THE VIEW FROM ASIA

10 July 2006 00:00  [Source: ICB]

Why Reliance keeps getting it right

There is such an obsession with outsourcing or offshoring that many companies around the globe have dumped the idea of maintaining a comprehensive supply chain. The high-tech industry is the best example of using outsourcing to the maximum. PC makers such as Dell and Hewlett Packard outsource all manufacturing and a lot of software development to countries such as India, Taiwan and China, and concentrate on marketing and sales.

It’s a model that has worked well for them, and even big oil companies got in on the act a while ago. They dumped much of their downstream petrochemical facilities by spinning them off into subsidiaries that were later taken over. Petrochemicals were the poor cousins, which didn’t sit well with institutional shareholders who demanded more bang for their investment bucks.

Granted, some companies such as BP have kept hold of some downstream operations to ride on the wave of Asian, particularly Chinese, growth rates, but not everyone.

Now, one Indian company has gone old-school unlike its western counterparts. Reliance Industries, India’s largest private sector company, is running an operation with a supply chain that is so comprehensive, it can pump the oil out of the ground and make the shirt you are wearing on your back.

On 28 June, chairman Mukesh Ambani unveiled a strategic tie-up with Chevron to build one of the world’s largest refineries. The Indian company plans to spend $6.1bn to build a new refinery alongside its existing one in the western Indian town of Jamnagar.

Then two days later, Reliance announced that it was getting into retail – a savvy move that would help it forge relations with farmers and consumers. It already has a clothing brand, Vimal, but the new $5.6bn retail company would move further into footwear, household consumer goods, farm implements, cosmetics and electronic goods.

The move is a masterful stroke. It means that Reliance’s petrochemical subsidiaries can access feedstock way upstream and don’t share their rival’s headache: scouring the earth for a source of crude. This frees it up to focus on running Reliance’s vertically integrated supply chain better and more efficiently, which ultimately serves emerging consumers in India.

And for the aromatics players, this is of crucial importance. Paul Hodges, chairman of consultancy International eChem, said at the Asian Aromatics and Derivatives Conference in Singapore at the end of June that there are not enough refineries globally to convert crude – causing jitters for the aromatics industry in need of supply. ‘You really need to be fully integrated upstream,’ said Hodges. And Reliance has done just that.

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