discussions.

Pragati Maidan is typical of India's ageing infrastructure. The venue is probably the best and the largest exhibition centre in India, but it is nowhere near international standards. Its buildings badly need a coat of paint while the roads could do with some resurfacing.

Signboards are hard to spot, and the few that are still standing are difficult to decipher. And navigating the Delhi traffic to reach the venue is another story.

Wouldn't it have made sense for the plastics industry to have got together to provide heavily discounted or even free new signboards for the owners of the venue?

Yes, but in an Indian context, sometimes the bigger picture is overlooked. The smaller picture is that Indian plastics and other producers are so cost-conscious that they are unwilling to stump up cash for anything but the most essential and basic capital investment.

The bigger picture is that clearer signboards, promoting the use of plastics, might help the future users of Pragati Maidan and would therefore help to promote Indian industry as a whole.

One western delegate, having had to pay a visit to the toilets at the venue, dreaded every subsequent visit and was as a result particularly choosy about where he ate.

One might argue that when in India, one has to accept India; that this is the reality of life in a country that is wrestling with so many long-term, deep structural problems, not least of which is poor sanitation.

But if India cannot get it right when it comes to a major showcase event for an international audience, what's the likelihood of it getting it right when international attention is elsewhere?

In his presentation at the Ascend forum, Taparia emphasised that India lagged behind China on road and port infrastructure. Terminal handling charges in major Indian ports such as Mumbai were as high as Rs5000 for a 20-ft container. The charges in China are lower as the government is keen on encouraging exports.

The average power cost in India is around 9 cents/kWh compared with 5 cents/kWh in China. The Indian industry pays much more for power as it has to compensate for the subsidies offered to the agricultural sector. And even after paying a higher amount, it has to live with frequent power breakdowns, estimated at more than 40-50 times every month in some states.

One alternative for the processing units, said Taparia, is to use expensive diesel generators. However, the government allows generators to be used only for standby purposes.

Government policies on taxes have also not supported the processing industry. High sales taxes, as much as 15% in certain states, have discouraged consumption and industry growth. And although the government has introduced a value-added tax (VAT) system from 1 April, most of them were unable to provide details or explain how the system will work.

One industry source speculated that trade would probably grind to a halt in early April until everyone had understood the new tax system.

The high cost of capital was another issue that was highlighted at the Ascend forum. Despite a decline in interest rates in the last few years, the cost of capital in India is significantly higher than in many other countries. For instance, the interest rate in India is 11-15%/year compared with 4%/year in China, pointed out Taparia.

And then there is the problem of antiquated labour laws that impose restrictions on employers (ACN 17 Feb, p16). Units with a staff strength of 100 or more are not able to dismiss excess manpower easily. Female workers cannot be employed for late-night shifts. And overtime is limited to 50 hours/quarter.

Yes, the government has raised the cost of doing business in India. But is it fair to blame only the government for all the troubles confronting the processing industry?

Several people believe that the industry itself is responsible for many of the problems.

Others highlight a number of success stories - companies that have overcome barriers to carve a niche for themselves in the domestic and in some cases the international market.

Moser Baer is one such company that has prevailed over Taiwanese and Chinese competition to emerge as the third largest producer in the world for CD-Rs and CD-RWs. The company entered the optical compact-disc business only in 1999. Besides CD-R and CD-RW Moser Baer also produces floppy discs and digital video discs.

The export-oriented company, with a major presence in Europe, recently signed an agreement to supply high-quality optical media solutions to US computer disc producer Imation Corp. And the two will also form a US$10m joint venture which will focus on long-term technology transfer, joint R&D and customer servicing.

Success for the company has come through volumes. Poor infrastructure and unsupportive government policies have not stopped it from building huge plants that offer economies of scale. The focus has been to capture a share of the global market.

While Moser Baer relies on international suppliers for sourcing polycarbonate, it buys large volumes of PS from India's Supreme Petrochemical to make CD jewel boxes.

The relationship has helped both companies. Moser Baer enjoys all the privileges of a most-favoured buyer. And Supreme benefits because, as Moser Baer exports the end-product, PS sales are deemed as exports. Supreme is then able to import a portion of its styrene requirement duty free.

And in the case of the often-used excuse of government policies and infrastructure inadequacies, India's largest producer of PP and hdPE bags does not believe they are a hindrance for companies with a drive to succeed.

