Bayer MaterialScience and AkzoNobel reveal China and India strategies

The waiting game

30 April 2010 21:18  [Source: ICB]

Global chemical companies such as Bayer MaterialScience and AkzoNobel have been making great strides in China. Now, India awaits

OF ALL the Asian economies, China has been in the limelight for a decade now, with its stellar growth and enormous long-term potential. The global chemical industry is much more hesitant about India, however, despite its similarly huge population and growth prospects.

There is a familiar pattern among Western chemical firms: while many have made significant investments in China, the approach to India is much more cautious. For many company boards, the main reasons for this difference center on the lack of strong central government in India, compared with China.

China's lack of democracy might make living there uncomfortable for many people, but it allows for swift decision-making and powerful central planning. This has allowed the country to implement a vast program of infrastructure improvements and to provide an excellent, conducive environment for industrial and chemical sector development.

By contrast, India - the world's largest democracy - has a weak central government and strong, independent regional states. Lack of coordinated planning has held back the development of its creaking power and transport infrastructure. Meanwhile, conflicts between regional and central government slow down and confuse decision-making on industrial policy.

Many Western chemical groups that have plunged with gusto into China are watching India, waiting until they think the time is right for a major investment.

Patrick Thomas, CEO of Germany's Bayer MaterialScience (BMS), sees India in terms of potential. "Where we are there is where we were, maybe 10 years ago, in China. We're putting in systems houses; we've got the first coatings-type facilities being built. It's still a very sophisticated market in one extreme - there are highly sophisticated consumers in the middle classes, and then massive potential at the bottom of the 'pyramid' for novel technologies which will meet the needs of the mass population."

Thomas acknowledges that a lot of challenges remain: "There is a huge colonial influence on the legislature in India so you've got to ask whether they'll be able to move quickly enough when the time comes. How long will India take to get there: 10 years? 20 years? 50 years? It's very difficult to estimate."

Most enterprises in India tend to be family owned. But the country does boast some world-class industries, such as Moser Baer, one of the largest producers of optical data storage globally. This is one of BMS's biggest polycarbonate (PC) customers and a major supplier of solar cells.

Thomas says there is a lot less encouragement for foreign direct investment (FDI) in India than there was in China 10 years ago.

He adds: "We are not at the stage of planning MDI [methyl di-p-phenylene isocyanate], TDI [toluene di-isocyanate]-type assets in India because we don't see the market demand at the moment. We have coatings, downstream elastomers, PU [polyurethane] systems houses and color competency centers. Most of the volume materials we're importing from Europe or South East Asia.

"There's no lack of sophistication in the industrialization which has taken place. When you visit factories in India, you still see state-of-the-art equipment and highly competitive assets. The difference is there's no grand plan for how the economy should grow. We see high rates of growth of 9-10% but it's from a much smaller base than China."

India's Reliance Industries is the dominant player in Indian petrochemicals, with a 62% market share in ethylene. Such dominance makes it difficult for new market entrants.

Thomas says: "There's a lot you can learn about the way Reliance has succeeded in India. They have made a sequence of massive investments which have been very professionally executed. "India does allow single, dominant players to come into existence and in the same way they don't interfere in FDI, they don't interfere in what other people could call unreasonable competition."

DRIVING FORCE
"For BMS, China is a huge growth driver. While European volumes fell by 10-15% and the US plummeted by 20-25% from the third quarter (Q3) of 2008 to Q4 2009, China and Asia rose by over 30%."

Manufacturers are less conservative and more willing to use newer technologies such as increasing use of PC in auto manufacture. Thomas says: "China has enormous potential for the sorts of business we're in. Their time to market with new car models is typically half the time you see elsewhere in the world. They're prepared to adopt non-steel, non-glass technology far more quickly and ably than is wanted or - some would argue - possible in Europe because of regulation.

"In 2009 there was greater automotive production than in the US. If you think about trends in China such as urbanization and mobility then public as well as private transportation will be really important." BMS is involved with rail-building companies in China, where they are willing to use innovative materials much more freely than in Europe and the US.

"If you're looking for where in the world hydrogen and electrical vehicles will be prevalent, it's probably going to be China.

"We have an 'automotive creative' team in Shanghai, China, focusing heavily on design and trends rather than just a procurement portal. Competitors have a one-stop shop for product; what we have is a one-stop shop for designers and influencers - people who will set the shape of the industry in future.

"They approach car design anew. The logic of looking at a hybrid, for example, just isn't there: they think about all electric. The other thing which is hugely different is that Europe and the US [are] full of heavy equipment for bending metal. It's fundamental - there is so much capital-intensive infrastructure which would have to be replaced to adopt these new lightweight materials."

According to Thomas, the economic crisis accelerated the changing world order for chemical demand. Before it hit, 55% of PC went into Asia. The figure is now 65%. About one-quarter of group sales is derived from Asia, and in China the company is enjoying growth rates of 16-18%, double GDP growth.

AKZONOBEL AWAITS INDIA TAKEOFF
Rob Frohn, AkzoNobel's board member responsible for specialty chemicals, believes it is still too early to invest heavily in India. The country will also need fewer high-end products than the typical AkzoNobel portfolio. That could mean acquisitions or investment in alternative technologies.

He says: "India has yet to take off: typically at $3,000-5,000 (€2,240-3,740) per capita, you'll see a peak in consumption of paper, personal care and other sophisticated products including coatings. In the eastern part of China we see an enormous increase in consumption of our chemicals and coatings."

For AkzoNobel in China, chemical demand growth is typically GDP to GDP+ so the firm is enjoying double-digit growth.

