In 1971, he joined Rohm and Haas as a financial analyst, but today Raj L. Gupta is the Chairman and CEO of the US-based $6.5-billion (Rs 29,900 crore) speciality chemicals major. A mechanical engineer from iit Bombay (batch of 1967), Gupta went to the US to obtain a Master's in operations research from Cornell University and then stayed on for an MBA in finance from Drexel University. In the three decades, Gupta is credited with putting the company on a fast growth trajectory in a fairly mature sector. In an interview to BT's Priya Srinivasan, Gupta, who was named Chairman and CEO in October 1999, shares some details of the strategies he has pursued at the helm as well as the fundamental shifts he sees in the manufacturing industry worldwide, given his vantage point as supplier to some of the world's largest manufacturing companies. Excerpts:

Rohm and Haas has just set up its first manufacturing facility in India, could you tell us something about the facility?

The manufacturing facility is at Taloja, 60 kms from Mumbai, and will focus on two lines of businesses that are growth platforms for Rohm and Haas. One is the intermediates for coatings and paints and the second is high performance adhesives focused on packaging. The first part is to serve the Indian market but some part of production is towards exports in the se Asian region. This is really our first investment in India. We started our operations here in 1995, rather restarted since we had been here earlier from 1964 to 1989, in collaboration with the Modis and then decided to re-enter post liberalisation. We started with a fully-owned company in 1995.

What sort of market do you see in India?

India is a significant market for specialty chemical products. Bulk of the chemical products go into packaging, construction, automotive industry and India has always been a significant market, and I think we have also changed as a company over the years and our product line would be a great fit for the Indian market. We have been studying and looking to re-enter India since the early 90s and have built a strong team. We have been selling products in India through imports and the current plant would replace some of those imports through local production.

"We look to differentiate our products and invest in R&D"

What is the market size in India for the two product lines you mentioned?

Currently, our sales are in the $20-25 million (Rs 92-115 crore) range annually in India and we expect to quadruple that in the next five years. Being close to the customer is important in this business.

The India sales at $25 million is obviously not very significant for a $7-billion (Rs 32,200 crore) company, what is your take on this market? Why are you here?

Rohm and Haas works in 30 countries with over 100 manufacturing sites. We scan the globe and decide where our products have relevance and where we need to be close to customers. In that sense India, with an overall chemicals market worth $28 billion (Rs 1,28,800 crore), is a significant market. It represents about 2 per cent of the global chemicals industry. I think potentially both domestic production and global scale production in some selected segments in India could be three times the size at $100 billion (Rs 4,60,000 crore) for chemicals in the next eight-to-10 years.

What are the other emerging markets for you, particularly in the region?

In the region, we have gone from five manufacturing facilities about 10 years ago to 22 today. The biggest growth has been in China. About six years ago, we had one manufacturing facility and 100 employees there, today we have seven facilities and over 800 employees. So in Asia certainly China is the largest market. The market for chemicals in China is three times the size of the Indian market and growing at the same pace. It is also an export-driven market. We are active in Argentina, Brazil, Korea, Taiwan, Singapore, Indonesia, Thailand, Japan, and Australia. In terms of emerging markets we have a wide presence in Latin America and Asia.

Is this where you see significant future growth?

I would say there is significant growth in the US and Western Europe but they are mature markets. Each of these two markets is worth about $400 billion (Rs 18,40,000 crore). They are perhaps growing at about 2 per cent a year while the emerging market growth rate is between 5 and 10 per cent. It's clearly where the growth is, where our products are relevant and where we are putting our infrastructure.

You already have competition in the Indian market, secondly it's a price-sensitive market across product categories, so what would your strategy be?

I would say today there is overcapacity of everything everywhere in the world. Not just chemicals, but for every product, and India is no exception. And I would say customer expectations are rising, price competition is rising and Rohm and Haas' strategy has been fairly straightforward and simple-we really look to differentiating our products and invest a significant amount in R&D, almost $250 million (Rs 1,150 crore) annually. One out of nine employees working in this company is working on research so our product line tends to be differentiated. We support it heavily in technical service and have manufacturing facilities close to customers so we can supply them efficiently. So it is supply chain, it is technology, it is technical service and competent sales and marketing. So I think our formula is a little different from our peers, we bring innovative products to market so that we can carve out a space for ourselves and be profitable.

The specialty chemicals industry has been facing rising raw material costs and falling demand despite which Rohm and Haas' revenues have gone up by about $3 billion (Rs 13,800 crore) in the last four-to-five years. How have you managed to buck the trend?

I would say we did extensive work in the mid-90s to study the landscape and came to a number of conclusions: One, the critical mass to be a successful long-term player in this space needed to be larger than we thought. Two, a number of products were getting commoditised and we felt that we did not belong in some of those businesses long term. Three, we had very extensive experience in operating globally and knew that we could operate in the global arena. And finally, I would say we had the financial resources to transform the company in terms of the portfolio. So in the last four years, our sales have gone from $3.7 billion (Rs 17,020 crore) in 1998 to $6.5 billion (Rs 29,900 crore) this year. A good part of that growth has come from a series of about 40 acquisitions and alliances in the last four years. All the effort has been towards creating a portfolio with differentiated products and using our financial leverage to expand the size of the company.

