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S u s t a i n i n g t h e I n d i a A d v a n t a g e

2010

Handbook on

Indian Chemical Industry


Prepared by :

Disclaimer: All rights reserved. Includes copyrighted material. The same may not be reproduced, distributed, modified or in any manner communicated to any third party except with the written approval of Tata Strategic Management Group. This report is for information purpose only. While due care has been taken during the compilation of this report to ensure that the information is accurate to the best of Tata Strategic Management Group's knowledge and belief, the content is not to be construed in any manner whatsoever as a substitute for professional advice. Tata Strategic Management Group accepts no responsibility for any loss arising from any action taken or not taken by anyone basis this report.

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CONTENTS
2010
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05 Industry Reports 1. Basic Organic Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 09 2. Petrochemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3. Fertilizers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4. Chlor Alkali . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 5. Pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 6. Agrochemicals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 7. Specialty Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 8. Biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 9. Petroleum, Chemical and Petrochemical Investment Regions (PCPIRs) and their impact on Indian Chemical Industry . . . . . . . . . . . . . . . . . . 119 10. Process Plant and Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1274 Thought Notes 1. Indian Chemical Industry - The Road Ahead . . . . . . . . . . . . . . . . . . . . 137 2. M&A opportunities in Chemical Industry . . . . . . . . . . . . . . . . . . . . . . 145 3. Competing successfully in Indian Specialty Chemicals Industry . . . . . 155 4. Chemical Industry needs more 'Explorers' . . . . . . . . . . . . . . . . . . . . . 163 5. Hazardousness of Chemical Industry . . . . . . . . . . . . . . . . . . . . . . . . . 169 6. Acting green - Philosophy to results: An Indian perspective . . . . . . . 177 7. Will India be the next big green growth market? . . . . . . . . . . . . . . . . 185 8. Emerging opportunities in Indian Pharmaceuticals industry . . . . . . . 191 9. Contract research - Deriving strategic value from . . . . . . . . . . . . . . . 199 emerging markets 10. Raising India's 'Pulse' rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 11. Water is everybody's business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 12. Well being in India: Disparity and surprises across districts . . . . . . . . 219 13. Are family-owned businesses sustainable? . . . . . . . . . . . . . . . . . . . . 223

2010
Jai Hiremath Chairman, National Chemicals Committee, FICCI Vice Chairman & Mg. Director, Hikal Ltd.

As you are kindly aware that FICCI jointly with Dept of Chemicals & Petrochemicals, Govt. of India is organizing 6th edition of INDIACHEM 2010 an international exhibition and conference on Chemicals, Petrochemicals, Pharmaceuticals, Process Plant and Automation Systems on October 28-30, 2010 at Mumbai. This follows the immense success of the earlier five editions in 2000 and 2002 at New Delhi, 2004, 2006 and 2008 at Mumbai. The biennial event has served as a platform for interaction between the Indian and foreign chemical industry. The event showcases the strength and the potential of the Indian chemical, petrochemical and pharmaceutical industry in products as well as services and provides opportunities to formulate business alliances for growth of trade and investment in these sectors. Phenomena like accelerated globalisation, business and changing pace of technology have brought in their wake sweeping changes and abundant opportunities for companies to grow and prosper globally in both traditional and non-traditional industries. Chemical and allied sectors are no exception to this. The chemical industry is one of the oldest industries in India. It has played a significant role in the country's ongoing metamorphosis from an agrarian economy to an industrialized economy. The chemical sector including pharmaceuticals and petrochemical has an annual turnover of approximately US $ 83 billion, which is equivalent to about 5% of India's GDP. It is the 12th largest in the world in terms of volume and the third largest in Asia. Over the last decade this sector has evolved from being a basic chemical producer to an innovative industry. With investment in R&D this industry is registering a significant growth in the knowledge sector, especially the specialty and fine chemicals segments. The Government of India is committed to providing comprehensive infrastructure to the industry. Since the chemical industry requires specialised infrastructure, it has been the endeavor of the Government to promote the creation of world class infrastructure that fulfils the requirements of this industry. With this background the Govt. approved the policy Investment Regions for the Petroleum, Chemical & Petrochemical. The infrastructure would be such that it not only spurs the growth of the industry at the selected location but also helps in introducing economies of scale and synergy, making the units cost competitive. It has the added advantage of providing linkages to suppliers and markets to seize the emerging opportunities in the chemical sector. The comprehensive Report prepared by FICCI and Tata Strategic Management Group (TSMG) would help potential foreign and domestic investors in understanding the vast investment opportunities available in Indian Chemical Industry. The report will also serve as a ready reckoner for those connected with Chemical Industry. The conference and exhibition will provide an excellent opportunity to show case the major technical development and serve as a platform to exchange ideas and information between the Indian and foreign participants. This is in every way the most timely initiative and I am sure the participants would benefit immensely from the endeavour. I wish the event all success.

Handbook on Indian Chemical Industry

01

Global Chemical Industry Perspective of a changing framework

2010
After a long period of prosperity, the global chemical industry was hit double in 2008/2009, firstly by the end of the "natural" cycle the chemical industry is experiencing, secondly by the financial crisis that impacted all regions and businesses in a similar way, something that hasn't happened and has not been expected by any industry specialists. Now, luckily, the sales as well as the profits have been going up steeply and a number of companies are exceeding each other announcing the "best ever" 6 month period for the first half of 2010. Besides such exciting news and the fact, that growth rates are starting to decline in the second half initiating a discussion of a "V" vs. a "W" economic development, the fundamental question is, what the long-term future of the chemical industry will look like. Overall, the global chemical industry is facing a number of structural framework changes that
l will request the established players to adopt to the new circumstances l offer opportunities for existing ones further leveraging their particular strengths

and give new players a window of opportunity to enter the global stage. l The financial crisis was not the reason for these changes, but provided a sense of attention and urgency in the industry that has not existed to that extent before. On a high level, the following three key topics will be crucial for the future success of chemical companies 1. Understanding and participating on ongoing strengthening of Asia 2. Finding concepts to run feedstock cost driven businesses also in non-upstream regions 3. Understanding and fulfilling future customer industry expectations globally but also within regional specific

Strengthening of Asia
It is needless to say, that the demand growth is in Asia, in particular in China but also in India and a number of South-eastern Asian countries. Today, Asia is already the leading market for chemical industry globally, accounting for 38% of global sales followed by EU27 and NAFTA at 29% and 21% respectively. China accounts for almost half of the chemical sales in Asia, followed by Japan and India. Asia's share in global chemical production has increased significantly in the last decade, from ~27% to 38% from 1998 to 2008. What is not true looking 20 years ahead, or at least capable of being misunderstood, is the widely used phrase of "demand shift". The

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demand shift has happened in the past, but is largely completed, customer industries like textile and leather, as classic examples, have completed that years ago. What is essential to understand is, that emerging markets show stronger growth potential and have proven to do so even in the financial crisis, e.g. with China showing approx. 5% growth even in 2009 and the markets are becoming critical size. The impact of these developments has to be analyzed differently for global majors and the local champions in these countries. For the global majors, the crucial questions will be the strategy around how to participate on this growth, including asset and investment allocation, exports vs. local production, adoption of business models, cooperation with locals vs. standalone activities and many more. Above all this is the need to achieve and sustain a profitability that satisfies their shareholders. And, not to be forgotten, to maintain and ideally increase the business in the strong home markets Europe and the US these will even in the next 20 years account for a very large portion of global chemical business: For the local champions, the challenge consists of two steps. First step is the coverage and supply of domestic markets not leaving them to the global majors, and secondly the subsequent development of a global business where sustainable competitive advantages can be achieved. A good example for this is API production, where according to industry reports, Indian and Chinese producers already cover 65-70% of the world market

2010

Concepts for feedstock driven commodities


In feedstock driven commodities (in particular petrochemicals and polyolefins) the increasing production capacity in low feedstock cost countries is a historical fact and is likely to continue. However, it is clear amongst industry experts, that Middle East will never serve the whole world. Considering that, the long-term challenge for the chemical industry is to find the right balance between low cost production hubs and local/regional commodity production close to the customers. Western Europe and the US have been through this process to a large extent already, plant closure and efficiency gains as well as value chain integration efforts have shown results. Looking to China and India as the major countries of future demand, both have shown a strong will to establish and maintain a commodity industry themselves, however the strategies are different. While China is putting a lot of effort into developing a coal-based petrochemical industry (and by doing so relying on the domestic carbon feedstock) and successfully invites international partners to do so, the Indian Government has set up PCPIRs with strong focus on downstream integration, providing an ecosystem for chemical companies to prosper. This is an India only effort so far, and international companies are not heavily involved yet. Irrespective of which strategy will be more successful, it clearly shows that these regions are willing and able to develop a commodity industry on their own, but, also as a matter of fact, that has to prove its position in a global context still.

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Understanding customer industries' needs

2010

Last but not least, the global chemical industry has to face the challenge to complete its transformation from a production and technology driven industry to a customer oriented one. Given the complexity and the tremendous range of products and services offered by the chemical industry, this will play a more prominent role for customer oriented segments like specialty chemicals than for specification-based commodities. There is for sure no "one-size-fits-all" approach, but the following two issues will play a strong role in terms of future profitability
l Adapting product developments to the actual needs of the customers, in mature

countries where customer industries are not willing to pay for the best possible product/service anymore but only for the best suitable one, as well as adapting product portfolio and service to the local needs of emerging markets e.g. a growing middle class in India getting access to chemical related products has different needs and perceptions vis--vis mature European group of customers And in particular local companies are "naturally" positioned best to fulfill these needs
l Set up organizations (from sales force to group structures) that allow to most

efficiently target these customer groups. A number of companies have already designed their front end according to customer groups (e.g. DuPont), and this is likely to continue

Implications for India


Summarizing, it becomes clear that the global future of the chemical industry will look substantially different than today. There will be a place for everybody - the global majors of today, the world-scale Middle East commodity producers as well as local champions in India and elsewhere developing their home markets. But amongst all groups, the successful ones will be those who manage to adapt early to the upcoming changes and doing so, create a long-lasting competitive advantage. Indian chemical players are excellently positioned in this "new game", supported by a PCPIR infrastructure being built, having a government that understands and supports the needs of the chemical industry, being located in one of the most prosperous markets in the world and last but not least being able to rely on a well skilled and educated workforce. Taking these good staring points combined with the entrepreneurial spirit, social and political responsibility and a forward looking understanding of the future framework provides an excellent outlook to the Indian Chemical industry.

By-Dr. Alexander Keller, Partner - Energy & Chemicals, Roland Berger Strategy Consultants

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2010
Global Chemical Industry
Globally, the chemical industry is estimated to be ~USD 3.4 trillion. Global chemicals industry grew at a healthy rate of ~9% p.a. during the period 2004-2008. However, the industry went through a dramatic downturn in 2008-2009 due to the global economic recession. In 2009, the global chemical industry is estimated to have seen a decline of 4.5 5% over 2008 levels as demand from large end-use industries such as construction, automotives, electronics etc. fell massively worldwide. The downturn witnessed shutting down and idling of significant capacities and other costcutting measures like workforce reduction.

Global chemicals industry Fy 10


(USD Bn, % share)
Agrochemicals, 50, 1% Specialty Chemicals, 740 22% Biotechnology 180 , 5%

Base Chemicals, 1,525 , 45% Pharmaceuticals 900 , 27%

Total: USD 3,395 Bn


Source: Datamonitor, Tata Strategic Analysis

Post 2009, as global economy has started recovering, chemicals industry is starting to register slow volume growth due to restocking and revival of underlying demand. While the recovery in Europe is still sluggish, America is expecting a V-shaped recovery curve as per the American Chemistry Council and China saw a 21% y-o-y growth in chemicals output in October 2009. However, it is expected that with subdued demand in near future and reduced margins due to poor capacity utilization, it might still take 2-3 years before the global chemicals industry is back to the growth rate levels of 2008. During the period 2008-2013, the chemicals industry is expected to grow at ~5.3% CAGR.

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Chemical Industry Classification

2010

Tata Strategic has classified the chemical industry into 5 key segments, based on a detailed analysis of various industry classifications followed by several domestic & international bodies. The key segments are: 1. Base chemicals: Petrochemicals, man-made fibres, industrial gases, fertilizers, chlor-alkali and other organic & inorganic chemicals 2. Specialty chemicals: Dyes & pigments, leather chemicals, construction chemicals, personal care ingredients and other specialty chemicals 3. Pharmaceuticals: APIs and formulations 4. Agrochemicals: Insecticides, herbicides, fungicides and other crop protection chemicals 5. Bio-technology: Bio-pharma, bio-agri, bio-industrial Base chemicals segment is the largest, accounting for ~45% of the total industry. Under base chemicals, petrochemicals segment is showing an upswing in polymer and resin prices. Pharmaceuticals segment is the next biggest segment, accounting for ~27%. Though the segment was not severely impacted by the downturn, it witnessed reduced R&D spending. Post recession, while large markets like US and Western Europe are slowing due to saturation and patent expiry of key blockbuster drugs, developing regions like Asia and Latin America are experiencing strong growth driven by increasing prevalence of diseases, rising healthcare expenditure and CRO. However, the much sought after outsourcing hubs like China and India are facing stiff competition from new geographies like Eastern Europe and Central and South America. Specialty chemicals segment is the third largest segment accounting for 22% of overall industry. While the recession highlighted the vulnerability of specialty chemicals to economic cyclicality, the segment is expected to register higher sales in 2010 with improving demand. US specialty chemicals companies are looking to post stable margins backed by forecasted real GDP growth of 1.9%. European specialty chemicals giants Clariant and Rhodia turned profitable in Q3 FY10 driven by costcutting initiatives. Globally, biotechnology accounts for 5% of the total market. The segment saw a slowdown in growth to 4% in 2009 compared to growth rate of 12% before the downturn. The global agrochemicals market (1% of total chemicals) is expected to complete its recovery in 2010 with growth resulting from rising prices and positive volume effects.

Indian Chemical Industry


Total size of the Indian chemical industry in FY10 is estimated to be ~USD 83 Bn. Base chemicals is the largest segment accounting for ~53% of the total industry, followed by pharmaceuticals with 24%.

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Indian chemicals industry Fy10


(USD Bn, % share)
Agrochemicals 2, 2% Biotechnology 2.5, 3%

2010

Specialty Chemicals, 15 18% Base Chemicals, 43.3, 53%

Pharmaceuticals 20, 24%

Total: USD 83 Bn
Source: Industry reports, Tata Strategic Analysis

Base chemicals has a lager share of the domestic chemicals industry vis--vis global. Base chemicals are raw material driven; bulk manufacturing chemicals produced by standardized reactions unlike pharmaceuticals, and specialty chemicals which are more R&D intensive, high value, low volume chemicals. Petrochemicals (Olefins and aromatics) form the largest sub-segment of the base chemicals industry. Olefins demand in India is expected to grow at 10% per annum while aromatics demand is expected to grow at 12% per annum over the next fourfive years. India is soon expected to be among the world's top 5 manufacturers of petrochemicals products ETA and poly-propylene. Pharmaceuticals is the second largest segment with 24% share. Over the last 30 years, India's pharmaceutical industry has evolved from being a marginal global player to becoming a world leader in the production of high quality generic drugs. India exports pharmaceutical products to more than 200 countries. Exports of drugs and pharmaceuticals from India rose by 25% to ~ Rs. 384 billion in FY09 compared to ~ Rs. 307 billion in FY08. Indian specialty chemicals industry is expected to return to pre-recession growth in the next couple of years primarily driven by large demand in end use industries like automotives, electronics, packaged food, textiles etc. and strong domestic capability being supplemented by both domestic and international investments. Many foreign companies have made significant commitments to India and have plans to continue to invest over the long term not only because of the abundant availability of skilled and cheap labor but also because of the certainty of potentially huge markets. Biotechnology accounts for 3% of the total chemicals industry. Indian biotechnology industry crossed the USD 3 billion mark in FY10 (including bio-services and bioinformatics), registering a y-o-y growth of 17%. The industry is fragmented in nature with presence of over 300 domestic and international companies. However, it is witnessing several partnerships/ acquisitions as companies try to expand capabilities and capacities.

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2010

Agrochemicals comprise ~2% of the total industry. The agrochemicals consumptions in India (580 gms/ hectare) is low compared to global standards of 10-12 kg/ hectare. Indian agrochemicals industry is largely exports driven with over 60% of production being exported to USA, U.K., Russia, Europe, South Africa, Bangladesh, Malaysia etc.

CONCLUSION
Strong end use industry demand is expected to boost growth for the Indian chemical companies, both domestic & multinational. Increasing local production requires global competitiveness to withstand imports as well as for exports of surplus. Key success factors needed are feedstock cost & availability, value chain access, technology, capital investment, presence of strong local players as well as access to a rapidly growing large domestic market. India is today seen as a growth market for many western companies. Domestic companies have built significant assets and have the opportunity to leverage them and will need to strengthen them further to withstand global competition. It could be worthwhile to explore partnerships, in select areas, for mutual beneficial development.

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Basic Organic Chemicals

Introduction
Organic chemicals are a significant part of Indian chemicals industry. The chart below shows select major organic chemicals. Availability of natural gas for use as feedstock is a critical part of the entire production process. Formaldehyde and acetic acid are important methanol derivatives and are used in numerous industrial applications. Phenol is an aromatic compound and derived from Cumene, a benzene and propylene derivative.

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Select organic chemicals


Feedstock (Natural Gas/Naphtha)

Methanol

Benzene

Acetic Acid

Formaldehyde

Cumene

Phenol Formaldehyde

Urea Formaldehyde

Phenol

Indian Organic Chemicals Industry


Industry Overview
The consumption of organic chemicals in India has increased at a CAGR of 6.4% from 2.02 million metric tons per annum (mmtpa) in FY04 to 2.76 mmtpa in FY09. The domestic supply however, has shown a negative CAGR of 2.3% to reach 1.31 mmtpa in FY09 against 1.47 mmtpa in FY04. The deficit has been met by a large increase in imports over the years. The net imports have grown at a CAGR of more than 20%
Demand & Supply
(Mn tons) 2.0 2.0 2.2 2.4 2.8 2.6

1.5

1.5

1.6

1.5

1.5 1.3

FY 04

FY05

FY06 Demand

FY07 Supply

FY08

FY09

Source: Dept. of Chemicals & Petrochemicals

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2010

from 0.55 mmtpa in FY04 to 1.51 mmtpa in FY 2009. The major reason of lower domestic production of organic chemicals has been oversupply in global markets leading to cheaper imports of organic chemicals into India. As a result, the capacity utilization levels of domestic producers have fallen from 92% in FY04 to 65% in FY09. Even after discounting the impact of the global economic crisis on the Indian industry, the average utilization levels have been around 80% in FY07 and FY08.

