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OCTOBER 22, 2006
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The Building Boom
Is an asset price bubble building up in the real estate market? Flats in posh Mumbai areas sell at the rate of Rs 50,000-70,000 a sq. ft. and housing plots in Gurgaon are going for Rs 1 lakh a sq. yard. This may sound like music to those who have been clinging on to their assets, it portends danger to buyers. The high real estate prices keep the majority out of the housing market and make the dream of owning a house more distant.


The Learning Curve
India's investment in education-as a percentage of GDP-is lower than not just of countries in the West but also some of the emerging economies, including China. The percentage of population in the relevant age group enrolled in higher education too is the lowest among countries with which it must compete. Clearly, there is a need to scale up substantially the physical infrastructure and attract better faculty by offering market wages.
More Net Specials
Business Today,  October 8, 2006
 
 
BT SPECIAL
SPECIALTY CHEMICALS

Taking China Head On

This is another industry where the twin advantages of low cost and chemistry capability are opening up new global markets for manufacturers in India.

Specialty chemicals account for only $9 billion of the $36-billion chemicals industry in India

Want to see R&D-driven manufacturing in action? Drop by at Jubilant Organosys' facility at Gajraula in Uttar Pradesh. One of the two specialty chemicals factories that the Delhi-based company runs, it's a live example of how Indian manufacturers are taking Chinese rivals, who have a dominant share of global exports, head on.

About two years ago, Jubilant's Head of specialty chemicals business, S.N. Singh, was a worried man. One of their top-selling specialty chemicals had suddenly come under fire from the Chinese. Compared to Jubilant's sticker price of Rs 2,500 per kg, some Chinese manufacturers had started selling the same product at less than half the price (Rs 1,200 per kg, to be precise). Threatened with a loss of market, Jubilant's chemists went back to their vats and beakers to find ways to cut production costs. After three months of R&D, they came up with a manufacturing process that allowed them to sell the same specialty chemical at a price lower than that of the Chinese. "This business is knowledge-driven, and you have to continuously innovate to stay ahead of your competitors," quips Jubilant's Singh.

The chemicals business can be broadly divided into three categories: Basic, specialty and high-end. Specialty chemicals, which go into things like adhesive sealants and plastic additives, are produced in smaller quantities compared to bulk chemicals, and demand a high degree of technical input and R&D.

SECTORAL SNAPSHOT
» India's specialty chemicals industry is expected to grow at a CAGR of 15 per cent compared to global industry projected rate of 7.5 per cent
» In 2007, the Indian specialty chemicals market will be worth $11 billion (Rs 50,600 crore), including $3 billion (Rs 13,800 crore) of imports
» Indian specialty chemical exports are expected to touch $13 billion (Rs 59,800 crore) in 2013 from $4 billion in 2007, and $33 billion in 2018

Therefore, while India's chemicals industry is $36-billion (Rs 1,65,600-crore) big, specialty chemicals account for only $9 billion (Rs 41,400 crore). But like in pharmaceuticals, global industry dynamics are changing, and the big players are expected to either shift manufacturing to low-cost countries or buy from them. The reasons are all familiar: Profits of manufacturers in the West are under pressure; a lot of user industries are shifting factories to Asia, forcing their suppliers to tag along; and, more importantly, manufacturers in countries like India and China have matured rapidly in terms of their competence. In India's case, a better intellectual property regime starting 2005 is an added attraction for manufacturers abroad to outsource production.

That said, the industry still has a long way to go. India has traditionally had a fragmented chemicals industry and that continues to be a competitive hurdle. "Even though India had a significant domestic market for some constituents of chemical industry like dyestuffs, it never got translated into economies of scale in manufacturing," points out Sunil Lalbhai, MD & CEO of Atul, an Atul-based (Valsad district, Gujarat) manufacturer of specialty chemicals. "As a result, China has beaten India in this game." Besides, within the value chain, there are inverted duty structures for intermediates and finished goods, leading to high input costs for some producers, who are then rendered unviable even if they are efficient. Power apart, "the rigid labour laws are making it very difficult to restructure businesses and this has led to increased inefficiencies", notes Lalbhai.

Jubilant's Singh points out that even 'softer' issues such as environment, health and safety (EHS) have become very important. Traditionally, Indian companies have paid little attention to EHS, but these days it is considered a hygiene factor. Just like customers abroad frown upon use of child labour, they shun manufacturers who aren't environment- and labour-friendly. "The concept looks at a business' impact on the triple bottom line of economy, environment and society," says Singh.

Issues such as environment, health and safety have assumed importance for Indian specialty chemical makers

One of the reasons why manufacturers in India are competitive is the large pool of engineers and chemists. At least in the case of low-volume, batch-processed chemicals, that is a big advantage. Companies, however, fear that to maintain India's edge, the country needs to churn out larger number of skilled and unskilled workers. Among the solutions, they say, is to enhance the collaboration between industry and academia for innovation, and to step up supply of skilled workers. "The way things are moving, it is expected there will be an acute shortage of talent within five years," says Singh. If manpower costs go up without any significant gain in process or product breakthroughs, then competitiveness of Indian manufacturing will suffer across the board.

No wonder, people like Lalbhai of Atul say that the path ahead for this industry has to be different from the one India has followed so far. To build global competitiveness, he says, India requires a multi-pronged approach and a comprehensive strategy to address crucial aspects of infrastructure, technology and investments. "First, we must encourage and enable existing investments to restructure and become competitive," says Lalbhai. "This may mean an exit from one location or from one product line to another.

However, rigid labour laws prevent this logical step towards competitiveness. Lalbhai's lament may sound all too familiar, but it carries an important message: When you are fighting in the cut-throat global markets, every millimetre of strategic elbow room counts.

 

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