You work with a whole host of industries that are your end customers-right from automobiles to electronics and computer chips. Could you give us a sense of the broad global trends you are seeing in these sectors?

The trends are common across these industries and I would summarise them into three very basic categories. One, we are going to live in a deflationary environment for a while and this is a global observation. I would say that it is driven by two or three very distinct phenomena: One is consolidation in the end user industries. That means the buying power of our customers or customers' customers is increasing and that includes the creation of the Wal-Marts and Home Depots, which are mega markets and have put enormous pressure in terms of pricing power of the suppliers. Two, clearly that globalisation has led to what I would call people sourcing from the lowest cost point and in manufacturing China has set itself to become the manufacturing centre for the world and India has been incredibly successful in terms of becoming the outsourcing centre and companies are migrating.

India has positioned itself as a services provider, so you see an opportunity for outsourced manufacturing as well?

Yes. In fact, I would like to take a minute to explain where exactly I see the opportunity for India in manufacturing. Look at fine chemicals, pharmaceutical intermediates or agricultural intermediates, where you need small volumes but a very competent workforce and raw materials comprise a very small part of the production but you need intellectual capacity. So in specialised chemicals clearly India has a place. I would say going forward, you need to think about knowledge-based industries and there India has an edge as it has already established with the it sector. It has established the same capability in pharmaceutical and agricultural intermediates and as the biotechnology industry emerges, I expect that India will have an opportunity to establish itself. As opposed to China, which has created an enormously productive and efficient infrastructure that really has attracted the nuts and bolts of manufacturing. If you look at the transportation, utilities and communications systems, the infrastructure in China has created an advantage for manufacturing bulk materials while India clearly has an advantage in positioning itself in the knowledge industries.

Going back to the larger issues that are dictating manufacturing trends today, you mentioned a deflationary trend. Any others?

The second thing I would say is inflation of costs, which is disproportionate world over today. In the US, the cost of an employee is increasing and it is driven not only by wages themselves but by pension plans, healthcare costs and so on. So you are really looking at a situation where the delta between costs in India and China versus America and Western Europe is increasing. So you are living in an environment of deflation on the one hand and increasing difference in costs for the same skills. The third piece is where the demand lies. Demand is shifting not to the more mature markets, but more into emerging and developing markets. Now take a combination of the three factors and you will understand what is driving a lot of the fundamental changes. We, in the chemical industry at the end of the day, are serving other customers and they are moving. Their needs are moving geographically and we are simply following them. These are the mega trends that are driving the migration of manufacturing and services. Where is it all leading? Clearly, there are areas where the US has an advantage, companies automatically gravitate towards their strengths and also know where the cost-driven markets are for production. It is more a question of migration up the value chain in manufacturing as opposed to saying the US will lose all manufacturing to lower cost countries.

Can you illustrate with an example, preferably a specific sector, the pattern of migration of manufacturing that you just outlined?

For example, US auto companies do a lot of the design but components get sourced from different parts of the world. Pricing, styling and design has to be done at the end market. We as suppliers to these industries need to be close to them. If our material goes into leather, for example, then we need to be in India or Korea or wherever the leather is being sourced. If we are supplying for plastic components then we have to be where that is moulded, Mexico, China, wherever. We need to follow our customers who are in turn moving in response to their customers. The chemical industry, a $1.2-trillion (Rs 5,520,000 crore) industry, as a result is very diverse and very fragmented. The largest segments that Rohm and Haas serves are the construction market and electronics. The latter is another great example of how migration is taking place. Our materials go into the hardware. Key trends there are smaller and smaller devices, faster response and lower cost. Effectively, we supply the raw material to chips to become smaller, faster and cheaper. There are a number of key trends there, one is that each new chip manufacturing plant costs $3 billion (Rs 13,800 crore). That means the number of companies that can build those plants is shrinking. Eventually, there will be two left in the US, two in Europe and the rest will be in Asia. We as a supplier, therefore, have to migrate our production to Asia. The second newer trend is in chip design, which was the intellectual property of large companies, but now a large number of them are moving design capability to India.

One last question on a general trend that we are observing in India today. Several Indians who were working overseas, particularly in the US, seem to be returning in droves. Is this because of a shrinking job market overseas or just because of growing opportunities in India? What is your reading of the situation?

One interesting trend that is comparable to this is Ireland, which saw net migration out for 50 years, as a supplier of highly qualified engineers to the world. Now in the last 10 years, the Irish economy has really grown and in fact is the fastest growing economy in the EU and now there is a net migration into Ireland from across the world. I think it's the same phenomenon you are seeing in China and Korea and Taiwan, where people, as they saw opportunities in their homeland, began to realise why not be there as opposed to anywhere else as an immigrant. So I think it's a natural process that takes place and I think that's what is happening in India. I think the opening of the Indian market, growth, the possibility to make a difference, that's what I would like to think is driving the migration back.