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Time To Buy Some Better Advice On India

Business, China, Company Strategy, Economics, Environment, Europe, India
By John Richardson on 04-Jun-2015


By John Richardson

WHEN was the last time you picked up a bottle of shampoo, looked at the price, and thought “can I really afford this? Might it be better if I bought a couple of single-serve sachets of shampoo?”

In the West, even if you are one of the more than 50% of young people in Greece who are unemployed, your answer is likely to be: “I’ve never had to worry about such a small amount of money. OK, I might opt to buy a cheaper ‘supermarket own brand’ rather than a branded version, but affording a whole bottle has and will never be an issue for me.”

Life is vastly different in India for hundreds of millions of people. This is why for many years a wide array of goods, including shampoo, coffee, tea, detergents, matches, tobacco, biscuits, mouth fresheners, cosmetics and even bread, have been sold in single-serve sachets.

And because the vast majority of Indians remain incredibly poor by Western standards, this also explains why the country’s biggest autos growth sector is motor bikes rather than cars.

As fellow blogger Paul Hodges points out in this post, the underlying reason why motor bike sales have continued to boom, whereas car sales growth has been flat since 20011, is that around half of India’s population lacks access to a toilet. You cannot even hope to attend school, and thus get the education you need to rise out of poverty, if you are sick from the malnutrition and diarrhoea that result from lack of access to modern sanitation.

But it is no good if India only hits its target of providing every rural home with access to a toilet by October 2019. By that date, it must also make sure that schools are worth attending by significantly improving the quality of education.

These are enormous challenges, but I remain very optimistic about India. I think Narendra Modi’s government is on the right track, but it is going to take time – a lot of time. This therefore means that chemicals companies must be realistic about what they expect from India.

Another reason to be realistic about India is China. If you take a proper look across India’s border, you will see that China will remain an industrial powerhouse because:

  • Whilst in eastern China, labour costs mean it has to escape the “middle income trap”, the focus in its less-developed western provinces is on building the low-value manufacturing that will create minimum-pay jobs that will allow people to escape from poverty.
  • This means that the relocation of low-cost manufacturing from China to India could well be more limited in scale than many people think.
  • China also has vast oversupply in industries such as steel, aluminium, cement and some chemicals that will take many years to absorb.
  • And it has huge infrastructure and supply-chain advantages. China already has all the highly efficient ports, roads and electricity supply etc. that it needs to maintain a strong position in manufacturing. Plus, it has fantastic hubs in provinces such as Guangzhou where all the services and spare-parts suppliers for each industrial chain are located close together.

There is also the issue of demand for manufactured goods. In East Asia alone, which of course, excludes India, there are two billion people who need to find jobs with reasonably decent pay, with only one proven way of finding these jobs: Manufacturing goods for export to wealthy countries. But there only one billion affluent consumers in the world.

Crucially, we also know that these one billion relatively rich people mainly live in North America and the EU, where populations are rapidly ageing. Less babies means less demand, and so less demand means lower economic growth.

In short, therefore, all the talk of India becoming another global manufacturing powerhouse – assuming, of course, that it can first of all meet basic needs such as sanitation – simply doesn’t add up.

So where are the opportunities? It is in incremental, gradual improvements in income levels. But volume-wise these improvements will be huge. Perhaps this might mean 200 million Indians over the next decade moving from “subsistence”, as defined by the Harvard Business Review (earning $1 a day or less) to “low income”($3-5 a day).

This means that as the New Normal further develops, a fantastic opportunity will be producing millions of refrigerators, laptops and TVs etc. that retail for as a little as $50 each. Chemicals companies will have to work closely with finished-goods manufacturers on the difficult innovation essential to help keep costs sufficiently low.

I can also see one particular disruptive technology – 3D printing – eventually making big gains in India. Lots of chemicals and polymers go into 3D printing.

How might this work? Similar to how this could work in Europe and North America, you can imagine:

  • An autos repair shop in India buying a 3D printer, once the cost of 3D printing has come down, as it surely will do.
  • It uses the printer to keep very old cars, and more likely very old motor bikes, on the road for many years by printing replacement spare parts.
  • This is obviously a great solution for people on low incomes.

In two particular polymers – low-density polyethylene (LDPE) and linear-low density PE) – there could be one specific huge opportunity: Making many more tonnes of coatings-grade resin that will be needed to manufacture billions more of those single-serve sachets.

India also needs to deal with its environmental problems. Cleaner-burning cars, safer drinking water, sanitation (e.g. in this case, lots more polyvinyl chloride pipes) and safer food all represent other opportunities for the chemicals industry. But again, the solutions to these problems will have to be very low cost.

How does the Indian strategy of your commodity chemicals company match up to all the above? If you are a local company, you will already very probably be there. Nothing that I’ve described above is likely to be in the slightest bit new to local players.

But I suspect that some overseas suppliers of chemicals to India could be falling short because they have been taken-in by over-simplistic reports about “the rise of India’s middle class”.

All I can add in this post, in an effort to help any such overseas companies, is this: Buy some better advice.