19 February 2010 12:22 [Source: ICB]
China and India continue to achieve unparalleled growth, but which of the Asian giants will come out on top?
WHILE MOST major economies have floundered since the global financial crisis took hold, China and India have gone from strength to strength. They remain two of the largest, most high-profile economies in the world, both boasting enormous opportunity.
Rex Features/Chris Eyles
While many Western societies are left counting the cost of overindulgence and overexpansion - and contemplating a new era of belt tightening, China and India are preparing themselves for an epoch of success and unadulterated growth - providing neither of them find themselves in a bursting economic bubble. China is taking big steps towards cutting the huge amounts of easy credit flowing around its economy. India, meanwhile, has a fairly conservative banking sector and did not suffer greatly from financial instability.
In 2008, China represented around 14% of the global chemical industry's annual sales at $546bn (€387bn), according to data from global consultancies Accenture and Datamonitor. By 2013, its chemical market is forecast to rocket to $1.176 trillion (19-20% of the global total), growing at 17%/year on a current dollar basis.
"China has really opened its doors to the outside world in the past 30 years, achieving tremendous growth almost every year," says Suwei Jiang, director, China Business Group at global consultancy PricewaterhouseCoopers (PwC). "Last year, we were looking at over 8% GDP growth. Set against the overall global picture and the downturn, that is a fantastic achievement."
Over the years, this huge influx of foreign investment into China has helped the country develop its technology base, with the capital providing a strong foundation to look at overseas opportunities, adds Jiang.
HOT ON CHINA'S HEELS
India has also had a growth spurt over the past decade. In 2008, its chemical sector was the 12th-largest in the world, at $35bn, says Accenture - but is tipped to rapidly climb the rankings. Its growth rate for basic chemicals is around 7-8%/year, while the specialty, agrochemicals, pharmaceuticals and biotechnology segments are rising by 13-15%/year.
"Right now, it is India that is increasingly in everybody's minds," says Thorsten Ploss, partner at Germany-based Roland Berger Strategy Consultants. "We have seen many Western companies refocusing from China to India in the last 12-18 months. They have really ambitious growth targets and are thinking seriously about how to achieve them."
Clearly, the tables have turned. India's Reliance Industries has risen to prominence as a major global player since the 1980s - reaching number 34 in last year's ICIS Top 100 rankings (ICIS Chemical Business September 14-20, 2009), with its chairman Mukesh Ambani taking 15th place in our Top 40 power players (December 7-13, 2009). Reliance is eyeing the takeover of Dutch chemical group LyondellBasell Industries, with a reported bid of $13.5bn. Meanwhile, Chinese giants Sinopec and PetroChina (8th and 18th respectively in our Top 100) are focusing on major overseas expansion plans of their own and have become involved in numerous joint ventures. At the helm, their respective chairmen, Su Shulin and Jiang Jiemin, took seventh and sixth spots in the Top 40.
Both of these developing nations have adopted a very different stance for their expansion and success. Compared with other emerging markets, India has a lower dependence on product exports and, as a result, has been somewhat insulated from the downturn.
China is more macroeconomic-driven, India is more micro-economic, says Alexander Keller, partner at Roland Berger. In China, self-sufficiency and secure and competitive access to feedstocks are a major driver, but in India, the stance is to retain maximum intellectual capital and achieve the best returns.
"The Chinese government has a clear perception of what it wants to achieve - they decide and they do it. They tend to make allowances to meet their objectives. India, on the other hand, will walk away if something doesn't meet their requirements," he says.
Players in India tend to plan for the longer term, perhaps looking 20-30 years ahead - which does not happen to the same extent in Western firms - and are far more focused on return of investment. Chinese companies are more driven by cash flow, says Keller.
"It's very hard to compare India and China - both have their own strengths and internal challenges. However, they do face many of the same issues," says Jennifer Kao, Accenture outsourcing lead for chemicals in Greater China. "The countries are growing very fast, there are concerns over pollution and water treatment, and then there is Reach [the EU chemical legislation]. They need to start addressing these issues. Huge markets are opening up because of this - but it will also increase costs for investors."
"We do foresee the focus remaining on petrochemicals but in the future we also see new fields opening up," says Kao. "China will be considering new opportunities in food additives, water treatment and surfactants, for example, especially with environmental safety becoming more important."