Jhaveri Polymers entered the business in 1990 with just one machine. Today, its capa-city is 30 000 tonne/year. It operates 14 lines and its polymer consumption is 2800 tonne/ month.

Amit Jhaveri, who heads the company, believes that Indian raffia-bag producers are in a position to compete globally. And with textile quotas due to be eased in the next two years, India has a chance to export as much as 100000 tonne/year.

On technology, India is equal to, if not better than, China in this sector, says Jhaveri. 'Our sector is the only sector that can take China head on'.

But will this be easy? There is only one producer in India with a capacity of over 20000 tonne/year. And most of the units have a capacity of less than 10000 tonne/year.

'There is scope for consolidation,' Jhaveri admits.

Consolidation and the exit of the very small non-viable units would help improve overall industry health. Some believe that the number of processing units in India should be no more than 5000. Only then would the industry enjoy economies of scale.

 
Another area of concern is the lack of emphasis on applications development, technology and product innovation.

In the past, polymer producers undertook this work especially when a product was in oversupply and the processing industry was in its infancy. But who should undertake the work now? Should it once again be the polymer producers or should the processing industry join hands to create new markets?

Many of the country's polymer producers continue to work in this area - after all, it will only help boost their business. For instance, Supreme Industries is working with plastics processors to push PS in applications that traditionally have used other polymers or conventional material such as wood.

The PS plastics-processing industry has been heavily criticised in the past for being no more adventurous than the production of combs and hair clips.

But at the Supreme Petrochemical stall at Plastindia, the array of products on display that illustrate what can be done with PS was truly impressive. Some of the applications are popular overseas but have yet to catch the imagination of the Indian plastics-processing community.

Artificial wood made from high-impact PS, which Supreme claimed has a better finish than PVC, was on display. Supreme also claimed that in order to achieve the same levels of density with PVC, the result was heavier artificial wood.

Supreme added that PS artificial wood with 50-70% of recycled material helped keep costs down. Hous-ings for TV and other electrical goods can be made from PS, Supreme pointed out, with finished goods from several leading brands on display, including Samsung Electronics. The washing machine and automobile sectors were other areas of potential growth identified by Supreme.

Obviously, producers of other polymers will argue the case with Supreme. But whatever the merits of using PS over other materials for the above applications, the point here is the company's 'can do' attitude which takes into account the Indian context, meaning extreme price sensitivity, hence the work on using recycled materials.

At the Ascend forum, S Sivaram, director of the National Chemical Laboratory, stressed that the industry was simply not spending enough time on issues related to technology. 'There is a lack of strategic thinking on future growth,' he said.

Sivaram argued that, even if all the current problems were magically removed, the industry would still not be in a position to lead.

A number of small processors now depend on local polymer producers for technical services. There are very few product innovations or developments in product design. Growth is based on volumes rather than value.

Even plastics exports are based on cost competitiveness. But if the industry shifts focus to performance or quality products it will be in a position to enjoy premiums.

Sivaram's advice to the industry was to create a strong and dedicated research and technology function within the company. He also urged processors to establish relations with external technology partners, both within India and abroad.

'We spend more time in talking about labour and sales-tax problems. We are not talking enough about technology,' he said.

'Any enterprise which is not continually developing, acquiring, adapting or advancing technology has made a strategic decision not to be in business in 5-10 years. There are limits to driving growth only through volumes in a business which is cyclical and volatile.'

Sivaram's arguments were well received and were echoed by many others at Plastindia.

But it remains to be seen how many companies will be able to develop a new business orientation. R&D does not figure high on the priorities of many processors as the emphasis has for long been on duplicating a successful product.

And if the butter is truly missing from the bread, will there be enough money to invest in R&D?

Some of the interested players are also not sure how to proceed in these uncharted waters. A leading processor acknowledges the importance of technology but is not sure how to find a good technological leader for his company.

A source working for a multinational company says Indian processors have to widen their horizons and keep up with product innovations taking place outside the country.

He describes a visit that he had made with a leading Indian processor to a European plastics company a few years back. A few samples were displayed at the meeting. One of them was for a product with over five parts produced in a single mould. 'The Indian processor could not understand how this was made. He was simply not keeping in touch with developments worldwide,' he says.

He adds that this particular processor was operating a plant that used multiple moulds to produce the same products as those being made with the one mould. The result was that he was incurring relatively high labour costs and therefore could not compete in international markets.

Staying abreast of product and process innovations is vital especially if the industry has to move beyond the production of commodity products.