Production details of major organic chemicals in India


No. 1. 2. 3. 4. 5. Total
Source: Dept. of Chemicals & Petrochemicals, CMIE

Organic Chemical Methanol Formaldehyde Acetic acid Phenol Others

Production (000 tons) Fy07 Fy08 396 235 288 71 555 1,545 351 243 316 75 567 1,552

Fy09 237 232 266 76 506 1,317

Share in Fy09 18% 18% 20% 6% 38% 100%

The major organic chemicals are methanol, acetic acid, formaldehyde and phenol. The four chemicals constitute around 60% of total organic chemicals produced in India in FY09. Post the global economic crisis, the production of organic chemicals in India is also expected to have recovered and reached 1.5 mmtpa in FY10.

Key Segments
Methanol
Methanol, a very versatile chemical is primarily produced from natural gas or naphtha.

Demand and supply of methanol (Mn tons, Fy09)


0.01

1.3

1.06

0.24

Production

Import

Export

Consumption

Source: CMIE report

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Demand for methanol has increased at a CAGR of 10% from 0.8 mmtpa in FY04 to 1.3 mmtpa in FY09. The domestic production of methanol is not sufficient to meet the demand of methanol in India. As a result, in FY09, the net import of methanol was 1.06 mmtpa i.e. more than 4 times the domestic production of 0.24 mmtpa. Import of methanol has increased at a high CAGR of 22% from 0.4 mmtpa in FY04 to 0.85 mmtpa in FY09. The two main end-user industries of methanol are chemicals and energy. In the chemicals industry, methanol is used mainly to manufacture formaldehyde, acetic acid, di-methyl terephthalate (DMT) and some solvents. In the energy industry, methanol goes into the manufacture of methyl tertiary butyl ether (MTBE), tertiary amyl methyl ether (TAME), di-methyl ether (DME) and bio-diesel among other chemicals. Methanol is also used for blending with petrol. Over the years the usage pattern of methanol has remained same. However, share of formaldehyde in sectoral usage of methanol has improved from 34% in FY06 to 38% in FY09 primarily due to increase in demand of formaldehyde from plastic and paints industries. The demand of methanol for production of DMT has fallen primarily due to closure of Bombay Dyeing's DMT plant. Indian manufacturers have small capacities compared to global standards. GNFC, the largest producer of chemicals in India has a capacity of 230 kilo tons per annum (kta) followed by Deepak Fertilizers and Rashtriya Chemicals and Fertilizers Ltd (RCF) with capacities of 100 kta each.

2010

Sectoral usage of methanol


(% share) FY06 Others 18% Acetic Acid 9% DMT 9% Pharma 14% MTBE 16% Others 20% Acetic Acid 9% DMT 2% Pharma 15% FY09

Formald hyde 34%

Formald yde 38%

MTBE 16%

Source: Crisil research, Tata Strategic analysis

Acetic Acid
Acetic Acid is the main alcohol based chemical and is primarily used in the production of Vinyl Acetate Monomer (VAM), Purified Terephthalic Acid (PTA), Acetic Anhydride and Acetate Esters. The Acetic acid derivatives are applied in various industries as mentioned in table below:

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S. N Derivatives 1. 2. Vinyl Acetate Monomer Purified Terephthalic Acid (PTA) Acetic Anhydride Acetate Esters

Applications Adhesives, textiles, paints and paper PET bottle resins, films and polyester fibre Cellulose Acetate which goes in cigarette filters and textile applications Solvents in a wide variety of paints, inks and other coatings

2010

3. 4.

Demand for acetic acid has grown at a CAGR of 10% from 0.34 million tons in FY04 to 0.55 million tons in FY10. The demand growth has happened mainly due to increase usage by manufacturers of PTA and organic esters such as RIL and Vinyl Chemicals. New PTA capacities added by Indian Organic Chemicals (IOC) (0.55 million tonnes per annum) and RIL (0.53 million tonnes per annum) in the recent past have spurred demand growth further. Most of the demand was met through domestic production earlier. However, due to oversupply of acetic acid in global markets and depressed prices, imports of acetic acid have grown from 0.02 mmtpa in FY04 to 0.29 mmtpa in FY09. Cheap imports have led the domestic manufacturers to reduce their plant capacity utilization. Market size of acetic acid is estimated to be around Rs. 1,450 crores in India in FY09, of which imports constitute more than 50%. Major acetic acid producing companies in India are GNFC, Jubilant Organosys and IOC. Acetic acid is manufactured in India

Demand and supply of acetic acid


Mn tons, Fy09 0.29 0.01 0.55

0.27

Production
Source: CMIE report

Import

Export

Consumption

through two routes: the methanol route and the ethyl alcohol (from molasses) route. Manufacturing acetic acid using methanol is more cost-competitive and, therefore, more profitable. GNFC is the only company in India to manufacture acetic acid through the methanol route. It has a competitive advantage in acetic acid because of

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the assured supply of the raw material and its lower cost of production and hence, was able to hold its 30% market share in a weak global price scenario.

Formaldehyde
Unlike methanol, production of its derivative formaldehyde in India is sufficient to meet the domestic demand. The production of formaldehyde has increased, at a similar pace as has its demand, at a CAGR of 3% from 0.20 mmtpa in FY04 to 0.23 mmtpa in Fy09.

2010

Demand and supply of formaldehyde


Mn tons, FY09 0.23 0.23

Production
Source: CMIE report

Consumption

Market size of formaldehyde is estimated around Rs. 190 crores in India. Total production capacity is 0.23 mmtpa in FY09. Major formaldehyde producing companies in India are Kanoria Chemicals, Hindustan Organic, Rock Hard and Asian Paints. The first two companies account for 44% of formaldehyde production in India. Asian Paints produces formaldehyde for captive consumption.

Phenol
Derivatives Phenolic resins Caprolactam Bisphenol-A Applications Plywood adhesives, construction, automobile & appliance industries Nylon and synthetic fibre Polycarbonates in electronics and housing industries

Phenol is a significant type of organic chemical with numerous applications as mentioned in the table below. Its demand is closely linked to end user industries like the construction and automobile industries. More than 70% of demand of phenol is met through imports with no fresh supply addition in last few years. There are only two suppliers - Hindustan Organics and S I Group with capacity of 40 Kta each in FY09. As the consumption has grown from 0.18

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mmtpa in FY04 to 0.23 mmtpa in FY09, the imports has grown at a higher CAGR of 8% to meet the rising demand. The total market size is Rs. 1,800 crores approximately in India in FY09 including imports.

2010

More than 70% of demand of phenol is met through imports with no fresh supply addition in last few years. There are only two suppliers - Hindustan Organics and S I Group with capacity of 40 Kta each in FY09. As the consumption has grown from 0.18 mmtpa in FY04 to 0.23 mmtpa in FY09, the imports has grown at a higher CAGR of 8% to meet the rising demand. The total market size is Rs. 1,800 crores approximately in India in FY09 including imports.

Demand and supply of phenol


Mn tons, FY09 0.17 0.02 0.23

0.08

Production
Source: CMIE report

Import

Export

Consumption

Key Trends
Market Trends:
l Focus has moved from west to east. There is an increase in M&A activities and

setting up of new plants in China, Middle East and Russia. The latter two being rich in feedstock and the former being the driver of demand. Demand for methanol based MTBE manufacturing has been declining due to l environmental concerns. In the US, MTBE is getting phased out leading to fall in methanol demand by 3 mn tons. Demand from new applications such as DME and bio-diesel is on the rise l Technology Trends Increased acceptance of methanol over olefins and over propylene technologies l Regulatory Trends Government of India continues to provide duty protection to domestic l manufacturers. For example, in case of phenol, the custom duty of 7.5% was maintained in Union Budget 2009-10 whereas the excise duty was reduced from 16% to 8%.

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l Recently, Government has also levied anti-dumping duty on import of phenol

from countries such as USA, South Korea and Taiwan.

Growth Forecast & Drivers


Indian organic chemicals market is expected to grow at a growth rate of 5% to reach ~ 3.53 mn tons by FY14. Key segments expected to grow are methanol and phenol. 1. Rise in methanol demand: Domestic methanol demand is expected to grow at a CAGR of 6.8% from FY10 to FY14. The key growth drivers are growth in construction, infrastructure and new areas such as fuel blending and bio diesel. The demand from the formaldehyde segment (largest user of methanol) is expected to grow at 8%. Despite the higher operating rates expected in future, more than 2/3rd of demand will still be required to be met by imports.

2010

Methanol Market Outlook


RHS Demand & Supply (Mn tons) 1.5 LHS Operating rate (%) 100 80 1 60 40 0.5 20 0 FY10 Demand
Source: Crisil report, Tata Strategic analysis

0 FY11 FY12 Production FY13 FY14 Operating rate

2. Rise in phenol demand: The demand of phenol is expected to grow at a CAGR of 8% from 0.14 mmtpa in FY10 to reach 0.19 mmtpa in FY14. The improvement in demand is primarily driven by growth in application of phenolic resins in the decorative laminates sector, dyes and drugs in pharmaceutical industries. growth in application of phenolic resins in the decorative laminates sector, dyes and drugs in pharmaceutical industries.

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Phenol Market Outlook


RHS Demand & Supply (Mn tons) LHS Operating rate (%) 100

2010

0.2

99 0.1 98

0 FY10 Demand
Source: Crisil report, Tata Strategic analysis

97 FY11 FY12 Supply FY13 FY14 Operating rate

Key Challenges
1. Lack of cheaper raw material availability: Feedstock (naphtha and natural gas) and power are critical inputs for organic chemicals industry. Costs of these raw materials are high in India compared to countries like China, Middle East and other South East Asian countries such as Thailand and Indonesia. Given the poor infrastructure with lack of adequate facilities at ports and railway terminals and poor pipeline connectivity, domestic manufacturers will continue facing difficulty in procuring raw materials at a cost competitive with the global peers. 2. No domestic price discovery: Domestic prices of organic chemicals are highly correlated with international prices. Given the small scale of domestic operations, local manufacturers are more influenced by global demand and supply forces. 3. Large global capacity additions: Apart from the current oversupply in global markets, there is another cause of concern for domestic manufacturers, with further large capacity additions happening in global markets. For example, globally, methanol industry is expected to witness excess capacity in the future due to a spate of capacity additions in gas rich countries such as Middle East and Russia. In China itself, 20 million tons of methanol capacity is expected to be coming upstream by 2010.

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Methanol capacity additions Year 2009 2010 2011 Regions China (delayed) Egypt, Russia Middle East, South East Asia South America Capacity (Mn tons) 20 1.6 4

2010

Source: Crisil report, Tata Strategic analysis

4. Low capacity utilization: Due to oversupply in global markets, prices of major organic chemicals have taken a steep decline, thereby forcing the domestic companies to under utilize their plants operating levels. The average capacity utilization has fallen from > 90% in FY04 to 65% in FY09. Though, post the global economic crisis in FY09, utilization levels have improved, but are still far behind the utilization levels of more than 90%.

Key Opportunities
1. Consolidation: Since most of the Indian manufacturers operate on a small scale compared to global peers, there is a room for consolidation in Indian organic chemicals industry. Domestic players can take advantage of economies of scale arising from consolidation and become more competitive thereby preventing cheaper global imports. 2. Improved feedstock supply: Domestic organic chemicals players don't have the advantages of backward integration and hence, they lack pricing flexibility. However, given the new finds of natural gas reserves in the country, domestic manufacturers will be able to get supply of feedstock at stable prices. 3. Wider product portfolio: Commodity chemicals companies can improve their product portfolio by adding specialty chemicals such as polymers additives, water treatment chemicals, lubricating additives, etc. This will help in improving their margins but requires significant R&D efforts. 4. Forward integration: Petrochemical companies producing benzene and propylene can look for forward integration opportunity given the demand-supply deficit in phenol market. Similarly, an opportunity exists for companies with better access to natural gas supply to venture into the methanol market facing continuous supply deficit. 5. Outbound approach: Even successful companies from west are shifting their base to resource rich nations like Saudi Arabia, Qatar, Russia, etc. Indian organic chemical companies may also explore opportunities outside the country either through greenfield or brownfield projects.

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References
1. Annual Report 2009-10, Department of Chemicals & Petrochemicals

2010

2. Performance of Chemical & Petrochemical Industry at a Glance (2001 - 2007), Department of Chemicals & Petrochemicals 3. Working Group on Indian chemical industry for formulation of the 11th Five Year Plan, Planning Commission, Government of India 4. Commodity Chemicals: Industry Profile, Crisil Research, January 2010 5. Industry: Market Size & Shares, Centre for Monitoring Indian Economy, April 2010 6. GNFC Analyst Report, ICRA Research, June 2010

This report has been authored by: Pratik Kadakia (Pratik.kadakia@tsmg.com) and Chirag Surana

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Petrochemicals

Introduction
Petrochemicals are chemicals made from petroleum and natural gas. Currently naphtha and natural gas are the main feedstock as they are most easily processed into basic petrochemicals. Olefins such as ethylene, propylene, butadiene and aromatics such as benzene and toluene are basic petrochemicals and their further derivatives are known as end products petrochemicals such as polymers, synthetic fibers, elastomers and surfactants.

2010

Global Petrochemicals Industry


Size of the petrochemical industry is determined by the size of ethylene and propylene capacity built. Both constitute almost 70% of global basic petrochemicals market. Global ethylene capacity was estimated at 130 million tons in 2009 and is expected to achieve a CAGR of 3% to reach 155 million tons in 2014. Whereas, global propylene capacity, estimated at 90 million tons in 2009, is expected to achieve a CAGR of 5% to reach 115 million tons in 2014. Based on their cumulative capacity and overall market share, the market size of basic petrochemicals was USD 320 billion in 2009 and is expected to reach USD 385 billion in 2014.

Global Market Size


(USD Bn) 385

4%
320

2009
Source: Crisil research, Tata Strategic analysis

2014

Major countries are North America, Western Europe and East Asia and major petrochemical companies are Lyondell-Basel, Dow, Sinopec, Exxon and Ineos.

Indian Petrochemicals Industry


Industry Overview
As a downstream industry of exploration and refining business, the petrochemicals industry is a significant industry for the Indian economy. The Indian basic petrochemicals market grew at a rate of 5% from USD 5 billion in FY2005 to an estimated USD 6.5 billion in FY2010. Considering end products market which includes

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23

polymers, synthetic fibers, elastomers and surfactants, the total petrochemical market has grown at a CAGR of 8% from USD 6.8 billion in FY2005 to USD 10 billion in FY2010.

2010

India is the fifth largest consumer of polymers in the world after China, United States, Japan and Germany. By global standards, its contribution is not very large, primary reason being low per capita consumption of polymers in India, only 5 kgs, compared to world average of 25 kgs. The Indian petrochemicals market is influenced by international demand and supply forces as the domestic market is oversupplied. The total installed capacity of major basic petrochemicals (ethylene, propylene, butadiene, benzene & toluene) in FY2005 was 5.97 million metric tons per annum (mmtpa) against the total demand of 5 mmtpa, leading to a surplus of 0.97 mmtpa. This surplus got further increased to 1.59 mmtpa by FY2010 as capacity additions grew at faster pace than demand.

Basic petrochemicals installed capacity and demand ('000 tons)


8,120 6,530 5,970 5,000

FY05 Capacity
Source: Crisil research, Tata Strategic analysis

FY10 Demand

Even in the end products petrochemicals market (polymers, elastomers, synthetics fibers and surfactants), the oversupply gap has increased from 0.74 mmtpa in FY2005 to 1.76 mmtpa in Fy2010

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Key Segments
End products petrochemicals installed capacity and demand ('000 tons)
11,840 10,080 7,540

2010

6,800

FY05 Capacity
Source: Crisil research, Tata Strategic analysis

FY10 Demand

Polymers: Polymers are popularly known as plastics, Polyethylene, polystyrene, polypropylene and polyvinyl chloride are major types of polymers. Consumption of polymers has increased from 61% to 69% of total volume of major end products petrochemicals between the period FY2005 and Fy2010.

End product petrochemicals market: share (% of total)


6% 4% 6% 2% 23% 28%

61%

69%

FY05 Polymers Synthetic Fibers Elastomers

FY10 Surfactants

Source: Industry Report, Tata Strategic Estimates

Synthetic Fibers: Synthetic fibers account for about half of all fiber usage, with applications in every field of fiber and textile technology. The market share of synthetic fibers has decreased from 28% in FY2005 to 23% in FY2010. Elastomers: Elastomers are polymers with elastic properties. They find applications in manufacturing of various types of tyres and non-tyre goods. Share of elastomers have declined from 6% in FY2005 to 2% in FY2010.

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Surfactants: Surfactants stabilize mixtures of oil and water and find application in detergents, emulsifiers, etc. Its share has remained same in overall market at 6%.

2010

Segment Polymers

Major Products Polyethylene, polystyrene polypropylene, polyvinyl chloride (PVC) Polyester, nylon, acrylic fiber purified terephthalic acid Styrene butadiene rubber poly butadiene rubber plasticized PVC Linear alkyl benzene and ethylene oxide

Main Applications Packaging, Carrier bags, extrusion coating Fiber and textile technology Tyres, toys, consumer items

Synthetic fibers Elastomers

Surfactants

Detergents, emulsifiers, foaming & conditioning agents

Competitive Landscape - Polymers Industry


Polymers constitute 70% of end products petrochemicals market in India. Indian polymers industry is oligopolistic in nature with only 3 large producers - Reliance Industries Ltd. (RIL), Haldia Petrochem Ltd (HPL) and Gas Authority of India Ltd (GAIL). Market entry barriers are high with high start-up costs and raw material costs. Post acquisition of IPCL, RIL has obtained majority of the market share (70%) of total polymers market followed by HPL and GAIL (11% respectively). RIL produces all forms of polymers namely Polyethylene (PE), Polypropylene (PP) and Poly vinyl chloride (PVC). HPL and GAIL produce PE and PP but don't produce PVC. Other domestic players are Finolex Industries, DCW, Chemplast and DCM Shriram. All of them produce only Poly vinyl chloride (PVC).