"We see domestic consumption really taking off in China. Rather than being manufactured for export, products are being consumed locally. China is one of the most profitable countries for us in terms of size and performance. Our footprint is now over $1bn with greater profits in 2009 than 2008, and that was a recession year."

AkzoNobel plans to expand into China's hinterland when the time is right. "For the moment, our operations are based on the eastern side of China but as time goes by, we'll try to move inland too. We are completing the Ningbo project this year and want to turn that into a commercial success. We've just opened our monochloroacetic acid unit [at Taixing] and we're running the plant flat-out."

"We see domestic consumption really taking off in China"
Rob Frohn, board member, AkzoNobel
The Taixing site - which now boasts a production capacity of 60,000 tonnes/year - is the largest of its kind in China. Last year, the company inaugurated a Powder Coatings Technology Center in Ningbo, while in December, the new chelates facility located at the €275m ($361m) Ningbo multisite became operational. The Ningbo site is due to be officially opened in November.

Frohn believes that India should be just as exciting but the truth is it has yet to take off. "As a board, we visited India in September 2009. The middle class in India is growing rapidly, with access to money so we need products catering to their needs: affordable housing, particularly for coatings but also for chemicals such as cement additives. We need to develop more products catering to this segment rather than the top segment which is our typical strategy elsewhere in the world."

He is optimistic about India, but realistic about its challenges. "I believe that developments will come but possibly not as fast as in the last 15 years in China. The organization, infrastructure and approach is quite different. The Chinese have put a lot of money into infrastructure, have been very active in supporting FDI, grants and development zones which we have benefited from. I don't see this [as] so well-developed in India as in China."

AkzoNobel's board met government officials who showed them the development plan for the next 10-15 years. "The plans are there, but let's see if they really can deliver on it. We need good transportation: roads, harbors and railways. If we don't have good distribution, we won't be able to distribute our goods."

In terms of production in India, the company operates in car refinishes, coatings from AkzoNobel and ICI heritage; plus peroxides for plastics production. Frohn says the company is trying to build up a position in areas such as personal care and paper chemicals.

"If you're looking for where in the world hydrogen and electrical vehicles will be prevalent, it's probably going to be China"
Patrick Thomas, CEO, Bayer MaterialScience
"Some of these are just plans in their early stages but our development people are visiting India to see who we can cooperate with, what raw materials are available and what kind of outlets are available."

AkzoNobel's India production will be focused mostly on domestic consumption rather than export. "We're very interested in paper chemicals and surfactants as people at a certain level of demographics start to use more of these products: more paper, personal care, household and cleaning products. If India opens up and more plastic is produced, then that opens up for more of our products. In construction we make products for tile fixing, cement, insulation. We produce sealants for double windows. It depends on the emphasis of the Indian government."

The AkzoNobel board asked its managers in India to come up with a strategy that addresses the middle or even the low end of the market. "Of course our type of chemistry is not as cheap as the really low end, so it's not an immediate fix, but we believe we can come up with the right ideas and then we'll invest in local production for the local market."

Acquisitions are also a possibility: "There are many SME companies which could be a good platform to start. The difficulty is finding a reasonably priced company. Typically the high growth rate in the country gives very high multiples and price expectations. So that's holding us back."

The firm sees joint ventures as a vehicle to get started. "Our clear strategy is to take it all or get out. If there's a clear two- to three-step process to full ownership, that's our preferred way of operating."

VITAL STATISTICS

INDIA
GDP/capita 2009 $2,941***
Global ranking 128
Population below poverty line 25%*

CHINA
GDP/capita 2009 $6,567***
Global ranking 99
Population below poverty line 2.8%**
SOURCES: IMF, CIA; NOTES *2007 EST.; **2006 EST. *** PURCHASING POWER PARITY

BAYER MATERIALSCIENCE PLANTS AND PROJECTS IN CHINA AND INDIA

CHINA
Polycarbonate (PC) 200,000 ­tonnes/year on stream
location: Caojing
Coatings, adhesives, specialties 30,000 tonnes/year, coatings derivatives 73,000 tonnes/year
location: Caojing
Polyurethane (PU): methyl ­di-p-phenylene isocyanate (MDI) 350,000 tonnes/year on stream
location: Caojing
PU: toluene di-isocyanate (TDI) 250,000 tonnes/year under construction, on stream Q1 2011
location: Caojing
Thermoplastic PU production
location: Shenzhen

INDIA
Coatings, additives, specialties project €20m ($26.8m) investment
location: not announced
Thermoplastic PU production
location: Cuddalore
BaySystems houses PU
locations: in both countries
Color Competence and Development Center (PC)
locations: Guangzhou, China (live), Greater Noida, India (Q2 2010)
Sheet Companies (PC)
locations: in both countries
SOURCE: BAYER MATERIALSCIENCE

AKZONOBEL FACILITIES IN CHINA AND INDIA

CHINA

Decorative paints
locations: Langfang, Shanghai, Guangzhou
Car Refinishes
location: Suzhou
Marine and protective coatings
locations: Suzhou, Shanghai
Powder coatings
locations: Chengdu, Langfang, Ningbo, Suzhou
Wood finishes and adhesives
location: Beijing
Coatings
locations: Jiaxing, Tianjing, Dongguan
Pulp and paper chemicals
locations: Suzhou, Guangzhou
Functional chemicals
locations: Tianjin, Ningbo, Taixing, Shanghai
Industrial chemicals
location: Taixing

INDIA
Decorative paints
locations: Hyderbad, Mohali, Koparkhairne (Thane)
Car refinishes
location: Bangalore
Industrial coatings
location: Bangalore
Marine and protective coatings
location: Bangalore
Powder coatings
location: Bangalore
Functional chemicals
locations: Pune, Mahad
SOURCE: AKZONOBEL

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