Jiang agrees: "Foreign businesses going to China to look for a low-cost manufacturing base have been finding an increasing cost element, which they had perhaps not budgeted for when they first drew up their business plans." Nevertheless, major players cannot afford to overlook these markets. Both regions share significant financial benefits over their Western counterparts, although rising wages are eroding China's advantaged labor costs. Skilled and highly educated recruits are still easy to source at comparatively low salaries. In India, for example, the cost of skilled chemists is one-fifth of that in the US.
Capital costs when building plants are far below those in the West too. Infrastructure is also rapidly improving in both China and India, with the governments investing heavily in new road, rail and sea networks. Both countries have also splurged on establishing large chemical parks and developing hubs and closely integrated networks to reduce costs and improve efficiency.
The past two to three years have seen the Chinese government encouraging firms into the hinterland away from the oversubscribed and expensive coastal areas. The initiative has so far proven successful, with players lured inland with zero tax rates, low rents and simpler approval and registration processes.
India, meanwhile, is establishing special economic zones - petroleum, chemicals and petrochemicals investment regions - to promote growth and develop complexes. To support this, firms are being offered incentives.
And if the physical changes to infrastructure and services are not enough to tempt foreign investors to India, it also boasts a young population with a rising disposable income to tap into, says Mukesh Rajani, partner at PwC and head of the India Business Group.
Unlike China's aging population, some 600m people in India are aged 25 or less. These are the workforce for tomorrow, he says, adding that as soon as disposable income is over $1,500-2,000/year, people start buying more chemical-related products. "In the next decade, 250m Indians will jump that hurdle and become consumers," he says. "We should therefore see huge demand growth in the coming years, clearly above GDP growth."
For Western firms, however, India is a tougher nut to crack. There is plenty of red tape, says Rajani. "It is often said that the British brought bureaucracy to India but India perfected it. There has been much progress in terms of trying to dismantle bureaucracy. However, there remains plenty of red tape for business to navigate through," he says.
Tax regulation can also prove extremely problematic for foreign companies. Although rates are not too high, it changes frequently and rapidly and is very complex.
Clearly, it is impossible to compare the two economic behemoths on a like-for-like basis; their markets, structures and direction are a complete dichotomy. Suffice to say that these two thriving nations have come a long way in the past few decades and have left all others trailing in their wake.
The question is no longer whether to invest in China or India, but how best to invest in both.
INDIA KEEPS ON GROWING… BUT SLOWLY
Even as India experiences robust petrochemical demand growth, capacity additions are happening slowly. Indian petrochemical major Reliance Industries has planned expansions in India and overseas. It has already made a preliminary offer for Dutch chemical company LyondellBasell Industries and revived a 2m tonne/year olefins and derivatives project at Jamnagar, on the Northwest coast of India.
Work on the project, announced in 2007, had slowed down during the global financial crisis. Since the completion of a new refinery at Jamnagar, Reliance has renewed its focus on the project. It has also said that it would be expanding its presence in butadiene rubber and investing in new styrene butadiene rubber (SBR) plants to reinforce its position.
Among other major projects, state-owned Indian Oil Corp. is on track to complete its first cracker at Panipat this year. Although the firm is keen to build petrochemical plants at Paradip on the East coast of India, the initial focus is to complete a refinery at the site by 2012.
Oil and Natural Gas Corp. (ONGC)-led ONGC Petro additions Ltd. (Opal) has selected Germany's Linde and Korea's Samsung Engineering to build a 1.1m tonne/year dual-feed cracker at Dahej on the West coast of India. Work has yet to commence and the company is likely to find it difficult to meet the December 2012 completion date.
The Indian government's plan to set up petrochemical hubs across the country has also seen slow progress. Land acquisition for these integrated hubs, called petroleum, chemicals and investment regions, has become a contentious issue. Politics and lack of public support threaten to derail government plans for mega investment zones.
GDP - real growth rate: 8.4% (2009 est.)
GDP composition by sector:
Labor force: 812.7m
Unemployment rate: 4.3%
Population below poverty line: 2.8% (2006 est.)
SOURCE: CIA WORLD FACTBOOK
GDP - real growth rate: 6.1% (2009 est.)
world ranking: 13
GDP composition by sector:
Labor force: 467m
world ranking: 2
Unemployment rate: 9.5%
world ranking: 110
Population below poverty line: 25% (2007 est.)
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