Major polymers facilities in India (FLY10)


Kota (0.07) Baroda (0.38) Jamnagar (1.93) Gandhar (0.47) Company Hazira (1.20) Nagothane (0.47) Ratnagiri (0.26) Patalganga (0.29) Mettur (0.24) RIL & IPCL HPL GAIL Finolex Tuticorin (0.09) Chempl ast DCW Source: Crisil Report, Tata Strategic DCM Feedstock Natural Gas/ Naphtha Naphtha Natural Gas Natural Gas Naphtha Naphtha Naphtha Focus Capacity

Capacity in mmtpa
Auriya (0.51 ) Haldia (1.04)

Existing plants

PE, PP PVC PE, PP PE PVC PVC PVC PVC

4.74 1.04 0.51 0.26 0.24 0.09 0.07

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Key Trends
Market Trends
Increase in global demand: Global demand for ethylene is forecasted to grow at a CAGR of 4.5% and that of propylene to grow at a CAGR of 5.5% between period 2010 and 2014. Ethylene and propylene will continue to have major share (80%) of total petrochemicals demand Capacity expansion: Between 2010 and 2014 ethylene capacity additions is expected to grow by 22 million tonnes. Major capacity build up is happening in China, large demand centre and Middle East, ethane rich region towards the end of 2010. Depressed margins: With oversupply hinging in the global petrochemicals market, margins will increasingly come under pressure in early 2011. Low utilization levels: Global capacity utilization levels are expected to be at all time lows of 80% in 2011 as compared to 90% now.

2010

Technology Trends
Product switch: Linear low density polyethylene is increasingly replacing the usage of low density polyethylene in India. Only 1 ton of ethylene is required to produce 1 ton of LLDPE whereas > 1 ton of ethylene is required to produce 1 ton of LDPE Change in feedstock mix: With increase availability of natural gas and new gas finds, the dependency on naphtha as major feedstock for petrochemicals complexes have reduced. In Middle East, substantial capacity additions will be based on ethane as a feedstock.

Regulatory Trends
Loss of duty protection: Government's protection cover is getting eroded gradually with import duties on feedstock naphtha increased from 0% to 5% in Union Budget 2007-2008. Also on final products, import duties have been reduced over the years from high of 70% in early 1990s to 5% (basic duty) in 2006. Reduced fiscal benefits: As India is fast becoming a refining and petrochemical surplus nation, Government has also taken away the income tax holidays and other fiscal benefits from the industry. Only oil exploration companies now enjoy the benefits based on the profit-sharing mechanism with the government.

Growth Forecast & Drivers


The demand for basic petrochemicals is expected to grow at a CAGR of 9% to reach 10.27 mmtpa by FY2015. However, market will still be oversupplied to the tune of 1.7 mmtpa in FY2015. The demand growth will be driven by olefins segment including ethylene, propylene and butadiene. Demand as well as capacity growth in aromatics such as benzene and toluene will be marginal compared to overall market size. Indian end products petrochemicals market is also expected to grow at a CAGR of 9% to reach 15.1 mn

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Basic petrochemicals: Demand and supply forecast


Capacity ('000 tons) Total 11,970 Total Demand ('000 tons) 10,270

2010
8,120 4,300 3,300 5,460 3,040 FY10 Ethylene FY15 Propylene Butadiene 6,530 4,300

2,780 4,850 2,900 FY10 Benzene FY15 Toulene

Source: Crisil Report, Department of Chemicals & Petrochemicals (GoI), Tata Strategic analysis

tons by FY2015. The surplus capacity is also expected to grow from 1.76 mmtpa in FY2010 to 3.28 mmtpa in FY2015. The major drivers for demand growth are:

End products petrochemicals: Demand and supply forecast


Capacity ('000 tons) Total 18,440 Total 10,080 2,290 11,040 6,980 FY15 Synthetics Elastomers FY10 Surfactants FY15 11,260 Demand ('000 tons) 15,160

11,840 3,800 7,240 FY10 Polymers

4,500

2,800

Source: Crisil Report, Department of Chemicals & Petrochemicals (GoI), Tata Strategic analysis

1. Low per capita consumption: Consumption pattern in India varies from that of the world. Per capita consumption of polyolefins in India was 6 kgs. in 2009 compared to global average of 25 kgs With the economic growth expected to continue, this gap is also expected to narrow down significantly. 2. Rise in polymers demand: The demand of polymers is expected to grow at a CAGR of 10% from 6.98 mmtpa in FY2010 to reach 11.26 mmtpa in FY2015. The high growth in demand is primarily driven by growth in packaging, infrastructure, agriculture, healthcare and consumer sectors. As per a Goldman Sachs report, the packaging sector itself will constitute 6.2 mmtpa of polymers demand by FY2012.

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3. Development of PCPIRs: Development of Petroleum, Chemicals & Petrochemicals Investment Regions across India is also expected to induce development of industries consuming petrochemicals as major raw material. Till now PCPIRs have been approved in states of Andhra Pradesh, Gujarat, West Bengal and Orissa. PCPIR project in Orissa alone is expected to invite Rs. 2.3 lakh crore worth of investment from petroleum and petrochemicals sectors. Similar scale of investments is envisaged in other approved projects.

2010

Key Challenges
1. Volatility in raw material prices: More than 50% of global petrochemical capacities are based on naphtha, a crude oil derived product. The prices of crude oil products have witnessed significant volatility, thereby making petrochemicals prices highly volatile. 2. Increased competition: Large capacity additions taking place in ethane rich Middle East and demand rich China. Out of the 22 million tons of ethylene capacity additions expected during period 2010 and 2014, 9 million tons is expected in Middle East alone. Since, ethane based petrochem products are cheaper than petrochem products in India, domestic producers are expected to witness margins pressure. 3. High entry barriers: Given the capital intensive nature of the petrochemical plant and tariff barriers, new entrants and small and medium size companies are prohibited from easily entering into the market. 4. Low capacity utilization: Due to oversupply in global markets, prices of petrochemicals have taken a steep decline, thereby forcing the domestic companies to under utilize their plants operating levels. The average capacity utilization has fallen from 95% levels before global economic crisis to 80% in 2009. Even post crisis, the capacity utilization rates are below 90%.

Key Opportunities
1. Backward & forward integration: Given the volatility of crude oil prices and India's heavy dependency on oil imports, there is opportunity for oil and oil related companies to reap benefits of increase in presence across the value chain. For e.g Reliance Industries Ltd. successfully backward integrated from refining and petrochemical company to oil and gas exploration. IOC which is primarily a refining PSU has ventured into exploration in the past and currently building greenfield petrochemical projects. 2. Improved feedstock supply: Availability of feedstock dictates the location of the plant. Domestic products are uncompetitive due to high costs of naphtha when compared with ethane based products from Middle East. One means to improve the competitiveness of the domestic products is by improving the infrastructure support as is the case in Middle East, China and Singapore. Also going forward, as more natural gas becomes available in India, the domestic players are likely to shift from naphtha to cheaper natural gas thereby increasing their competitiveness in the market.

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29

2010

3. More value-add products in portfolio: Demand for performance plastics such as biodegradable polymers is expected to be on rise across the world including India. Given the environment concerns with traditional plastics, companies should look at expanding their portfolio and include more value add products. 4. Increased geographical presence: Given the capital intensive nature of the project and high costs associated in India (due to no duty waivers, no/ very less tax exemptions and high interest costs), the domestic companies may also look outside for organic and inorganic opportunities. Many western companies such as Dow, Shell, etc are increasing their presence in energy rich countries like Saudi Arabia, Kuwait, Qatar, etc. and setting up manufacturing facilities.

References
1. Annual Report 2009-10, Department of Chemicals & Petrochemicals 2. Performance of Chemical & Petrochemical Industry at a Glance (2001 - 2007), Department of Chemicals & Petrochemicals 3. Working Group on Indian chemical industry for formulation of the 11th Five Year Plan, Planning Commission, Government of India 4. Petrochemicals: Industry Profile, Crisil Research, August 2010 5. Petrochemicals: Opinion, Crisil Research, August 2010 6. PCPIR Orissa Article, Business Standard, August 14 2010

This report has been authored by: Pratik Kadakia (Pratik.kadakia@tsmg.com) and Chirag Surana

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Handbook on Indian Chemical Industry

Fertilizers

Global Fertilizer Industry


Fertilizer consumption in FY09 had declined by 7% from FY08 to reach 156.7 million tons nutrients. Because of the highly fluctuating crop and fertilizer prices during the financial crisis, farmers in most countries (India being an exception) reduced or postponed investments in agricultural inputs. The improved economic and financial situation is expected to have a positive effect on fertilizer demand. Stable commodity prices make it less risky for the farmers to invest in fertilizer. Global fertilizer industry is expected to grow at 3% CAGR till 2015.

2010

Global fertilizer demand


(Mn ton nutrients) 188.3 3% 179.1 174.7 170.4 162.5 183.7

FY10
Source: IFA

FY11

FY12

FY13

FY14

FY15

Factors affecting fertilizer demand


1. Increasing food grain consumption is a major demand driver for fertilizers. According to Food and Agriculture Organization of the United Nations (FAO) the 2010 world cereal output is expected to reach 2.28 billion tons. This would be 2%

World Cereal Production and Utilization (Mn tons)


2,400 2,300 2,200 2,100 2,000 1,900 1,800 2002
Source: FAO

Production

Utilization

2004

2006

2008

2010

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increase over the previous year. World cereal utilization, currently at 2.25 billion tons, has been rising at 2.0-2.5% over last 8 years.

2010

2. Scope for expanding cultivated land in the next five years is limited. The per capita land availability is expected to go down to 0.15 Hectare by 2015. Hence yield gains are expected to contribute to most of the output growth. This will lead to increased usage of fertilizer per hectare of land.

World - Available arable land per capita (Hectare)


0.27

0.15

1998
Source: Yara fertilizer handbook, PotashCorp

2015E

3. Biofuel production using cereals, sugar cane and oilseeds as feedstock is another major driver for fertilizer demand. About one-third of US maize, 55% of Brazilian cane and two-thirds of EU rapeseed were used as feedstock for biofuel in 2009. Increased demand for biofuels would require higher production of these feedstocks. Biofuel production also influences the prices of these feedstocks which has a larger indirect impact on fertilizer demand.

The forecast for fertilizer demand is subject to major uncertainties


The evolution of current economic situation poses a major uncertainty for fertilizer demand. If the economic situation in some of the major economies does not improve, it could lead to increased speculation in agricultural commodities which directly affects fertilizer demand. Some other uncertainties include evolution of policy priorities in China, the fertilizer scheme in India (two large fertilizer consuming countries) and bio-fuel consumption which will be affected by governments' priorities on climate change.

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Fertilizer consumption in India


Fertilizer Product Consumption: India (Mn tons)
7.4 7.0 9.2 7.0 6.8 9.7 7.1 7.2 8.2 8.6 8.6 9.4 8.8 9.7 9.0 10.1

2010

10.2

10.9

11.8

11.9

12.1

26.6

26.5

27.9

29.1

29.9

30.9

31.4

FY09
Source: Crisil, IFA

FY10 Urea

FY11 DAP

FY12

FY13

FY14 Other

FY15

Other complex

India is one of the major regions contributing to the rising fertilizer demand. A better monsoon and higher prices of farm goods are expected to increase fertilizer consumption in FY11 compared to FY10. Monsoon rains in June-September this year, a key factor in fertilizer demand, was 2% above the normal. The fertilizer demand in India is expected to grow at 4% CAGR from FY09 to reach 63 Mn tons in FY15, higher than the global growth rate of 3% during the same period.

Global Urea Outlook


Urea is a widely consumed fertilizer product. It contains the nutrient N only. Of all nutrients, application of N was the least affected during the recent crisis. N-fertilizers need to be applied through the life cycle of crop and demand for it is mainly inelastic.

Global Urea demand-supply (Mn tons)


155.6 151.2 162.9 158.4 169.9 163.5 179.1 169.7

193.4

174.5

2010
Source: IFA

2011 Demand

2012 Supply

2013

2014

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Global urea demand is expected to grow by 4% CAGR, to reach 174.5 Mn tons by 2014. The growth rate is expected to be higher in the case of South Asia driven primarily by India.

2010

The growth in capacity addition, however, will outpace the demand. According to The International Fertilizer Association (IFA), global urea capacity is expected to grow by 6% CAGR to reach 222 Mn tons in 2014. This would result in a supply of 193.4 Mn tons in 2014. Between 2009 and 2014, about 55 new plants are planned to come on stream. East Asia will contribute 32% of net increase in capacity.

Urea capacity in low-cost feedstock regions to meet world demand


Natural gas is the most efficient feedstock for Urea production; most of the global capacities are based on natural gas. West Asia with vast natural gas availability has become a major hub for urea manufacturing. It is also a major exporter of urea. Coal is used as a feedstock in China due to its easy availability. China has world's largest urea capacities but it mostly caters to domestic requirement. Hence incremental capacities which would be important from trade point of view are those which would come from low consumption regions i.e. West Asia and Africa.

Region wise incremental capacity and consumption of urea (2015 over 2009, Mn tons)
20 18 16 14 12 10 8 6 4 2 0
EA sia SA sia

18 Incremental capacities Incremental consumption 14 10 5 5 3 3 0.5


Am er ica As ia EE W C A

3 2 0.5 1
Af ric a

4 2
LA m er ica

Source: Crisil, IFA

North America, Western and Central Europe are expected to add limited capacities due to high cost of natural gas in these regions. Increase in demand is expected to outpace the increase in capacity in South Asia. The incremental capacity in West Asia and Africa is expected to meet the demand of the deficit regions.

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India Urea Outlook


India currently relies heavily on import to fulfill its urea demand. India imported 5.7 Mn tons of urea in FY09 to meet its demand of 26.2 Mn tons.

2010

Trend in Urea demand-supply scenario (Mn tons)


35 30 25 20 15 10 5 0 FY09 FY10 FY11 FY12 consumption FY13 FY14 import production
Source: Tata Strategic analysis, FAI

27

28 26

29

30

31

9 8 7

6.2 5.7 4.5 5.8

6.3

6.6

6 5 4 3 2

This dependence on import is expected to continue in near future since urea capacity is not expected to increase enough to meet the 4% annual increase in demand. India's urea demand is expected to reach 31 Mn tons in FY14 whereas domestic capacity is only expected to supply 24 Mn tons.

Urea production in India


In India approximately 85% of urea production is based on captive ammonia production while ammonia is procured externally only for the remaining 15%. Major feedstocks used for urea manufacturing are natural gas, naptha, coal, fuel oil or LSHS. Of all the feedstock mentioned here, natural gas is most cost effective and resultant urea manufacturing cost is lowest. But traditionally majority of urea manufacturing in India were naptha based. Retention pricing scheme (RPS), introduced in 1977, assured 12% return on net worth of fertilizer plant and hence there was no clear incentive for cost cutting.

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Feedstock wise share of captive ammonia capacity (% of total)

2010

Fuel oil 9% Caprolactum 1%

Coke oven gas, 1%

Naptha 17%

Natural Gas, 72% Source: Crisil, FAI

Recent policy developments in India: Nutrient based subsidy scheme (NBS)


The NBS scheme, in effect from April1 2010, is an attempt by the government to encourage balanced fertilizer consumption in India. As per the policy, subsidy on complex fertilizers would be calculated based on nutrient level and not at the product level. Through this, govt. has changed the subsidy from constant farm gate prices to constant subsidy. Producers now have the freedom to charge retail prices. Following the policy announcement, players hiked DAP prices by around Rs. 600 per ton. Prices of other complex fertilizers were also raised. Urea has been kept out of this policy, but its maximum retail price was increased by 10% from Rs. 4,830 to Rs. 5,310 per ton with effect from April 1. The result has not been very encouraging in the limited time frame with most farmers still preferring to use urea, the cheapest fertilizer. The sale of urea in kharif 2010 season, up to July 31, rose to 7.4 Mn tons from 6.8 Mn tons in the same period last year.

Greenfield projects at IPP-linked prices


Govt. of India introduced an investment policy in 2008 to overhaul production of urea in the country and reduce dependence on import. As a part of this policy revamping of existing urea unit plants and brownfield projects were encouraged through IPPlinked prices. However, for Greenfield projects the govt. decided prices based on competitive bidding. As per the policy the govt. decides the location and potential investors bid for the project. Whoever agrees to sell it by taking lowest amount of subsidy from the govt. wins the bid. This policy failed in its attempt at putting up new Greenfield urea plants in India.

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The New Urea Investment Policy 2010, to be released by the end of this year, is expected to make the policy more investor friendly. All Greenfield projects would be assured a price which is 95% of IPP. The policy is also planned to provide additional benefits for reviving the sick units under the Fertilizer Corporation of India (FCI) and Hindustan Fertilizer Corp Ltd. It is estimated that nearly Rs. 30,000 crore investments would come up in next 3-4 years if the policy is made truly investor-friendly and sufficient gas is made available.

2010

Global Phosphatic Fertilizer Outlook


Rock phosphate is the key raw material for manufacturing of DAP, MAP, TSP and other NPK fertilizers. Almost all of rock phosphate is converted into phosphoric acid and 85% of phosphoric acid is converted to phosphatic fertilizers. Global rock phosphate capacity is expected to increase by 4% CAGR to reach 228 Mn tons by 2014.

Global Phosphate Rock Capacity (Mn tons)


250 4% 205 211 220 228

200

190

196

150

100

50

0 2009
Source: IFA

2010

2011

2012

2013

2014

Rock phosphate reserves are mainly concentrated in China, Morocco and US. Top 5 rock-phosphate producing countries account for about 80% of world production. China is the largest producer and consumes almost all its production. The US is the second largest producer and consumer. Morocco is the third largest producer and largest exporter of phosphate rocks.

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Limited addition of phosphoric acid (P2O5) supply in the near term

2010

Global phosphoric acid demand is expected to increase by 4% CAGR to reach 43.6 Mn tons by 2014.Global supply on the other hand is expected to increase by 4.4% CAGR to reach 47.1 Mn tons by 2014. The global phosphoric acid supply/demand gap is expected to grow from 2 Mn tons in 2010 to nearly 3.4 Mn tons in 2014 with commissioning of new projects.

Global Phosphoric Acid demand-supply (Mn tons)


50 39.6 40 37.6 30 39.2 40.6 41.5 43.3 45.3 47.1

42.3

43.6

20

4%

10

0 2010
Source: IFA

2011

2012 Demand

2013

2014 Supply

The main addition to supply would be in China, Morocco, Brazil and Saudi Arabia.