This is the direction that some in the industry are advocating. They argue that the industry should get over its obsession with China as it is next to impossible to follow the model adopted by this country.

'We are ten years behind China in many respects and cannot hope to catch up. The industry will be better off developing its own niche in global markets,' says a third source.

With a huge base of technically qualified manpower, Indian companies should focus on products that require technical expertise, says the source.

And the pressure to innovate in such products will be even greater. The hard fact of business life is that today's high value speciality is tomorrow's commodity.

Processors also need to get rid of their preoccupation with price. The industry is driven too much by price and too little by quality, was a remark that was heard often at Plastindia.

Poor product quality has hurt sales and polymer consumption. And the fear is that if quality continues to be neglected, Indian consumers may well reject plastic products.

It is hard to say who is responsible for the lack of quality consciousness. The drive to find a bargain exists at almost all levels of Indian society. The end-consumers are extremely price sensitive and selling to such a market is certainly not easy. After all, processors too are under pressure to conclude sales and deliver quarterly profits.

Take the case of PVC where a high product price only encourages a greater use of fillers.

A fourth industry source points out that there is a limit to how much PVC pipe prices can be raised. Once prices breach the ceiling, many buyers, especially farmers, withhold purchases.

As a result, there are now many processors in the country which tailor-make pipes to fit the budget of buyers.

Major buyers of pipes in India are various government departments which operate through a tender system. Quality-conscious companies can never hope to secure an order as contracts are always awarded to the lowest bidder.

A major PVC pipe seller talks of how he has been attempting to convince various government departments to place greater emphasis on quality. But government officials claim that, as long as they are forced to buy through a tender system, their hands are tied.

'There are checks to ensure only pipes of a certain quality are supplied. But it is also possible to evade them,' says the PVC pipe seller.

So will the industry come together to overcome this problem? PVC manufacturers have in the past met several times to discuss this issue. As for pipe producers, the will to find a solution seems to be lacking.

The PP furniture industry also faces a similar crisis. Fierce competition in the marketplace and the pressure to cut costs has prompted many processors to reduce thickness. Formulations have been changed to such an extent that some processors use negligible quantities of PP copolymer. As a result, their tables and chairs do not last long and this in the longer term would discourage consumers.

Yet another sector plagued with quality issues is wire and cable. Due to unhealthy competition, prices of jelly-filled cables have fallen to such low levels that a quality-conscious producer is simply not able to recover raw-material costs.

Some good sense appears to have finally prevailed. In a government tender last year, processors rejected a demand for a further 10% reduction in prices. As a result, there has been very little business for the last 8-10 months. LldPE and hdPE sales to this sector have therefore suffered.

High polymer prices have also pushed some processors to sacrifice quality.

'A year ago, the price of reprocessed material was Rs30/kg while that of virgin hdPE was around Rs40/kg. Now the difference has widened to over Rs15/kg. This has encouraged some processors to increase the use of reprocessed material in some applications,' says a polymer seller.

Certain segments of the industry have been able to overcome the quality problem. Vendor development programmes run by multinationals have ensured that processors adopt international-quality standards. Companies need to establish more links with such multinationals.

Calls for lower raw-material prices were certainly heard during the exhibition. And some processors also asked for smaller fewer fluctuation in prices. But these requests are probably unreasonable. Polymers are commodity products with prices in India largely dictated by developments in Asian markets. It would certainly be better for processors to learn to live with price volatility.

A bigger headache is the growing belief in India that plastics are not green. Non-government organisations (NGOs) have been aggressively campaigning to limit the use of plastics.

A foreign executive posted to India says that on his arrival two years ago, he found that NGOs were asking consumers to say no to plastic bags. The industry, he believes, was not able to effectively counteract this campaign.

And last month, at the Plastindia awards, two men, reportedly from Greenpeace, ran across the stage carrying a banner stating 'awards for eco destruction' The men were quickly escorted off the stage along with the banner and the function went on smoothly. But the incident serves to highlight a pressing need to improve the image of plastics.

Another foreign executive says he was surprised when, on a flight in India, a passenger criticised him for working for a company that pollutes the environment. What was even more shocking to the executive was that the passenger was a professor at an Indian university.

'If a professor has such a negative image about the industry, imagine what the students will be learning,' he says. He believes that part of the reason the environmental debate has gained momentum is poor waste management.