Region wise P2O5 capacity (Mn tons)


18 16 14 12 10 8 6 4 2 0 E Asia
Source: IFA

2009 3.6 2014 Incremental capacities (RHS)

1.2 0.7 0 S Asia W Asia EECA N America Africa 0.6 0.7 0.2 L America

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P2O5 capacity addition ('000 tons)


Region China Morocco Brazil Tunisia Jordan Saudi Arabia Venezuela Vietnam Egypt
Source: IFA

2010 2,680 730

2011 1,500

2012 1,020 450

2013

900 2,000

2010

240 360 500

2,900

1,800 320 325 600

Global DAP demand to rebound


Di-ammonium phosphate (DAP) contains both N and P type nutrients with higher P percentage. It is applied mainly to meet the P requirement of the soil. DAP is the most consumed amongst all phosphatic fertilizers. DAP demand is mostly elastic unlike Urea demand. It is mainly used during sowing and its reduced application does not result in immediate adverse effect on yield. The global DAP demand declined by 8% in 2008 over 2007 during the economic crisis.

Global DAP Consumption (Mn tons)


26.9 5.6 2.0 4.6 10.6 25.6 3.7 2.1 3.1 33.0 5.2 2.9 4.1

5 year CAGR of 6.3%

7.2

14.0

7.5 2004 E Asia


Source: IFA, Crisil

6.2 2009 N America

8.5 2014 L America

S Asia

ROW

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Going forward DAP demand is expected to be strong, primarily driven by India (Largest importer of DAP), China and North America. It is expected increase by 6% CAGR to reach 33 Mn tons by 2014.

2010

Major capacity expansions for DAP


Global DAP/MAP capacity is expected to rise by 4% CAGR to reach 42.5 Mn tons by 2014. Bulk of this incremental capacity is coming up in reserve rich regions of East Asia, North America and Africa.

India Phosphatic Fertilizer Outlook


Trend in DAP demand-supply scenario (Mn tons)
14 12 10 8 7 6 4 2 0 FY09
Source: IFA

11.8 10.9 9.2 9.7 10.2

12

8 6.2 5.2 4.6 5.9

FY10 Production

FY11

FY12 Demand

FY13 Import

FY14

Indian DAP demand is expected to increase by 5% CAGR and reach 11.9 Mn tons by 2014. Domestic DAP production declined in FY09 as there was a fall in international prices of DAP without a similar fall in the prices of raw material. The rise in DAP consumption was met by increasing imports. India is currently the largest importer of DAP in the world. Import of DAP is expected to rise from 6.2 Mn tons in FY09 to ~8 Mn tons in Fy14. DAP and other complex fertilizers can be manufactured in same unit. The availability of other complex fertilizers is very limited in the international market compared to DAP availability. Hence, producers are expected to manufacture greater quantities of other complex fertilizers in the unit and meet DAP deficit through imports.

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Fall in DAP price made imports sustainable


Rock phosphate, ammonia and sulphur are the main feedstock for manufacturing DAP/MAP. Of these three, rock phosphate is the most critical feedstock and is not available in India. When DAP price peaked in 2008 the subsidy bill increased for Govt. of India (GoI). This led the govt. to promote Indian DAP manufacturers to scout for rock phosphate reserves globally. Syria, with high phosphate rock reserves was looked as a good investment opportunity. India's Oswal chemicals and fertilizer limited has plans to operate a phosphate-refining plan in Syria, it has signed an MOU with the Syrian govt.

2010

International DAP Prices ($/ton)


1,200 1,000 800 600 400 200 0 2006 2007 2008 2009 2010 P 2011 P 2012 P 2013 P 2014 P 331 541 400 430 540 610 1,128

450

470

Source: Crisil, Fertecon

International DAP prices have moderated after reaching its peak in 2008. This has made import of DAP more sustainable.

Global Potash Outlook


Muriate of Potash (MOP) contains potassium nutrient. Like DAP its demand is mostly elastic. Potash fertilizer demand in 2009 was down by 8.6% over 2008. Farmers rather opted to mine their soils to utilize the accumulated nutrient reserve in the soil.

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Global Potash Supply/Demand Balance (Mn tons)

2010

50 45.8 39.2 41.4 42.9

40

38

30 29.9 20

32

33.5

34.7

35.8

4.6%

10

0
Source: IFA

2010

2011

2012

2013 Demand

2014 Supply

Global Potash demand is expected to grow at 4.6% CAGR to reach 35.8 Mn tons by 2014. Demand will be primarily driven by East Asia (mainly China), Latin America, North America and South Asia (mainly India). Global potash capacity is expected to increase from 41.6 Mn tons in 2009 to 54.7 Mn tons in 2012. This would mean a supply of 47.1 Mn tons in 2014. The additional capacity is expected to come mainly from Canada and Russia.

M&A in global potash industry


BHP Bilton is trying to acquire Potash Corporation which controls 18% of world market for Potash. Earlier this year, two Russian major companies Urakali and Silvinit announced that they are being merged and the combined company would control 10% of global Potassium market. The global Potash trade is heavily cartelized with two companies Canpotex and Belarussian Potash Company controlling 70% of the global capacity and influencing the prices. Canpotex represents North American producers Potash Corp, Mosaic and Agrium, whereas Belarussian Potash Company represents Russian producer Uralkali and Belaruskali of Belarus. BHP has mentioned that if it becomes successful in purchasing Potash Corp, it would eventually sell potash through its own channel and not through Canpotex. The acquisition of Potash Corp is also likely to have an effect on supply levels, as the company has curtailed production to support prices during times of weak demand, while BHP is inclined to run operations at their full capacity.

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India Potash Outlook


Consumption of 'K' nutrient declined from 3.3 Mn tons in FY09 to 3 Mn tons in FY10. The demand for 'K' nutrient in India is expected to grow at ~4.5% CAGR from FY09 to FY14 to reach 4.1 Mn tons (nutrient) by FY14. The demand for complex fertilizers is expected to increase by ~7% CAGR and reach ~9.7 Mn tons (product) by FY14.

2010

Complex fertilizer (excluding DAP) demand-supply (Mn tons)


12 10 8 6 4 2 0 FY09
Source: Crisil, FAI

7% 7.0 6.8 7.2

8.6

9.3

9.7

FY10 Production

FY11

FY12 Consumption

FY13

FY14

Going forward, the domestic production of other complex fertilizers is expected to meet the domestic demand.

Potash Corp. acquisition could impact Indian govt.'s subsidy bill


BHP Bilton's acquisition of Potash Corp. may upset the two existing potash cartels and could lead to a change in industry dynamics. With no domestic potash reserves, India imports potash largely as potassium chloride at around Rs. 17,000/ ton. It offers a large subsidy on this and sells it to farmers for Rs. 4,000/ ton. Due to India's large dependence on imports, a significant change in global industry dynamics could impact Indian govt.'s subsidy bill. India could still try to use its big buyer advantage and get favorable terms in changing industry scenario.

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45

FERTILIZER INDUSTRY STRUCTURE IN INDIA

2010

The fertilizer industry in India is mainly characterized by govt. control. Since the fertilizer sector is of national importance, traditionally GoI has controlled the sector by regulating the investment, production, distribution and pricing. The most distinct characteristic of Indian fertilizer sector is partial dependence on monsoons for demand.

Ownership structure
The private sector leads in capacities in urea as well as phosphatic fertilizer sectors. As of Nov. 2009, out of 37 plants in India with a nitrogenous fertilizer capacity of 13.1 Mn tons, 23 were in the private sector with a total capacity of 5.9 Mn tons. In case of phosphatic fertilizers, 57% of total capacity was held by private sector.

Share of capacity of nitrogenous fertilizer (% share, Nov' 09)


Cooperative 26% Private sector 45%

Share of capacity of phosphatic fertilizer (% share, Nov' 09)


Cooperative 35%

Public sector 29% Source: FAI Source: FAI

Public sector, 8%

Private sector 57%

Concentration
Due to the capital intensive nature of the fertilizer manufacturing projects, the industry is relatively concentrated, where a few player capture large chunk of the market.The share of top 5 companies in total urea production in India is ~65% and in case of DAP it is ~84%.

Fertilizer sector Urea DAP Complex (excluding DAP)


Source: FAI

% share of top 5 companies (2009) ~65% ~84% ~80%

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Major Companies
IFFCO is India's largest urea manufacturing company producing ~3.2 Mn tons of urea annually. It has urea plants in UP and Gujarat and achieved net sales of ~Rs. 5,876 crore in FY '09 for its urea division. Other prominent companies in the Indian urea industry are National Fertilizers, RCFL, KRIBHCO, Chambal Fertilizers etc.

2010

Urea Manufacturing Companies


Company Name IFFCO NFL KRIBHCO RCFL CFCL NFCL
Source: Crisil, Capital Line

Capacity ('000 TPA) 4,242 3,231 2,594 2,037 1,729 1,195

Sales (Rs. Cr, 2009) 5,876 5,006 2,597 2,240 1,800

Location Aonla, Phulpur (UP), Kalol (Gujarat) Vijaypur (MP), Bhatinda (Punjab), Panipat (Haryana) Hazira (Gujarat) Trombay, Thal (Maharashtra) Kota (Rajasthan) Kakinada (AP)

The production, sales and location of 6 major urea manufacturers is provided in the table above. IFFCO is India's largest DAP manufacturer as well. It has an annual capacity of ~3.7 Mn tons capacity. Other leading manufacturers are Godavari Fertilizers, GSFC, Tata Chemicals etc.

Other developments Natural Gas allocation


Govt. of India (GoI) is trying to shift all the urea manufacturing units to natural gas based units by 2013. With the advent of RIL's KG basin natural gas and the increasing supplies of LNG, the availability of natural gas is expected to improve. The Govt. has allocated the initial 40 Mn metric standard cu. m per day (mmscmd) of RIL KG basin natural gas to various units on the basis of a gas utilisation policy. The priority has been given to fertilizer sector so as to meet their gas demand.

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47

Gas Allocation
End users Initial Allocation (mmscmd) Meet demand 18 (Maximum) 5 (Maximum) 3 (Maximum) 40 Actual Allocation (mmscmd) 15.33 18 0.87 (3.75 to steel plants) 3 40.9

2010

Fertilizer plants Power plants City Gas Distribution projects LPG making units Total
Source: Gas utilization policy

Subsequently, the govt. has allocated an additional 50 mmscmd gas, of which 20 mmscmd is on firm basis and additional 30 mmscmd is on fallback basis. With the new allocation, the govt. has tried to meet the demand of the power sector.

Additional Allocation
End users Power Fertilizer Steel Refineries Captive power plants CGD projects
Source: Gas utilization policy

Firm allocation (mmscmd) 12.08 0.18 0.44 5.38 -

Fallback allocation (mmscmd) 12.0 6.0 10.0 2.0

Oman has agreed to invest $ 3 Billion in India


Oman has agreed to invest around $3 Bn for revival of closed plants of Fertilizer Corporation of India and Hindustan Fertilizer Corporation and expansion of Rashtriya Chemicals and Fertilizers through Oman Oil Company. In addition to this, both countries are also looking at ways to expand the existing capacity of the 16.5 lakh tons urea project of the Oman India Fertilizer Company (OMIFCO) to 25 lakh tons.

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Aditya Birla Nuvo Limited (ABNL) gets preliminary nod for capacity expansion
ABNL, earlier known as Indo Gulf Fertilizers, has received first stage environment approval for its urea expansion project. The project envisages setting up a 2,200 tons per day (tpd) ammonia unit and a 3,850 tpd urea unit at its Jagdishpur complex in Utter Pradesh. The complex currently has 1,910 tpd ammonia capacity and two urea units, each of 1,625 tpd.

2010

Outlook on Indian Fertilizer Industry


Sale of urea at IPP linked price even for Greenfield projects is expected to promote fresh investments for Greenfield projects. The Investment Policy of 2008 has already provided incentives for brownfield expansion and improvement in facility for existing plants by linking the prices to IPP. In a way, GoI has rewarded all the existing Indian urea manufacturers and also encouraged new companies to invest in the market. Indian companies are also encouraged to invest in natural resource rich countries overseas. The Indian govt. is ready to enter into firm offtake agreements at prices decided by mutual consultation for such projects abroad. There is already a trend of some Indian companies forming joint ventures abroad, like Oswal chemical and fertilizers in Syria, and this trend will catch up with other Indian companies as well. Availability of feedstock has been an issue for Indian fertilizer industry. Against the industry's demand of 42 mmscmd of natural gas in FY09 , according to Fertilizer Association of India, only 28 mscmd was available to it. That may change as big new gas discoveries go into production. The govt. has given priority to gas based urea plants and and these plants would be supplied gas so as to make them run at full capacity. The govt. allocated 15.33 mmscmd of gas in this regard from RIL KG basin. In 2009, fertilizer companies started receiving natural gas supplies from the KrishnaGodavari basin. With availability of natural gas fertilizer production is expected to improve in India.

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49

References
1.

2010
2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Fertilizer policies, The Fertilizer Association of India (FAI), retrieved on September 13, 2010 Fertilizer production, consumption and import statistics, FAI, retrieved on September 13, 2010 Fertilizer Outlook 2010-2014, International Fertilizer Industry Association (IFA), Annual conference, June 2010 Phosphate Outlook, TFI Outlook Conference, Oct 2009 Fertecon Phosphate report, August 2010 Global Supply and Demand Outlook for Fertilizers, IFA, December 2009 Global Fertilizers and Agricultural Chemicals, Datamonitor, February 2010 Newspaper articles: The Hindu, Mint, Business Standard Fertilizer Annual Review , Crisil Research, January 2010 Gas utilization policy, Ministry of Petroleum & Natural Gas, Govt. of India Annual Report 2009-10, Department of Fertilizer Yara fertilizer handbook PotashCorp Industry report

This report has been authored by: Pratik Kadakia (pratik.kadakia@tsmg.com), Anshul Saxena (anshul.saxena@tsmg.com) and Binay Agrawal (binay.agrawal@tsmg.com)

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Chlor Alkali

Introduction
Alkali chemicals is the oldest and the largest segment of the chemical industry. These chemicals serve as key inputs for a number of industries such as aluminium, soap, detergent, glass, tyre, rubber, pulp and paper, pharmaceutical, water treatment, textiles, leather, fibre etc. The key chemicals in the chlor alkali industry are Caustic soda l Chlorine (including liquid chlorine) l Soda ash l

2010

Caustic Soda & Chlorine


Introduction
Caustic Soda (chemically known as sodium hydroxide) and chlorine are produced together through the electrolysis of common salt solution (sodium chloride or brine). Caustic soda and chlorine are generated in the ratio of 1:0.89. Demand for chlorine drives caustic soda production globally, but in India the industry has developed in line with the demand-supply balance of caustic soda. There are three alternative technologies used to manufacture caustic soda from brine. These are mercury cell, membrane cell and diaphragm technologies. 1. The membrane cell technology involves lower power costs compared to the other two. It is also the most environmental friendly as it does not use any hazardous materials as compared to mercury cell and diaphragm technologies which use mercury and asbestos respectively. 2. The diaphragm technology involves higher capital and power costs. The quality of caustic soda is also of inferior quality. However, it is popular as the purity of chlorine from this method is highest and chlorine demand is major driver for caustic soda production globally. 3. Mercury cell technology involves lower capital costs compared to membrane and diaphragm technologies. However, it is not so popular because of related pollution hazards due to use of asbestos. Globally the diaphragm technology is the most widely used while in India the membrane cell technology accounts for more than 90% of the total capacity.

Global Scenario
Globally the total capacity of caustic soda is estimated to be around 78.6 Mn tons in 2009. China has the highest caustic soda capacity at 27 Mn tons, accounting for 34% of world capacity. North America has a capacity of 15.5 Mn tons. India has a capacity of 2.9 Mn tons and accounts for 4% of the global caustic soda capacity.

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Global caustic soda capacity (78.6 Mn tons) Others


0.08

2010
Asia (excluding India China) 0.13

India 0.04 China 34%

North America 20% Source: Crisil

Europe 21%

China and Middle East are fast emerging as key production hubs for caustic soda. It is expected that there would not be any significant capacity additions in developed countries like North America and Western Europe primarily due to unattractive cost structures and flat demand. Global consumption of caustic soda in 2009 is estimated at 63.6 Mn tons. Asia is the largest consumer of caustic soda and is expected to remain the same in near future. Majority of caustic soda is exported from North America, the Middle East and Asia. Australia and Latin America are the leading importers.

Consumption Mix
Caustic Soda: Global Consumption (63.6 Mn tons, 2009)
Organics 19% Others 26%

Water treatment 4%

Inorganics 15%

Alumina 8% Soaps/det ergents/tex tiles, 13%

Pulp & Paper 15%

Source: Crisil

The majority of caustic soda is used in the chemicals and paper industry. Aluminium, textiles, soaps & detergents and water treatment are other major areas consuming caustic soda.

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Indian Scenario
Caustic Soda demand: India (Mn tons)
6.6% 2.29 1.86 1.96 2.09 2.55 2.32

2010

FY05
Source: Crisil

FY06

FY07

FY08

FY09

FY10

Caustic soda consumption in India increased at 6.6% CAGR from FY05 to reach 2.5 Mn tons in FY10.

Caustic Soda capacity in India (Mn tons)


2.08 1.81 2.25 1.94

2.98 2.74 2.16 2.76 2.2 2.25

2.46 1.99

FY05
Source: Crisil

FY06

FY07 Capacity

FY08 Production

FY09

FY10

Total domestic caustic soda capacity increased to 2.98 Mn tons in FY10 from 2.1 Mn tons in FY05.

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Caustic Soda: regional capacity distribution (2.98 Mn tons, FY10)

2010
East 13%

North 15%

West 47%

South 25% Source: AMAI, Crisil

Western region accounted for approximately 47% of the estimated capacity of 2.76 Mn tons in FY09 because of its proximity to salt which is one of the key raw materials. The southern regions accounts for 25% of the total capacity. The northern and eastern regions have a share of 15% and 13% respectively.

Large increase in caustic soda import in Fy10 Caustic Soda import/export ('000 tons)
Large spike in import

370.2

185.1 140.7 155

54.9 17.6 FY05


Source: AMAI, Crisil

58.3 30.9

59 39 37.8

62

FY06

FY07 Import

FY08 Export

FY09

FY10

Imports grew rapidly at CAGR of 46.5% from 54.6 thousand tons in FY05 to 370.2 thousand tons in FY10. In FY07 and FY10 a sharp rise in import was seen. Exports increased at a CAGR of 28.6% from 17.6 thousand tons in FY05 to 62 thousand tons in FY10.

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Major Companies
Caustic Soda: Market share of companies (Rs. 4,560 Cr., FY09)
GACL 16% Others 39%

2010

DCM Shriram 9% Grasim 9% Punjab Alkalies, 5%

ABNL 4% ABCL 4% Source: Capitaline, Crisil

Andhra Sugars, 4% Chemplast Kanoria Sanmar, 5% Chemicals 5%

Gujarat Alkalies and Chemicals Ltd. (GACL) is the market leader in caustic soda segment in India accounting for 16% of the total domestic sales value in FY09. The Aditya Birla Group, through its companies such as Aditya Birla Chemicals Ltd (ABCL), Grasim industries Ltd and Aditya Birla Nuvo Ltd (ABNL) capture around 16% of domestic market. Other major companies are DCM Sriram, Grasim Industries, Punjab Alkalies, Kanoria Chemicals and Andhra Sugars. The top five companies account for almost 45% of the total domestic sales of caustic soda in India.

Key Applications
Caustic Soda: India Consumption (2.3 Mn tons, FY09)
Pharma 6% Textiles 13% Others 40%

Alumina 17%

Soaps/det ergents 9% Source: AMAI, Crisil

Pulp & Paper 16%

The key end user industries of caustic soda in India are textiles, paper, soaps and detergents and aluminium. Alumina is the largest end-use industry accounting for 17% of the total caustic soda consumption in FY09. Caustic soda is used in processing of bauxite ore in the aluminium industry. The processing of bauxite ore gives alumina which is in turn used in the manufacturing of aluminium. Paper and textiles

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57

2010

accounted for 16% and 13% respectively of total caustic soda consumption in FY09. In the paper industry it is used in water treatment, de-inking of waste paper and as a raw material in pulping and bleaching processes. In the textile industry, caustic soda is used in processing of cotton fibers and bleaching of fabrics.

Chlorine Consumption
Global Scenario
Global consumption of chlorine in 2009 is estimated at 55.4 Mn tons. Chlorine is used in manufacture of paper and pulp, ethylene dichloride (EDC), which is used for producing polyvinyl chloride (PVC), manufacture of chlorinated paraffin wax, fertilizers and pesticides.

Indian Scenario
Chlorine: Global Consumption (55.4 Mn tons, 2009) Organics
20% Others 30% Chlor.Inter 6% Water treatment 4% Inorganics 2% Pesticides 5% Vinyls 18%

Chlorine: India Consumption (1.9 Mn tons, FY09)


Others 13% Organics 20%

Chlor.Inter 11% Water treatment Inorganics 2% 23%

Vinyls 36% Source: Crisil

Pulp and Paper, 2%

Pulp and Paper, 8% Source: AMAI, Crisil

Consumption of chlorine in India in FY09 is estimated at 1.9 Mn tons. The key enduser industries of chlorine in India are PVC, inorganic and organic chemicals. Vinyl, a key determinant of chlorine demand in India, accounted for 18% of total chlorine demand.

Caustic soda and chlorine capacity are correlated


Since caustic soda and chlorine are co-products capacities and production of caustic soda and chlorine are correlated. Chlorine production has been growing in line with the growth of caustic soda manufacturing and has not been determined by the growth of the chlorine-based downstream industries. There is more chlorine produced in India than there is demand. Like caustic soda, chlorine capacity also increased at a CAGR of 7.5% from 1.9 Mn tons in FY05 to 2.7 Mn tons in Fy10. Production also increased at 4.4% CAGR from 1.6 thousand tons in FY05 to 2 Mn tons in Fy10.

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Industry Outlook
Demand for caustic soda from end-use industry
Industry Alumina Paper Soaps/detergents Textiles
Source: Crisil, Tata Strategic Analysis

CAGR over next 5 years 17-18 4-5 3-4 4-5

2010

Demand for caustic soda is expected to be driven mainly by growth in end use industry i.e. alumina, paper, detergent and textiles. Domestic alumina production is likely to more than double to 10.5 Mn tons from current production of 4 Mn tons. Strong growth in industrial, infrastructure, automobile, transportation and power sectors would drive the demand for alumina. Demand for caustic soda from both paper and textile industry is expected to grow at ~5% whereas demand from detergent industry is expected to grow at ~4% in next 5 years.

Demand supply forecast


Driven by end use industry growth, demand for caustic soda is projected to grow at a rate of 7.3% from 2.55 Mn tons in FY10 to 3.6 Mn tons in FY15. Imports are projected to reach 611.2 thousand tons in FY15 from 370 thousand tons in FY10. This is due to the projected demand-supply gap in the industry. The increase in capacity is expected to be driven by companies like GACL, which is slated to add caustic soda capacity of about 200 thousand tons at its Dahej facility.

Trend in caustic soda demand-supply scenario ('000 Tons)


4,000 3,500 3,000 2,550 2,500 2,000 565 1,500 1,000 500 0 FY10 production
Source: Crisil, Tata Strategic

3,302 2,901 2,663

3,499

3,631

1000 900 800 700 600

588

611

500 400 300 200 100 0

471 370 392

FY11

FY12 FY13 consumption

FY14

FY15 import (RHS)

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Other expansions coming up are of about 112.5 thousand tons by Reliance Industries Ltd. and 75 thousand tons by Kanoria Chemicals. Aditya Birla Chemicals Ltd. is setting up two Greenfield projects with a combined capacity of ~90 thousand tons.

2010

SODA ASH Introduction


Soda ash is chemically known as sodium carbonate. Broadly there are two ways in which soda ash is produced; it is either manufactured synthetically from salt or is obtained from refining of naturally available mineral, trona, or naturally occurring sodium carbonate-bearing brines. Globally, approximately 75% of soda ash is produced from the synthetic process. Processing costs of soda ash from naturally available sources is less than the manufacturing costs of producing soda ash synthetically, thereby making the naturally available soda ash less expensive. There are three main processes to manufacture soda ash from salt. 1. Standard Solvay Process: The standard solvay process is characterised with low salt utilisation and requirement of good quality of limestone and coke. This process, compared to other two processes, generates larger amount of effluents and hence require good disposal facilities 2. Modified Solvay Process: The modified solvay process has better salt utilization and requirement of limestone is less. But the process requires very high quality of salt without any impurities and ammonia requirement is also high. 3. Dry Liming Process: The raw material consumption is low in the dry liming process and it has a perfect steam power balance. All the three processes are used in India and have their own advantages and disadvantages.

Global scenario
Worldwide consumption of soda ash is estimated at 41 Mn tons in FY09. Natural and Synthetic are two methods of soda ash production. From a total production 45.9 Mn tons, natural soda ash accounted for 11.7 Mn tons in Fy09.

Soda Ash: Global production method (% share, FY09)


Natural 25%

Source: USGS, Crisil

Synthetic 75%

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The US accounts for over 92.3% of global natural soda ash production of 11.7 Mn tons. The country has world's largest trona deposit in the Green River basin.
Kenya 4% Botswan a, 2% Others 1%

2010

Source: USGS, Crisil

US, 94%

The global soda ash capacity is estimated to be 55 Mn tons in FY09. China and US are the biggest soda ash producing countries accounting for 40% and 20.5% of the total global soda ash capacity respectively. India accounts for 5.2% of the total global capacity.

Consumption Mix
Globally the majority of soda ash is used in the glass industry which accounts for 50% of the global soda ash consumption. Chemicals and detergents are other major end uses, accounting for 10% and 15% of global soda ash consumption respectively. Soda ash can also replace caustic soda in certain industries like pulp and paper, water treatment and certain sectors in chemicals.

Soda Ash: Global consumption mix (% share, FY09)


Others 25%

Chemicals 10%

Glass 50%

Source: Crisil

Detergent 15%

Indian Scenario
The Indian inorganic chemical industry produces two varieties of soda ash: light soda ash (that is used in the detergent industry) and dense soda ash (that is used in the glass industry). Light soda ash has a share of 70% and dense soda ash has a share of 30% in total soda ash production.

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2.51

Soda Ash demand in India (Mn tons)

2010
2.16 2.18

2.35
3%

2.27

2.15

FY05
Source: Crisil

FY06

FY07

FY08

FY09

FY10

Total domestic soda ash consumption grew at 3% CAGR from FY05, to reach 2.51 Mn tons in FY10.
600

Exports and imports of soda ash ('000 tons)


369 284 185 208 182 186 145 159 395 421

253

FY05
Source: AMAI, Crisil

FY06

FY07 Export

FY08 Import

Fy09

FY10

The imports for soda ash have been increasing over the years and stand at 600 thousand tons in FY10 compared to 185 thousand tons in FY05. The soda ash exports exhibit a fluctuating trend. The total operational capacity of soda ash in FY09 is estimated to be around 2.87 Mn tons. Salt is the main raw material for soda ash production. The Indian soda ash industry is concentrated in Gujarat due to the proximity to and easy availability of inputs like limestone and salt.

Companies
Tata Chemicals is the market leader in soda ash sales in India accounting for 30% of the market in FY09. The top four companies account for around 84% of the total domestic sales of soda ash in India. Tata Chemicals is also the world's second-largest producer of soda ash with a total capacity of 5 million tons per annum of which more than 60% is attributed to natural soda ash.

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Soda Ash: Domestic companies (Sales market share, FY'09)


Others 13% DCW 3% Saurashtra Chemicals 10% Tata Chemicals 30%

2010

Nirma 18%

GHCL 26%

Source: AMAI

Domestic Consumption Mix


The consumption mix of soda ash in India differs significantly from the global mix. In FY09, detergent accounted for largest share of soda ash consumption at 33%, followed by glass at 27%.

Soda Ash: Domestic consumption mix (%, FY'09)


Glass 27% Others 40%

Industry Outlook

Detergent 33%

Source: Crisil

The domestic consumption of soda ash is expected to increase at a rate of 4.2% between FY10 and FY15. The domestic consumption is expected to be driven by the end-user industries like detergents and glass. Demand from detergents industry is expected to grow at a moderate rate of 3-4% between FY10 and FY15. The glass industry is driven by the construction and automobile sector. Both these sectors are expected to witness a high growth between FY10 and FY15. Demand from the glass industry is expected to witness a growth rate of 11-12% between FY10 and FY15. This would increase the consumption share of glass as well.

Demand growth from end-use industry


Industry Detergent Glass Others
Source: Crisil, Tata Strategic Analysis

CAGR over next 5 years 3-4 11-12 1.5-2

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Demand supply forecast

2010

The total capacity of soda ash in India is expected to increase from 2.95 Mn tons in FY10 to 3.09 Mn tons in FY15. The expected production from these capacities would not be able to meet the increasing demand. The production is expected to reach 2.7 Mn tons in FY15 from current level of 2.2 Mn tons. So it is expected that import will remain at high level and expected to increase to ~635 thousand tons in FY15, driven by captive imports by domestic producers.

Trend in soda ash demand-supply scenario ('000 tons)


4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY10 production FY11 FY12 FY13 consumption FY14 FY15 import (RHS)
600 480 504 544 588 635

1000 2,847 2,964 3,085 900 800 700 600 500 400 300 200 100 0

2,509

2,633

2,736

Source: Tata Strategic analysis, Crisil

Domestic producers face threat of cheap imports from China. In November 2009, in order to safeguard domestic producers from market disruptions caused by the increased imports from China, Govt. of India imposed a 20 percent anti-dumping duty on soda ash imports from China, which is expected to continue till imports normalize. This is likely to help domestic producers to hold on to prices and increase their production to meet domestic demand.

References
1. Inorganic Chemicals, IBEF, April 2010 2. Chlor Alkali Outlook, Alkali Manufacturer's Association of India, retrieved on September 16, 2010 3. Caustic Soda Information, Indian Chemical Portal, retrieved on September 18, 2010 4. Soda Ash Statistics and Information, US Geological Survey, retrieved on September 18, 2010 5. Newspaper articles: The Hindu, Mint, Business Standard 6. Chlor Alkali Annual Review , Crisil Research, January 2010

This report has been authored by: Pratik Kadakia (pratik.kadakia@tsmg.com), Anshul Saxena (anshul.saxena@tsmg.com) and Binay Agrawal (binay.agrawal@tsmg.com)

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Pharmaceuticals

Global Pharmaceutical Market Overview


The global pharmaceutical market was estimated at ~ USD 837 Bn in 2009 with 8% growth over 2008. The developed markets, which have been the traditional stronghold of innovator companies are expected to witness lower than historical growth going forward. Higher R&D costs, relatively dry pipeline for new drugs, increasing penetration of generics and pressure from governments for reduced healthcare costs are putting a lot of pressure on global pharmaceutical companies, Future growth is expected to be primarily driven by generics and emerging markets. The global pharmaceutical market is expected to grow at 6% CAGR to reach USD 1,100 Bn in 2014.

2010

Global pharma sales (USD Bn)


837 9%

1,100 6%

499

2003

2009

2014

Source: IMS Health, Crisil Research, Tata Strategic Estimates

The top 10 players account for over 42% of total global sales. Pfizer is the market leader, followed by GSK and Novartis AG. Lipitor is the largest selling drug followed by Plavix and Nexium. Oncology continues to be the leading therapy class globally followed by Lipid regulators.

Global Top 10 Pharmaceutical Companies


Rank 1 2 3 4 5 6 7 8 9 10 Total Company Pfizer Glaxo SmithKline Novartis AG Sanofi-Aventis Astra Zeneca Roche Johson & Johnson Merck & Co Abbott Eli Lilly Top 10 2008 Rev. (USD Bn) 43.4 36.5 36.2 35.6 32.5 30.3 29.4 26.2 19.5 19.1 308.8 Market share (%) 6.0 5.0 5.0 4.9 4.5 4.2 4.1 3.6 2.7 2.6 42.6

Source: IMS Health

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Global Top 10 Drugs


Rank Drugs Lipitor Plavix Nexium Seretide/ Advair Enbrel Seroquel Zyprexa Remicade Singulair Lovenox 2008 Rev. (USD Bn) 13.7 8.6 7.8 7.7 5.7 5.4 5.0 4.9 4.7 4.4 68.0 Market share (%) 1.8 1.1 1.0 1.0 0.7 0.7 0.6 0.6 0.6 0.6 8.8 1 2 3 4 5 6 7 8 9 10
Source: IMS Health

2010

Total leading brands

Global Top 10 therapy classes


Rank 1 2 3 4 5 6 7 8 9 10 Therapeutic Segment Oncology Lipid regulators Respiratory Anti-diabetics Acid pump inhibitors Anti-psychotics Angiotensin-II antagonists Anti-depressants Anti-epileptics Auto-immune agents 2008 Rev. (USD Bn) 48.2 33.8 31.3 27.3 26.5 22.9 22.9 20.3 16.9 15.9 266.0 Market share (%) 6.2 4.4 4.0 3.5 3.4 3.0 3.0 2.6 2.2 2.1 34.4

Total leading brands


Source: IMS Health

Indian Pharmaceutical Market Overview


The Indian pharmaceutical industry is ranked 3rd in the world in terms of production volume and 14th in terms of domestic consumption value. The Indian pharmaceutical industry was estimated at USD 19.4 Bn in FY09. Formulations account for ~65% and bulk drugs for the balance 35% in value terms. The industry is expected to reach USD 43.8 Bn in FY14. Bulk drug exports are expected to grow the fastest at ~35% followed by formulation exports at ~25%. The domestic formulation market is expected to grow at ~11% with key growth drivers being increased per capita spend on pharmaceuticals, improved medical infrastructure, greater health insurance penetration and increasing prevalence of lifestyle diseases.

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In 2008 the domestic formulation market contributed only 1% in value terms to the global pharmaceutical market, mainly due to lower drug penetration and lower prices compared to developed markets.
43.8

2010

India pharma industry (USD Bn)


18%

19.4 21%

7.6

FY04

FY09

FY14

Source: IMS Health, Crisil Research, Tata Strategic Estimates

Today the Indian pharmaceutical sector meets 95% of the country's medical needs. The Indian pharmaceutical industry consists of both domestic companies and subsidiaries of multinational corporations. Indian companies manufacture a wide range of generic drugs (branded and non-branded), intermediates and bulk drugs/Active Pharmaceutical Ingredients (API).

Regulatory System
The Indian pharmaceutical industry is mainly regulated on patents, price and quality. Until 2004, the regulatory system in India focused only on process patents. The process patent regime helped domestic players develop innovative process development capabilities while making it unattractive for MNC players to operate. The process patent regime and the DPCO (Drug Price Control Order - which regulated the import, manufacture, distribution and sale of drugs in India) introduced by the Indian government in 1970 gave a much needed boost to the Indian pharmaceutical industry. Indian companies flourished during this phase by re-engineering drugs of global pharmaceutical players and launching them in India. Indian companies gained process chemistry skills, but did not focus on research & development for new drug discoveries. In January 2005, India complied with WTO to follow the product patent regime. The Act allowed for only two types of generic drugs in the Indian market: offpatent generic drugs and generic versions of drugs patented before 1995. The

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2010

Amendment grants new patent holders a 20-year monopoly starting on the date the patent was filed and no generic copies can be sold during the duration of the patent. The Drug Price Control Order (DPCO) fixes the ceiling price of some APIs and formulations.

Evolution of Indian Pharmaceutical Industry


Product patents recognized MNC dominated

1970

Government sets up Hindustan Antibiotics and Indian Drugs and

Pharmaceuticals Ltd.
Indian Patent Act 1970: Process patent regime established Drug Price Control Order 1970: All formulations and bulk drugs

bought under price control 1991


1991: Liberalization Tariff barriers reduced FERA relaxed DPCO amended 1995: drugs under control reduced from 146 to 74

2005

Product patents recognized MNCs start launching patented drugs Proposed Pharmaceutical Policy 2007: intends to bring 200 essential

drugs under DPCO New policy likely to allow MAPE of 150% with additional 50% margin for companies that invest in new drug research
Source: Crisil research

Indian Formulations Industry


Formulations are broadly categorized into patented drugs and generic drugs. A patented drug is an innovative formulation that is patented for a period of time (usually 20 years) from the date of its approval. A generic drug is a copy of an expired patented drug that is similar in dosage, safety, strength, method of consumption, performance and intended use. Patented drugs are usually imported while most of the generic drugs are manufactured domestically. Absence of patent protection until 2005 and low average disposable incomes coupled with relatively low penetration of health insurance leading to unwillingness of local pharmaceutical companies to make major investments in R&D resulted in the industry's focus on generic products rather than innovative patented products. The Indian formulations market is estimated to be USD 12.6 Bn in FY09 comprising of domestic consumption of USD 7.6 Bn and exports of USD 5 Bn The formulations market is expected to grow at 17% CAGR to reach USD 25.6 Bn in FY14. Over 40% of total formulations exports from India is to regulated markets and this split is expected to continue at the same levels going forward. Over the last 30 years, India's pharmaceutical industry has evolved from being a marginal global player to becoming a world leader in the production of high quality generic drugs. India exports pharmaceutical products to more than 200 countries,

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primarily the United States, Russia, China and the United Kingdom. India's single largest export market continues to be the United States, the world's largest generic drug market. ~95% of India's drug market in volume terms consists of second-andthird generation drugs no longer subject to patent protection in the developed world.