Walk along the streets of any city in India and chances are that you will see rubbish piled along street corners. Even at Pragati Maidan, the disposal of waste was slow. Bins were piled high with discarded plastic bottles and bags.

The executive says that although environmental concerns have been expressed in other Asian countries such as Japan, they have not been to the extent that all plastics have been termed as evil.

At the Ascend forum, Suresh Bhojwani of Brite Brothers said environmental regulations would influence the growth of the plastics industry.

Sivaram stressed that companies must take into account the increasing drive towards greater sustainability, in both production and consumption of materials.

Once again, it is time to ask the question:Who should take the responsibility for educating consumers?

The Indian Centre for Plastics in the Environment, which was set up in 1999, is recognised by the Indian government as the agency that should handle all issues on plastics and the environment.

The agency is assisting in improving waste disposal in many cities in the country. It has joined hands with NGOs for a waste management project in Mumbai. It has also installed a prototype compactor to manage voluminous plastics waste at some railway stations.

But more needs to be done to change the public perception of plastics and the industry. Environmental issues as well as all the other problems listed above are expected to make it difficult for companies to capture growth opportunities.

At the Ascend forum, Kamal Nanavaty of Reliance Industries said the agricultural sector alone has the potential to soak up more than 2.3m of polymers in 2010. The consumer and industrial packaging sector has the capacity to absorb more than 1.2m tonne while the communications and infrastructure sector can take 970 000 tonne.

But a lot needs to be done to realise this potential. In the agricultural sector, government regulations on packaging have to be relaxed. Investments in the food-processing industry will also be needed.

In the consumer and industrial packaging sector, downstream capacities with economies of scale and the latest technology have to be established. The communications and infrastructure sector requires the participation of the private sector. It would also help if the government made the use of plastics compulsory in some applications.

Nanavaty cited the example of China where the government has ordered the use of PVC window profiles in all new construction. As a result, PVC consumption has increased five-fold in six years.

Gita Piramal, who moderated the discussions at the forum, stressed that to achieve current growth projections will not be an easy task. Besides the regulatory, infrastructure and tax issues, there is simply not enough capital expenditure. The industry had for long taken for granted that polymer consumption increase would be always be a multiple of the country's GDP growth. But it now faces a situation where it may be just at par with GDP growth.

For every opportunity in India, there is an even bigger challenge that has to be overcome. It would be easy to write off the processing industry. But the Indian entrepreneurial spirit will probably succeed.

The government, too, is working to create a better business environment, as is evident in the latest budget (see p9). It is unlikely that any dramatic improvements to infrastructure will happen overnight. The much-needed roads and bridges are still a few years away. But they will materialise one day.

'Who says elephants can't dance?' asked SVKabra, chairman and managing director of Kabra Extrusiontechnik at the Ascend forum. When the changes take place, Indian industry will have the agility and the flexibility to compete against China.

Until then, it would be good if companies can set their own houses in order. Even an acknowledgement that they are responsible for some of their woes would be a small step in the right direction.

Polymer industry in 2000
Country No of units Polymer consumption*

US

21 000 28

Germany

6300 7

China

22 000 15

India

20 000 3.4
SOURCE: industry * m tonne


Investment requirements in India
2000 2010 CARG (%)

No of machines

53 000 101 000 7

Installed capacity*

10 300 30 000 14

Polymer consumption+*

4800 15 500 13

Investment in machinery**

100 280 11

CARG = compounded average growth

* '000 tonne + virgin and recycled ** Rs bn
SOURCE: industry


Indian polymers: consumption by sector
Domestic market* Sectoral
1990 2000 growth (%)

Flexible packaging

262 800 12

Consumer goods

113 524 17

Raffia / bulk packaging

102 420 15

Building / construction

115 319 11

Wires and cables

59 186 12

Plasticulture

70 194 11

Rigid packaging

66 254 14

Industrial / transport

24 118 17

Fibres / filaments

6 45 22

Other markets

86 463 18

Total

902 3322 14
SOURCE: Reliance Industries * '000 tonne

Polymer consumption projection for 2010
Country 2010 (m tonne) Growth (%)*

US

38.9 3.6

China

37.5 8.1

India

12.3 14.1

Japan

11.5 2.3

Germany

9.4 3.9

South Korea

7.4 4.8

Italy

6.8 3.8

Brazil

6.7 7.0

CIS

6.2 9.1

France

6.1 4.1

UK

5.2 4.0
SOURCE: Reliance Industries * 2010 against 2000







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