India formulations market (USD Bn)


15%

25.7

2010

10.7

12.6 16% 5 6.1 15 1.6 7.6 4.5 FY04 FY09 FY14 Formulation exports

Domestic formulation market


Source: Crisil Research, Tata Strategic Estimates

Generic drugs are 40-75% lower in costs as compared to patented drugs. Low production costs and large talent pool give India a clear edge over other nations. In recent years, Indian pharmaceutical companies have invested substantial part of their total global investment in generic manufacturing capacity. Indian firms now account for over 30% of all US Abbreviated New Drug Application (ANDA) filings submitted to the FDA. India also has the largest number of US FDA approved manufacturing sites outside the US.
31.3

India ANDA approvals (% of total)


24.1

27.9

19.5

14.2

9.1 6.0 6.6 6.8

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: US FDA, Crisil Research

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ANDA approvals (approved and tentative) received by Indian players 131


121

2010
72 58 49 35 21 8 14 2 2001 2002 10 24 12 26 38

96

42

39

2003

2004

2005

2006

2007 Approved

2008

2009

Tentative

Source: US FDA, Crisil Research

The formulations industry is highly fragmented with ~400 units in the organized sector and ~15,000 units in the unorganized sector. The industry has a range of over 100,000 drugs spanning various therapeutic segments. Domestic companies dominate the formulations market with 7 Indian companies amongst the top 10 companies. The top 5 companies in formulations account for over 22%, while the top 10 accounted for over 36% of the domestic formulations market. Cipla was the largest Indian drug manufacturer based on FY09 revenues followed by Ranbaxy and GSK.

India top 10 pharmaceutical companies based on formulation sales


Rank 1 2 3 4 5 7 8 9 10 Total Top 10
Source: ORG IMS, Crisil Research

Company Cipla Ranbaxy GSK Cadila Healthcare Piramal Healthcare Sun Pharma Alkem Lupin labs Pfizer Dr. Reddy's

Market share (%) 5.2 5.0 4.7 3.8 3.7 3.3 3.1 2.7 2.6 2.4 36.5

Manufacturing operations are largely concentrated in West and South India, primarily Maharshtra, Gujarat and Andhra Pradesh. However, many players have shifted manufacturing base to excise free zones in the North, such as Baddi, Haridwar and Sikkim, due to shift towards MRP (maximum retail price)-based excise duty levy. In India, ~ 70% of the total formulations sold are for acute illness (short duration) and remaining for chronic illness (prolonged duration). This is true for most developing countries as compared to developed markets where the growth is led by chronic ailments.

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Growth in India has been primarily driven by high growth segments such as cardiac, anti-diabetic, gynaecology, anti-infectives and gastrointestinal. Going forward, sales of drugs for chronic segments are expected to increase due to increasing stress levels and higher prevalence of lifestyle diseases. The acute segments are however also expected to exhibit steady growth due to hygiene issues as well as its predominance in rural areas. Currently, the tier 2 cities and rural markets account for ~40% of the total market and are expected to drive the growth in future. Leading Therapeutic Segments in India Therapeutic Segments Anti-infectives Cardio Vascular Gastrointestinal Respiratory Pain/ Analgesics Vitaomins/ Nutrients Gynaecological Dermatology Central Nervous System Anti-diabetic Top 10 Therapeutic Categories Total Domestic Formulation Demand
Source: ORG IMS, Crisil Research

2010

FY09 Sales (Rs. Cr.) 6,290 3,950 3,830 3,110 3,080 2,760 2,040 1,930 1,930 1,860 30,770 35,370

% share of total demand 18 11 11 9 9 8 6 5 5 5 87 100

In FY09, leading drug classes by size were cephalosporins, anti-rheumatic nonsteroidal, anti-peptic ulcerants, oral anti-diabetics and ampicillin/ amoxycillin, which together accounted for over 20% of the total market share.

Indian Bulk Drugs Industry


Bulk drugs/ APIs are the key ingredients for making formulations. Bulk drug exports account for ~90% of bulk drug production in India.

India bulk drug exports (USD Bn)


22%

18.3

35%

6.7

1.5 FY04 FY09 FY14

Source: Crisil Research, Tata Strategic Estimates

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2010

Bulk drug exports from India have grown from ~USD 1.5 Bn in FY04 to ~USD 6.7 Bn in FY09 at a CAGR of ~35%. ~90% of bulk drugs manufactured in India cater to the export markets. Majority of the growth is expected to be from the rising exports to regulated markets like USA, Europe and Japan. The share of API exports to innovator companies in regulated markets is expected to increase from 8% of total exports in FY09 to 17% by FY14. This rise is expected to be driven by the stronger patent safeguards being adopted by India and increasing confidence of foreign players in the Indian regulatory framework and technical capabilities. API exports from India (FY09) (USD 6.7 Bn) API exports from India (FY14) (USD 18.1 Bn)
Semiregulated, 35% Regulated, 65%

Semiregulated, 51%

Regulated, 49%

Generics: 41%

Generics: 48%

Innovators: 8%

Innovators: 17%

Source:Crisil Research

Source: Crisil Research

The technical competence of Indian manufacturers compared to other nations can be gauged by the number of Drug Master Files (DMFs) filed. Over the period 2000 to 2009 India has filed the largest number of DMFs (over 2,000) as compared to various competing countries like China and Italy. Nearly 50% of all DMFs filed in 2009 (till October) are from India. In 2009 alone (till October), India filed over 270 DMFs, compared to 60 by China.

Country-wise cumulative DMF filings: 2000-09


2,016

575

401 187 167 121 99 69 13

India China Italy Source: Crisil Research

Japan Spain Israel France Mexico Brazil

Government Initiatives
The government of India has undertaken several policy initiatives and tax breaks for the growth of the pharmaceutical business in India. Some of the measures adopted are: l Pharmaceutical units are eligible for weighted tax reduction at 200% for the research and development expenditure obtained l Two new schemes namely, New Millennium Indian Technology Leadership Initiative and the Drugs and Pharmaceuticals Research Program have been launched by the Government in 2009 l The Government is contemplating the creation of special purpose vehicles (SPV) with an insurance cover to be used for funding new drug research l The Department of Pharmaceuticals is mulling the creation of drug research facilities which can be used by private companies for research work on rent

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Contract Research & Manufacturing (crams)


Declining R&D productivity of global pharma majors has led to increased cost of developing new drugs. Globally USD 130 Bn worth of drugs are expected to come off patent by 2013. All these factors have led to pressure on margins of both innovator and generic companies resulting in increased outsourcing decisions. This provides a good opportunity for CRAMS companies to provide a wide range of services from research to manufacturing. Critical factors considered by a global pharmaceutical company in selecting an outsourcing partner range from cost, good manufacturing practice (GMP) facilities, quality, availability, references, relationships, timeliness to confidentiality/ IP protection.
PHARMA INDUSTRY VALUE CHAIN
TYPICAL

2010

VALUE CHAIN

Drug Discovery (Research)

Development

Manufacturing

Marketing & Sales

Target Identification

Pre Clinical Trials Phase I Phase II & III Phase IV

Basic Chemicals Intermediates API/ Bulk Drugs Formulations

Packaging Logistics

STAGES

Validation Screening Optimization

Over the Counter (OTC)/ Prescription

CHALLENGES

Patent

Approval/ Preview

Site Certification

Sales Channels

Source: Tata Strategic Analysis, Duke University

Contract research essentially involves supporting the innovator companies in their drug discovery research and development. Drug discovery research comprises of target identification, validation, screening and optimization. Drug development involves Pre clinical trials, Phase I clinical trials, Phase II clinical trials and Phase III clinical trials. Contract manufacturing could be for manufacturing APIs or finished dosages for both patented and generic drugs. CRAMS in India has been growing at a rapid pace in India in the last few years and emergence of newer entrants has kept the momentum going. Increasingly there is now a rising trend of overseas investments by Indian companies, driven by access to new markets or technology, increasing product portfolio or completing the service offerings across the entire CRAMS value chain. Most acquisitions in US/ Europe have been for leveraging existing client relationships of target companies or access to markets or technology while acquisitions in China have been for securing access to low cost intermediates or basic APIs. Major CRAMS companies include Nicholas Piramal, Divi's Laboratories, Jubilant Organosys, Dishman Pharmaceuticals, Torrent Pharmaceuticals and Zydus Cadilla. Most of these players are present in contract manufacturing of both APIs and finished dosages as well as in contract research.

OUTLOOK
Large domestic market, low cost manufacturing and increasing acceptance for IP make India a promising destination for global pharmaceutical companies. Acquisition of Indian generic majors by leading global innovator and generic companies to increase India presence and leverage cost effectiveness of Indian manufacturing operations is increasingly expected. Extensive distribution and sales force network of Indian companies make them attractive partners for global research focused companies.

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2010

MNC outsourcing deals with Indian companies Indian company MNC partner Piramal Healthcare AstraZeneca Allergan Pfizer Divi's Labs Abbot Labs GSK Merck & Co. Dishman Solvay Aztrazeneca GSK Shashun Chemicals GSK Eli Lilly Cadila Healthcare Nycomed Wyeth Aurobindo Pharma Pfizer
Source: Crisil Research

Deal type Several APIs 2 APIs Few APIs n.a. 2 APIs 1 API 4 APIs 2 APIs Few APIs 1 API 1 API 1 API 1 API Several APIs

Year 2005 2005 2008 2005 2007 n.a. 2007 2009 2009 2008 n.a. 2004 2008 2010

In a post product-patent scenario, Indian companies will have to increasingly look at strategic alliances, investments, mergers, acquisitions or divestitures to improve their product portfolio to retain or improve their relative market share. In order to stay competitive and build future capabilities, domestic companies will have to invest in R&D. Indian pharma companies need to accelerate the transition from reverse engineering of generic drugs to development of new molecules. The Indian industry needs to develop and improve its capabilities in novel drugs and delivery mechanisms. Domestic companies should continue to focus on innovation to develop NCEs/ NMEs (new chemical entities/ new molecular entities) which will offer sustainable revenues going forward. Increasing collaboration with global pharma companies could help in sharing costs and risks, while improving capability and ensuring better results. Inlicensing/ out-licensing is an area that should continue to be actively pursued wherever relevant. The current environment throws up several opportunities for pharmaceutical companies, both in their home turf as well as export markets. Leading Indian companies are in a strong position to take advantage of the fundamental changes the industry is going through and emerge much stronger in the future with larger global presence.

References:
1. Pharmaceutical Report 2010, Crisil 2. Pharmaceutical Report 2010, IMS Health 3. Its 'India Calling' for global pharma companies: PWC report 2010, Express Pharma article 4. Indian Pharmaceutical Sector presentation 2008, IBEF
This report has been authored by: Pratik Kadakia (pratik.kadakia@tsmg.com), Jeffry Jacob (jeffry.jacob@tsmg.com) and Siddhartha Gondal (siddhartha.gondal@tsmg.com)

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Agrochemicals

Introduction
Agrochemicals or pesticides are chemical substances used to control or kill pests, unwanted plants or animals that may harm or damage the crops. Agrochemicals can be classified into the following key segments: 1. Insecticides 2. Herbicides/ Weedicides 3. Fungicides 4. Bio-pesticides 5. Others (Nematocides, Rodenticides etc.)

2010

Global Agrochemicals Industry


Global agrochemical industry has grown strongly at ~9% p.a. since 2001 to reach ~USD 51.2 Bn in 2009.

Global market Size (USD Bn)

51.2 9%

25.8

2001
Source: BCC Research, Tata Strategic Estimates

2009

Europe is the biggest market for agrochemicals with ~32% share in 2008. Globally, herbicides are the largest consumed agrochemical followed by insecticides. Top 6 companies account for ~70% of total market.

Global Geographical share: 2008 (%)


Middle East & Africa, 3.80% North America 20.60% Europe 31.70%

Latin America 20.80% Source: Industry Report, Tata Strategic Estimates

Asia 23.10%

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INDIAN AGROCHEMICALS INDUSTRY

2010

Industry Overview
India is the fourth largest producer of agrochemicals globally, after United States, Japan and China. The agrochemicals industry is a significant industry for the Indian economy. The Indian agrochemicals market grew at a rate of 11% from USD 1.22 billion in FY08 to an estimated USD 1.36 billion in Fy09.

State-wise consumption: FY09 (% of total)


Others 30% Andhra Pradesh 24%

MP & Chattisgarh, 8% Gujarat 7% Karnataka, 7% Punjab 11%

Maharashtra, 13%

Total: USD 1.36 Bn Source: Industry Report, Tata Strategic Estimates

India's agrochemicals consumption is one of the lowest in the world with per hectare consumption of just 0.58 Kg compared to US (4.5 Kg/ha) and Japan (11 Kg/ha). In India, paddy accounts for the maximum share of pesticide consumption, around 28%, followed by cotton (20%).

Per capita consumption: FY09 (Kg/ ha)


17

13

12

7 5 5

0.6 Taiwan China Japan USA Korea France UK India

Source: Industry Report, Tata Strategic Estimates

Industry Structure
In India, there are about 125 technical grade manufacturers (10 multinationals), 800 formulators, over 145,000 distributors. 60 technical grade pesticides are being manufactured indigenously.

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Industry Structure
Raw Materia Supplierl Technical Grade Manufacturer

2010

Formulator

End User

Distributor/ Retailer

Technical grade manufacturers sell high purity chemicals in bulk (generally in drums of 200-250 Kg) to formulators. Formulators, in turn, prepare formulations by adding inert carriers, solvents, surface active agents, deodorants etc. These formulations are packed for retail sale and bought by the farmers.

Agrochemicals installed capacity & production (000' tons)


148 145 146 146

82

85

83

85

FY06
Source: Ministry of Chemicals & Fertilizers

FY07 Capacity

FY08 Production

FY09

The Indian agrochemicals market is characterized by low capacity utilization. The total installed capacity in FY09 was 146,000 tons and total production was 85,000 tons leading to a low capacity utilization of 58%. The industry suffers from high inventory (owing to seasonal & irregular demand on account of monsoons) and long credit periods to farmers, thus making operations 'working capital' intensive. India due to its inherent strength of low-cost manufacturing and qualified low-cost manpower is a net exporter of pesticides to countries such as USA and some European & African countries. Exports formed ~50% of total industry turnover in FY08 and have achieved a Compounded Annual Growth Rate (CAGR) of 29% from FY04 to FY08.

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Key Segments
Agrochemicals market: Product share (% of total)

2010

1% 16% 14%

5% 20% 20%

69%

55%

FY04 Insecticides Fungicides

FY09 Herbicides Biopesticides & others

Source: Industry Report, Tata Strategic Estimates

Insecticides: Insecticides are used to ward off or kill insects. Consumption of insecticides for cotton has come down to 50% from 63% of total volume after introduction of BT cotton. Fungicides: Fungicides are used to control disease attacks on crops. The growing horticulture market in India owing to the government support has given a boost to fungicide usage. The market share of fungicides has increased from 16% in 2004 to 20% in 2009. Herbicides: Herbicides are the fastest growing segment of agrochemicals. Their main competition is cheap labor which is employed to manually pull out weeds. Sales are seasonal, owing to the fact that weeds flourish in damp, warm weather and die in cold spells. Bio-pesticides: Bio-pesticides are pesticides derived from natural substances like animals, plants, bacteria and certain minerals. Currently a small segment, biopesticides market is expected to grow in the future owing to government support and increasing awareness about use of non-toxic, environment friendly pesticides. Others: Plant growth regulators, Nematocides, Rodenticides, Fumigants etc. Rodenticides and plant growth regulators are the stars of this segment. Segment Insecticides Fungicides Herbicides Biopesticides Others Major Products Acephate, Monocrotophos, Cypermethrin Mancozeb, Copper Oxychloride, Ziram Glyphosate, Isoproturon, 2,4-D Spinosyns, neem-based Zinc Phosphide Aluminium Phosphide Main Applications Cotton, Rice Fruits, Vegetables, Rice Rice, Wheat Rice, Maize, Tobacco Stored produce

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Competitive Landscape
The Indian agrochemicals market is highly fragmented in nature with over 800 formulators. The competition is fierce with large number of organized sector players and significant share of spurious pesticides. The market has been witnessing mergers and acquisitions with large players buying out small manufacturers. Key market participants include United Phosphorus Ltd, Bayer Cropscience Ltd, Rallis India Ltd, Gharda Chemicals Ltd, Syngenta India Ltd, BASF India Ltd, etc. Top ten companies control almost 80% of the market share. The market share of large players depends primarily on product portfolio and introduction of new molecules. Strategic alliances with competitors are common to reduce risks and serve a wider customer base.

2010

Brief Profile of key companies United Phosphorous Ltd. (UPL) Sales (FY10) Key Brands Rs.1,753 Cr. (Crop protection) Insecticide: Viraat Herbicide: Devrinol, Orrja Fungicide: Saafe, Zeemil Pesticides: 91,000 tons per annum Intermediates: 41,000 tons per annum

Production Capacity

Bayer CropScience Ltd. Sales (FY10) Key Brands Rs.1,624 Cr. Fungicide: Antracol, Folicur Insecticide: Confidor, Calypso Herbicide: Atlantis, Topstar Active ingredients: 6,300 tons per annum Powder formulations: 7,650 tons per annum Liquid formulations: 10,000 KL per annum

Production Capacity

Rallis India Ltd. Sales (FY10) Key Brands Rs.874 Cr. Fungicide: Contaf, Contaf Plus, Master Insecticide: Rogor, Daksh, Tata Mida Herbicide: Fateh, Tata Metri Pesticides: 10,000 tons per annum Formulations: 30,000 Litre per annum

Production Capacity

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Key Trends
Market Trends

2010

l Focus on developing environmentally safe pesticides by the industry as well as

the Government. The Department of Chemicals has initiated a nationwide programme for "Development and production of neem products as Environment Friendly Pesticides" with financial assistance from United Nations Development Programme (UNDP).
l Focus by larger companies on brand building by conducting awareness camps for

farmers and providing complete solutions.


l Increase in strategic alliances among large players for greater market reach and

acquisitions of smaller companies globally to diversify product portfolio. For example: Rallis has a marketing alliance for key products with FMC, Dupont, Syngenta, Bayer and Nihon Nohayaku. In addition, UPL has had a series of small acquisitions globally to enter new geographies and gain product expertise. Technology Trends
l Increased R&D expected for development of new molecules and low dosage, high

potency molecules
l Focus on R&D in bio-pesticides segment with increasing preference for

environmentally safe products in the market

Growth Forecast & Drivers


Since the Indian agricultural sector is highly dependent on monsoons, the market for agrochemicals is expected to grow at a conservative growth rate of 7.5% to reach ~ USD 1.95 Bn by FY14. Key market drivers include: 1. Growth in demand for food grains: India has 16% of the world's population and less than 2% of the total landmass. Increasing population and high emphasis on achieving food grain self-sufficiency as highlighted in the FY10 budget, is expected to drive growth. 2. Limited farmland availability and growing exports: India has ~190 Mn hectares of gross cultivated area and the scope for bringing new areas under cultivation is severely limited. Available arable land per capita has been reducing globally and is expected to reduce further. The pressure is therefore to increase yield per hectare which can be achieved through increased World - Available arable land per capita (Ha) 0.27 usage of agrochemicals. Indian agrochemical exports accounted for 0.15 ~50% of total industry size in 2009.
1998 2015E

Source: Yara Fertilizer Handbook, PotashCorp

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3. Growth of horticulture & floriculture: Buoyed by 50% growth experienced by Indian floriculture industry in last 3 years, Government Horticultural Production, India 300 (Mn tons) of India has launched a national horticulture mission to double production by 2012. Growing horticulture and floriculture industries will result in increasing demand for agrochemicals, especially fungicides.
7.5% 205 146

2010

2002

2007

2012E

Source: National Horticulture Mission

4. Increasing awareness: As per Government of India estimates, total value of crops lost due to non-use of pesticides is around USD 17 Bn every year. Companies are increasingly training farmers regarding the right use of agrochemicals in terms of quantity to be used, the right application methodology and appropriate chemicals to be used for indentified pest problems. With increasing awareness, the use of agrochemicals is expected to increase.

Key Challenges
1. High R&D costs: R&D to develop a new agrochemical molecule takes an average of 9 years and ~ USD 180 Mn Indian companies typically have not focused on developing newer molecules and will face challenges in building these capabilities, while continuing to remain cost competitive. 2. Threat from Genetically Modified (GM) seeds: Genetically modified seeds possess self-immunity towards natural adversaries which have the potential to negatively impact the business of agrochemicals. 3. Need for efficient distribution systems: Since, the number of end users is large and widespread, effective distribution via retailers is essential to ensure product availability. Lately, companies have been directly dealing with retailers by cutting the distributor from the value chain thereby reducing distribution costs, educating retailers on product usage and offering competitive prices to farmers. 4. Support for Integrated Pest Management (IPM) & rising demand for organic farming: Promotion of IPM, zero budget farming and usage of bio-pesticides by Indian Government and NGOs is gaining momentum. With increasing demand for organic food, farmers in certain states like Karnataka have reduced chemical usage and have adopted organic farming. Agrochemical companies will have to tackle the rising environmental awareness and address concerns on negative impact of pesticide usage. 5. Counterfeit Products: The spurious pesticides market size in India is estimated to be USD 233 Mn in 2009. This negatively impacts the revenues of the organized sector.

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Key Opportunities

2010

1. Scope for increase in usage: With ~35-40% of the total farmland under crop protection, there is a significant unserved market to tap into. By educating farmers and conducting special training programmes regarding the need to use agrochemicals, Indian companies can hope to increase pesticide consumption. 2. Huge export potential: The excess production capacity is a perfect opportunity to increase exports by utilizing India's low cost producer status. 3. Patent expiry: Between 2009 and 2014 many molecules are likely to go off patent throwing the market open for generic players. The total viable opportunity through patent expiry is estimated at over USD 3 Bn.

Yield improvement potential (%)


42% actual losses 28% prevented losses Due to pests weeds & diseases 30% Due to pests weeds & diseases 100%

30% further losses Due to drought heat, cold, salinity 130%

58%

Yield without protection

Actual yield with crop protection

Attainable yield without pests

Source: Bayer Cropscience research, Emkay research

Additional potential without abiotic stress

4. Product portfolio expansion: Threats like genetically modified seeds, Integrated Pest Management, organic farming etc. can be turned into opportunities if the industry re-orients itself to better address the needs of its consumers and broadens its product offering to include a range of agri-inputs instead of only agrochemicals.

References
1. Crop Protection market in India 2008, Frost & Sullivan 2. Crop protection Business in the New Decade, 2010 presentation, Cheminova 3. Annual Reports FY10: Bayer Crop Science, Rallis and United Phosphorous Limited 4. Global Markets for Agrochemicals 2009, BCC Research 5. Annual Report 2009-10, Department of Chemicals & Petrochemicals
This report has been authored by: Pratik Kadakia (pratik.kadakia@tsmg.com), Jeffry Jacob (jeffry.jacob@tsmg.com) and Siddhartha Gondal (siddhartha.gondal@tsmg.com)

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Specialty Chemicals

Specialty Chemicals
Understanding specialty chemicals
Specialty chemicals are defined as a "group of relatively high value, low volume chemicals known for their end use applications and/ or performance enhancing properties." In contrast to base or commodity chemicals, specialty chemicals are recognized for 'what they do' and not 'what they are'. Specialty chemicals provide the required 'solution' to meet the customer application needs. It is a highly knowledge driven industry with raw materials cost (measured as percentage of net sales) much lower than for commodity chemicals. The critical success factors for the industry include understanding of customer needs and product/ application development to meet the same at a favorable price-performance ratio. BASE CHEMICALS Sold by "specification", defined purity Selection of chemical done by customer CSFs : Access to secure and competitive supply of raw materials, efficient operations and supply chain Generally medium to high volume products with lower price realizations SPECIALTY CHEMICALS Sold by "performance/impact", not composition Seller provides required "solution" to meet customer application needs CSFs : Price/performance ratio for specific application, technical assistance, channels to market Generally low to medium volume products with higher price realization

2010

Significance of specialty chemicals


The specialty chemicals segment (including the knowledge chemicals) currently estimated at ~USD 27 Bn, constitutes about one-third of the Indian Chemical industry. The specialty chemicals segment caters to a large number of end use industries including construction, automotive, polymers, personal care products, water treatment, textile, paints and coatings, etc. The knowledge chemicals segment caters to the key end use industries of pharmaceuticals, agrochemicals and bio- technology.

Specialty chemicals growth story


The specialty and knowledge chemicals industry combined has been growing at rates higher than the overall chemical industry and is expected to continue to grow at 14%15% p.a. to reach ~USD 50 Bn by 2015. The growth slowdown, demand contraction and recovery witnessed over the last year or so have not impacted the long-term growth prospects of the industry.

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50-55

Indian Specialty & Knowledge Chemicals Industry (USD Bn)


14-15%

2010
11% 18 27

FY06
Source: Tata Strategic estimates

FY10

FY15

Changing income distribution and evolving end use market are the key growth drivers for specialty chemicals. Rapid rise of the mid income households is expected to create a larger consumer base for products using specialty chemicals.

Changing Income Distribution- India


(Households in Mn) Rs. Lakh > 12 p.a Premium Mass 2.4 -12 Affluent Mass Basic 1.1 - 2.4 < 1.1 ~20 2 1 5 13 2 2005 - 06
Source: NCAER, Tata Strategic analysis

~22 4 2 7 11 4 2009 - 10E

~23 8 4 10 7 8 2013 - 14E

Additionally, high growth in end use markets and evolving customer needs are expected to drive the growth of specialty chemicals. Major end use industries textiles (esp. performance textiles), automotive, glass, construction and paints- are all expected to register double digit growth rates in the next five years. Also emerging needs in several of these end use industries is creating demand for high performance specialty chemicals driving penetration growth.

Growth potential: India's strong position on industry CSFs


India's strengths such as large market size, knowledge of unique customer needs, strong R&D capabilities and process know-how are aligned to achieve success in the specialty chemicals industry. The strong position of India on these CSFs indicates the growth potential. A comparison with the European chemicals industry and its

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-INDICATIVE LIST (% p.a.) END USE MARKET GROWTH Textiles Auto Glass Construction Paints Paper 9%

EVOLVING CUSTOMER NEEDS

- retardants, water repellents, wrinkle free, flame 20% Dirt repellents Lighter engineering plastics, catalytic converter 16% substrates, fuel additives, high performance coolants, brake fluids, 15% Low emissivity coatings, reflective glass, self cleaning glass 14% Structural adhesives, cement admixtures, surface coating 12% Glow paints, scratch proof paints, nontoxic edible paints Water proof paper, glazed paper

2010

Source: Industry reports, Tata Strategic analysis

evolution is a case in point. Faced with a similar structural framework of limited carbon based feedstock availability, European chemical industry developed the specialty chemicals segment which has a much lower dependence on raw materials than base chemicals. India could very well emulate the growth of specialty chemicals industry in Europe which is currently estimated at more than 10 times the size of the industry in India.

Way ahead for specialty chemical companies


Given India's potential to emerge as a global specialty chemicals demand and production destination, companies could explore how best they could participate in this growth story. A detailed growth strategy formulation would need to be based on each company's respective strengths and focus areas. However few overall factors as mentioned below would need to be addressed to compete successfully in the specialty chemicals industry. Emerging trends in consumer industries call for innovation and development of local products/ solutions based on understanding of the unique needs of the Indian consumer. Secondly, the development of strong channels to reach out effectively to customers is of immense strategic significance. Establishing leadership position in sustainable growth through an integrated approach across the value chain could help create positive differentiation. This would not only help companies create value through green product/ process innovation but also generate end consumer pull through ingredient branding in "green products". Finally the development of chemical/ petrochemical infrastructure/ clusters through PCPIRs (Petroleum, Chemicals and Petrochemicals Investment Regions) could enable companies to establish effective upstream linkages for increased cost effectiveness. A brief overview of some of the key segments of specialty chemicals is covered in this report, focusing on the demand and supply scenario, projected growth & drivers and key trends & future outlook in each segment.

PAINTS & COATINGS


Introduction
The Indian paint industry is estimated at ~USD 3.4 Bn. And can be broadly classified into 2 segments:

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Decorative Paints: This segment primarily caters to the residential and commercial buildings and accounts for 70% of the total paint industry. Enamels are the most widely used followed by distempers and emulsions. Interior and exterior paints account for 75% and 25% of the decorative paints respectively. On the basis of product composition, decorative paints are of two kinds - water based and solvent based.

Decorative paints segments


(% of total volume)
Ext. coatings 12% Wood finishes 2%

Emulsions 17%

Enamels 50%

Distemper 19%

Source: Industry reports, Tata Strategic analysis

Industrial paints: This segment includes paints used in automobiles, auto ancillaries, consumer durables, containers, etc. This segment requires technological expertise and therefore it is largely served by the organized sector. It accounts for 30% of the overall market.

Industrial paints segment wise breakup: FY09


Others, 5% Marine, 10% Refinish, 12% Auto OEM, 36%

Powder, 13% Protective, 24% Source: Industrial reports, Tata Strategic analysis

Demand and supply scenario


The Indian paint industry, valued at ~USD 3.4 Bn. has been growing at 1.5-2 times the GDP growth with a CAGR of 13.5% over the last five years. Owing to the economic downturn, the growth slowed down in the last 2 years. However, the growth is reported to have picked up with the resurgence of the construction industry.

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Indian paint industry growth (USD Bn)


13.5

3.4

1.8

2010

2005

2010

Source: Industry reports, Tata Strategic analysis

Paint industry is highly consolidated with 80% market captured by the organized sector. The major players in the paint industry are Asian Paints, Kansai Nerolac, Berger Paints and ICI. In the decorative segment, Asian Paints is the market leader followed by Berger and Kansai Nerolac. Kansai Nerolac is the market leader in industrial paints followed by Berger and Asian PPG.

Decorative paints market share by value: Fy09 (% of total value)


Others, 33%

Asian Paints, 37%

Shalimar, 2% Akzo (ICI), 7%

Kansai Nerolac, 8%

Berger Paints, 13%

Source: Industry Reports, Tata strategic analysis

Industrial paints market share by value: Fy09 (% of total value)


Kansai Nerolac, 29%

Others, 36%

Shalimar, 4% BASF, 7%

Berger, 12% Asian PPG, 12%

Source: Industry Reports, Tata strategic analysis

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Projected growth and drivers

2010

With the market recovering from the economic downturn, the paint industry is expected to grow at a CAGR of 14% in the next five years. In the decorative paints segment, water based paints are expected to drive growth with a CAGR of 15%. The key growth drivers of the paint industry are detailed below: Low per capita consumption: The per capita consumption of paints in India is very l low at 1.25 Kg against 38 Kg in Singapore, 25.8 Kg in the U.S or 2.5 Kg in China.
l Growth in automotive industry: Growth of automotive paint industry is directly

linked to the growth of passenger vehicles and commercial vehicles (expected CAGR >15%).
l Rapid growth in residential and commercial real estate with regulation permitting

100% FDI flow


l Untapped rural market: There is a shift in rural demand from cement paints to

better quality paints.


l Growing middle class with increasing disposable incomes

Indian paint industry growth (USD Bn)


14%

6.5

3.4

2010

2015

Source: Industry Reports, Tata strategic analysis

Key trends and future outlook


There is a shift in market shares in favour of organized companies at the expense of unorganized segment due to entry of organized players into low cost distempers and enamels. While solvent-based enamels are still popular in India, a shift is being seen from solvent- to water-based paints. Keeping the environment concerns in mind, companies are coming up with new lead free and low Volatile Organic Compound (VOC) products. There is also a perceptible shift towards usage of organic pigments in premium paints with heavy metal pigments being phased out. Companies which adapt to these trends could grow successfully in the paints market.

COLORANTS
Introduction
The colorant industry comprises two sub segments- dyes and pigments.

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There are 12 types of dyes, classified on the basis of the usage, however disperse, reactive and direct dyes are the most commonly used in India. Pigments are broadly classified as organic and inorganic. The pigment market is estimated at ~7 lakh tons p.a. with a market size of ~USD 970 Mn. Carbon black and TiO2 accounts for the 90% of the total pigment production.

2010

Classification of colorants Colorants Dyes Pigments

Soluble substances used to pass color to the substrate Major end use industries are textiles and leather

Insoluble substances and are in powdered or granular form Impart color by reflecting only certain light rays Major end use industries are paints and inks

Pigments demand, India: Fy10 (tons per annum)


Pigments (678,000)

Carbon Black & TiO2 (615,000)

Colour & Special Effect (63,000)

Organics (19,500)

Inorganics

Special Effect

Others

Chrome oxide

Others

Synthetic Iron Oxide

Source: Industry reports, Tata Strategic analysis

Demand and supply scenario


India accounts for ~7% of the global share of the dyestuffs industry and produces ~150,000 tons p.a. In India, the dyes industry supplies the majority of its production, almost 80%, to the textile industry. The balance is consumed by the paper and leather industry.

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Pigments by end use (% by volume)

2010

Plastics, 10% Textiles, 10%

Others, 9%

Inks, 47%

Coatings, 24% Source: Industry reports, Tata Strategic analysis

Also, these dyestuffs are exported to Europe, South East Asia and Taiwan to cater to the textile industries in these countries. Printing inks and coatings account for greater than 70% of consumption of pigments. Growth in these end use industries is driving the growth of pigment industry. The Indian dyestuff industry is highly fragmented and characterised by a large number of players in the unorganized sector. Around 1,000 units fall under the small scale industry category and only about 50 are large organized units. These units are mainly present in the western states of Gujarat and Maharashtra, with Gujarat accounting for almost 80% of capacity. Within India, the major players in the pigments industry are Sudarshan Chemicals, Golchha Pigments, Tata Pigments and Clariant India while in the dyestuff industry, companies such as are Atul, Clariant India, Kiri dyes, and IDI are large players present in the organized sector. Total installed capacity for organic pigment is 80,000 tons p.a., which is way higher than the demand from the Indian market. Large proportion of the organic pigments produced is exported. There are also niche markets in India for special effect pigments such as metallic and pearlescent. These pigments are usually imported into the Indian market, with Sudarshan Chemicals being the only domestic manufacturer. Though the volume for these pigments would be very small as compared to other pigment segments, they usually command a premium for the design appeal that they provide to the final product such as automotive coatings and packaging materials.

Projected growth and drivers


Globally, the demand for dyes and organic pigments is forecast to increase 3.9 percent per year to ~USD 16.2 Bn in 2013. This growth will have a direct bearing on the domestic production of dyes and organic pigments since a large proportion of production is exported. Moreover, after the REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) regulation, costs of handling effluents have increased. As a result a large number of companies have begun to relocate their operations to the Asian markets, particularly India and China. Due to a greater use of polyester and cotton-based fabrics, there has been a shift towards reactive dyes used in cotton-based fabrics and disperse dyes used in polyester. The demand for reactive and disperse dyes is expected to grow fastest due to this continued demand.

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The textile industry will remain the largest consumer of dyestuffs; however growth will be driven by markets such as printing inks, paints and plastics. These segments are also expected to increase the consumption of high performance pigments helping improve profitability. At around 8% growth, the Indian colorants industry (including pigments, dyes and dye intermediates) is likely to reach ~USD 5.1 Bn by 2012-13 and is expected to capture 10-12% of the global market.
Market

2010

Global overcapacity Customer requirements of environment friendly and high performance products

Technology

Trends in Dyes & Pigments industry

Regulatory

Color solution approach to counter commoditization

Stricter domestic environmental laws Compliance to REACH

Source: Tata Strategic analysis

Key trends and future outlook


Market Trends - High performance products The global capacity of dyestuffs has exceeded the demand resulting in an oversupply scenario. Due to the lack of export demand, the prices of the colorants had dropped by roughly 20% in the recent past. It is expected that consumer preference for environmentally friendly products and high performance dyes and organic pigments will help improve overall value of the market. Regulatory Trends - Stricter environmental laws Fiscal policies and excise concessions led to a high level of fragmentation in the Indian dyestuffs market. However, a gradual reduction in the excise duty has resulted in a more balanced pricing differential between the organized and unorganized sectors. The organised sector, with a better product range, technology and marketing reach, was able to increase its market share. Further, various regulations such as REACH and ban on certain dye stuffs have impacted the exporters resulting in the closure of small establishments and helping increase the share of the organized players. Technological Trends - Commoditization Since majority of dyestuffs are commodities there is not much product differentiation and duplication of products is easy. To counter the same, global manufacturers are investing in research and development to improve the specialty end of their portfolio. There is also a trend towards providing colour solutions rather than just a colorant. Collaborations with equipment manufacturers are being undertaken to provide integrated solutions to customers. The financial crisis in 2008 has resulted in a demand slump, worldwide over-capacity and further margin pressures on the dyestuff industry. The Indian dyestuff industry is

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facing challenges due to reduced export demand growth and decreasing profitability. Companies with greater focus on innovation and Research & Development will benefit in the long run. Adopting green chemistry practices and compliance to more stringent export market regulations would help ensure greater access to export markets. Such a holistic approach could ensure that the Indian dyes and pigments industry is able to overcome the challenges and convert them to opportunities, resulting in profitable growth.

Construction Chemicals
Introduction
The Indian construction chemicals market, valued at ~USD 340 Mn consists of a variety of products ranging from admixtures to sealants to flooring chemicals. However, the market is still very small when compared to other global markets like the United States which is estimated at ~USD 7.7 Bn. Admixtures form the biggest segment with 35% share followed by flooring chemicals with 15% share.

Demand and supply scenario


The market, boosted by the investment in construction sector has been growing at a CAGR of 14 % from USD

Indian Construction chemicals market

340

14%

180

2005

2010

Source: Industry reports, Tata Strategic analysis

Product share (% of total value)


Misc., 31 Admixtures, 35

Repair & rehabilitation 9 Water proofing, 10 Flooring, 15

Source: Industry reports, Tata Strategic analysis

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180 Mn in 2005 to reach USD 340 Mn in 2010. With the economic slowdown, the growth slowed down in 2009, but has gained momentum thereafter. The overall market is fairly consolidated but there is considerable fragmentation of individual products and application areas. The top 5 players account for ~50% of the market; the rest being accounted by small and unorganized players. Fosroc, SIKA India & BASF SE are the leading players in the Indian construction chemicals market.

2010

Market share by revenue: 2009


FOSROC, 14%

SIKA India, 13% Others, 50% BASF, 12% Pidilite, 6%

SWC, 5%

Source: Industry reports, Tata Strategic analysis

Projected growth and drivers


The market for construction chemicals is expected to grow at a CAGR of 14.5% to reach ~USD 670 Mn in 2015. Key growth drivers include: Growth in construction activities due to increased investments in infrastructure l and real estate by private and public sector
l 100% Foreign Direct Investment (FDI) in real estate to boost construction

activities
l Increasing usage of newer products like Ready-Mix Concrete l Development in untapped rural areas l Increased product awareness and compliance with international manufacturing

standards

Construction chemicals growth (USD Mn)


14.5%

670

340

2010 Source: Industry reports, Tata Strategic analysis

2015

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Key trends and future outlook

2010

Construction chemicals market has a huge growth potential due to the construction and manufacturing boom in India. Product innovation and diversification, producing low cost-high value products and creating product awareness among end users are the key success factors. Due to lack of entry barriers, competition is high and a lot of low value products are being sold in the market. Margins are lowered because most contractors prefer low cost chemicals to reduce the construction cost. High value products have limited demand from premium construction houses. Companies with innovative, low cost products are likely to capture the market.

Water Treatment Chemicals


Introduction
Water treatment chemicals are used for a wide range of industrial and in-process applications such as reducing effluent toxicity, control Biological Oxygen Demand (BOD) & Chemical Oxygen Demand (COD) and disinfecting water for potable purpose. The Indian water treatment chemicals market is estimated at ~USD 560 Mn. Coagulants and flocculants form the largest segment with ~ 40% market share followed by biocides and disinfectants with ~ 17% market share. Apart from use in potable water, the customer base is widespread across diverse industries ranging from large power plants, refineries and fertilizer factories to pharmaceuticals, food and beverages, electronic and automobile companies.

Product share (% of total)


Others, 30% Coagulants & flocculants, 40%

pH adjusters, 5% Biocides & disinfectants 18% Source: Industry reports, Tata Strategic analysis Defoaming agents, 7%

Demand and supply scenario


The Indian water treatment chemicals market achieved an 8% CAGR in the period from 2005-10 to reach ~USD 560 Mn in 2010. Certain segments like the industrial and drinking water segments have seen even higher growth rates. The market is highly competitive, and participants include private companies, MNCs, as well as joint ventures. Around 60 percent of the market is dominated by the organized sector, largely multinationals and large-scale domestic companies like Nalco Chemicals India Ltd., Thermax Limited and Ion Exchange (India) Ltd. These companies have a diverse product portfolio and a strong distribution network to cater to the Indian market.

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Water treatment chemicals market (USD Mn)


8% 380

560

2010

2005

2010

Source: Industry reports, Tata Strategic analysis

Projected growth and drivers


The market for water treatment chemicals is expected to grow at a CAGR of 10% to reach ~USD 900 Mn in 2015. Key market drivers include: l Increasing urbanization and rising living standards l Increased awareness about quality of drinking water and its impact on health l Rapid industrialization leading to huge demand for effluent treatment l Stricter effluent norms coupled with greater awareness about environment l Awareness among end users about recycling water, and cost effectiveness of recycling water in the long term

Water treatment chemicals market growth 900 (USD Mn)


10%

560

2010

2015

Source: Industry reports, Tata Strategic estimates

Key trends and future outlook


The market for water treatment chemicals has seen a shift from the traditional products to technically more advanced products. For example, traditional products like alum are being replaced by coagulants and flocculants. In the corrosion and scale inhibitor market, there is an ongoing shift from the traditionally used heavy metal based products to the ones which have better environmental profiles. Manufacturers are increasingly producing patented formulations with exclusive rights that offer customized solutions in a particular market. The market is expected to grow in light of stricter Government regulations in industrial and institutional domains. Innovative products catering to niche applications are likely to help market participants build/ sustain their competitive edge.

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POLYMER ADDITIVES
Introduction

2010

Polymer additives are specialty chemicals added to the base polymer to enhance certain properties or improve processing. The Indian polymer additives market is estimated at ~ USD 300 Mn. Plasticizers form the largest segment with 43% market share followed by heat stabilizers with 21% market share. From the applications perspective, PVC consumes the maximum amount of additives accounting for 40% of the total market followed by poly-olefins with 20%.

Product share: 2008 (%) Others,


19% Light stablizers, 4% Flame retardents, 5% Antioxidants 8% Heat stablizers,

Plasticizers 43%

Source: Industry reports, Tata Strategic analysis

Demand and supply scenario


Indian polymer additives market has been growing at a CAGR of 10.5% in the last five years and is estimated at ~USD 300 Mn.

Polymer additives market size (USD Mn)


10.5%

300

165

2005

2010

Source: Industry reports, Tata Strategic estimates

The organized segment has approximately 35 players and is dominated by multinational companies like Ciba India Ltd., Clariant Chemicals India Ltd., BASF, Lanxess India Private Ltd., Baerlocher India Ltd., Akzo Nobel Chemicals (India) Limited and Rohm & Haas India Pvt. Ltd. Major domestic players include KLJ Group, Fine Organics and Vision Organics Limited. KLJ Group and Baerlocher India are the market leaders in plasticizers and heat stabilizers, respectively. Ciba is the market leader in flame retardants, light stabilizers, and antioxidants.

Projected growth and drivers


The market for polymer additives is expected to grow at a CAGR of 11% to reach ~USD 500 Mn in 2015. Key market drivers include:

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Growth in the particular end-user markets: e.g. growth in plastic demand due to l increased usage in packaging, construction and automotive sectors
l Increasing environmental concerns l Replacement of wood, metal and glass by plastic across various applications

2010

Polymer additives market growth (USD Mn)


11%

505

300

2010 Source: Industry reports, Tata Strategic estimates

2015

Key trends and future outlook


Development of environment friendly additives is a major challenge being faced by the industry. Increasing demand for environment friendly additives by domestic market together with regulations such as REACH on exports is forcing players to adopt environment friendly products. With rising consumer awareness, players switching to oleo-chemical route could have a competitive advantage over others. Strict regulation on additive use in plastics is expected to drive demand and increase sales. The market has recently witnessed falling prices and low profit margins due to overcapacity of major manufacturers and reduction in import tariffs. The problem of overcapacity is likely to be addressed either by certain players exiting the market or via mergers and acquisitions. Companies that are able to modify their product portfolio accordingly could have a competitive advantage over others.

PERSONAL CARE INGREDIENTS


Introduction
The Indian personal care industry is estimated at ~USD 6 Bn. It can be categorized into distinct product segments such as bath & shower products, hair care, skin care, oral care, fragrances etc. The bath and shower products segment is the largest one. The Indian personal care ingredients market can be divided into active and inactive ingredients. Actives and inactives account for 40% and 60% by value of the total personal care ingredients market respectively.

India personal care product market: 2010


Deo & Others, 8% fragrances, Color 4% cosmetcis, 5% Skin care, 12%

Bath & shower products, 31%

Hair care, 25% Source: Industry reports, Tata Strategic estimates

Oral care, 15%

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Inactive ingredients Colorants Surfactants

Active ingredients Anti - ageing Exfoliants Conditioning agents UV ingredients

2010

Preservatives Polymer ingredients

Demand and supply scenario


Personal care ingredients market has grown at 12% in the period 2005-10 to reach ~USD 400 Mn. Rising income, increased availability and wider product portfolio of companies has led to growth in personal care products and thereby personal care ingredients. The market is extremely competitive with more than 1,500 manufacturers of personal care ingredients in India. The market is dominated by small and medium scale domestic companies which account for more than 50% of the market. Major domestic players include Vivimed Laboratories and Sami Labs. On the other hand, multi-national companies currently account for about 35% of the market. BASF India Ltd., Ciba Specialty Chemicals and Clariant Chemicals are the leading multinational players in India.

Personal Care Ingredients market (USD Mn)


12%

400

220

2005

2010

Source: Tata Strategic analysis

Projected growth and drivers


Personal Care Ingredients market in India is expected to grow at 14% to reach ~USD 770 Mn. by 2015. Key growth drivers include:
l Growth in the personal care products industry l Increasing personal care ingredient usage in formulation: Demand for products

with higher/ better performance


l Preference for "green products": Huge export potential due the demand for

natural products
l Product innovation: Development of multi-functional products

Key trends and future outlook


The industry is highly competitive with large number of domestic and international players. Domestic companies are registering good growth due to their meeting the market need for cost effective products. Indian personal care industry is highly cost sensitive and companies develop domestic substitutes for ingredients used globally. Indian market for personal care products like anti-ageing creams, sunscreen lotions etc. is very nascent and is developing at a fast pace leading to increasing requirement for investments in research and development of personal care ingredients.

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The growing awareness amongst the consumers is increasing the market for natural personal care products and in turn for natural ingredients. The rich heritage of Ayurveda is expected to make India a hub for natural ingredients Companies which are able to innovate and come out with value offerings to meet unique needs of the Indian consumers could have a competitive edge in the market.

2010

Personal Care Ingredients market growth (USD Mn)


14%

770

400

2010

2015

Source: Industrial reports, Tata Strategic estimates

PRESERVATIVES
Introduction
The preservative market in India is estimated at ~USD 50 Mn. Paints, personal care products and construction chemicals account for 65% of the total preservative market.

Preservative Market distribution by application: 2010


Animal Others, biosecurity, 6% 7% Water treatment, 7%
Gas and oil, 14%

Paints, 29%

Construction Personal Chemicals, Care, 23% 14% Source: Industry reports, Tata Strategic analysis

Demand & Supply Scenario


The preservative demand in India has been rising in the recent past fuelled by the growth in end user industries and rising consumer awareness. Currently, the market is estimated at USD 50 Mn. Preservative market in India is highly consolidated with organized sector having a market share of ~75%. Some of the major companies in the organized sector are Lanxess, Clariant, Thor Chemicals, Troy Chemicals, Arch Chemicals and Dow Chemicals.

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Projected growth and drivers

2010

The preservative market in India is expected to grow at an annual rate of 12%. Growth is expected to be driven by growth Expected growth rate for preservatives in major end use industries such as across segments: 2010-15 construction, personal care and paints.
Construction 16.0%

Major growth drivers for preservatives are:


l Growth of key end use industries such as
Personal Care 12.5%

paints, construction and personal care


l Increasing usage of water based paints

Leather

11.5%

Paints & coatings

11.0%

l Demand for natural products and high

shelf life of personal care products


l Greater usage of construction chemicals

Cooling water

11.0%

in construction activities
l Increasing awareness for quality

HI & I

9.5%

Paper

8.0%

products

Source: Industry reports, Tata Strategic analysis

Key trends and future outlook


Following the EU/ US markets, companies in India are moving away from the usage of products having harmful impact on the environment. Some of the widely used products such as Formaldehydes, Pentachloro Phenols, etc. are slowly being phased out. With newer players venturing into Indian market, companies may look into strengthening their competitive positions by providing full range of preservatives and offering blends as per customer requirements. Focus may shift to providing services along with the products which would act as the differentiating factor. The end to end services may include involving joint development with customers to provide customized solutions, providing R&D and testing facilities to know the efficacy of the end product.

References
1. CMIE report, Industry Market Size & Shares, April 2009 2. Research reports, Crisil Research 3. Business Press 4. Company Annual Reports 5. European Federation of Concrete Admixtures Associations 6. Chemistry Today, vol. 27, July-August 2009
This report has been authored by: Pratik Kadakia (pratik.kadakia@tsmg.com), Abhishek Nigam (abhishek.nigam@tsmg.com) and Mandeep Sandhu (mandeep.sandhu@tsmg.com

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Biotechnology

Introduction
Food Bio-Agri Energy Bio-Industrial Bio-Pharma
Established applications
Bt Cotton, Herbicide resistant corn, GM Soybean etc. Bio-enzymes 1st Gen Biofuels Hormones (Insulin), Vaccines (Hep B), MAbs1, ) Interferons ( (, ) Clinical trials, bioequivalence and bioavailability studies Data warehousing, mining, DNA sequencing, data management

Healthcare Bio-Services Bio-Informatics

2010

The next wave wave...


Bio-fertilizers? Bio-pesticides? Bio-manure? Bio-plastics? Bio-chemicals? 2nd & 3rd Gen Bio-fuels? Stem cell research? Therapeutic proteins from transgenic chicken eggs? India as a hub for KPO2 by pharmaceutical companies?
- India -India - Global -Global

Prediction of gene expression? Modeling of evolution?

Market Size ($ bn) bn 0.43 23 0.13 8.5 2 130

0.6

28

0.05

8.2

Prominent Players

In its most general sense, biotechnology can be used to refer to any technology that uses biology to accomplish its end. The biotechnology market consists of the development, manufacturing and marketing of products based on advanced biotechnology research. It addresses globally relevant themes like food, energy, healthcare etc. The biotechnology industry is divided into 5 key sub-segments Bio-Pharma: Biopharmaceuticals are medical drugs derived from life forms. They are proteins (including antibodies), nucleic acids (DNA, RNA or antisense oligonucleotides) used for therapeutic or diagnostic purposes, and are produced by means other than direct extraction from a biological source. Bio-pharma (also known as "Blue" biotech) includes products made by fermentation, animal cell culture and plant cell culture. Bio-Agri: Bio-agriculture (also known as "Green" biotech) includes analysis of Genetically Modified (GM) seeds, molecular markers and related products. Hybrid seeds are not considered part of Bio-agriculture. Bio-Industrial: Bio-industrial segment (also known as "White" biotech) consists primarily of enzymes used for industrial purposes in detergents, leather, paper, foods & beverages, starch, textile and various other industries. Upcoming segments like biofuels and bio-plastics are also part of bio-industrial segment. Bio-Services: Bio-services consists of clinical research, contract research and custom manufacturing for Bio-pharma products. Bio-informatics: Bio-informatics is usage of computer software tools for database creation, data management, data warehousing and data mining for molecular biology applications.

Global Biotechnology Market


The global biotechnology market was estimated at ~ USD 200 billion in 2009 having grown at a CAGR of 10.2% from USD 136 billion in 2005. It is estimated that the global market will grow at a CAGR of 9.6% to reach ~ USD 320 billion by 2014.

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Medical products accounted for 66% of global revenues while Bio-services market accounted for 14% of value in 2009.

2010

Global Biotechnology Industry 318 (USD Bn)


9.6% p.a. 201 10.2% p.a. 136

2005

2009

2014E

Source: Datamonitor

Global biotechnology segmentation (2009)


Env & Ind processing 4% Food and Agriculture 12% Technology service 4%

Services 14%

Medical Products 66%

Source: Datamonitor

Americas and Asia-Pacific regions together accounted for more than 70% of the global market in 2009. While the Asia Pacific market is projected to grow at 10.6% for the five year period from 2009-2014, the European market is expected to show a comparatively slower growth of 7.8% during the same period.

Global biotechnology regional share (2009)


Asia-Pacific 26% Americas 49%

Europe 25%

Source: Datamonitor

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Indian Biotechnology Market


Indian Biotechnology Industry (USD Bn)
21.5% p.a. 2.28 1.9 1.45 2.7 3.16

2010

FY06

FY07

FY08

FY09

FY10

Source: ABLE, Biospectrum, Tata Strategic projections

Industry Overview
The Indian biotech industry currently accounts for 1.6% of the global market and has more than doubled in size in the past five years from USD 1.45 billion (Rs. 6,520 Cr.) in FY06 to USD 3.16 billion (Rs. 14,200 Cr.) in FY10 growing at a rate of 21.5%. Indian biotechnology industry is largely exports driven with exports accounting for 53% of the revenues in FY10. Export value in FY10 stood at USD 1.67 billion (Rs. 7,530 Cr.) with Bio-pharmaceuticals and Bio-services leading in exports.

Indian Biotechnology Exports (USD Bn)


22% p.a. 1.42 1.09 0.76 1.56 1.67

FY06
Source: ABLE, Biospectrum

FY07

FY08

FY09

FY10

Indian Bio-services segment is purely export oriented with 95% of revenues coming from exports in FY10. This is primarily because of India's status as a key outsourcing destination owing to its skilled labour, diverse gene pool and low cost operations.

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Indian Biotechnology exports (% share)


Bio-agri 1%

Bio-industrial 2% Bio-informatics

2010
Bio- services 33% Bio-pharma 63% Source: ABLE, Biospectrum

Indian Bio-pharma segment registered export sales of 54% of total segment revenues, followed by bio-informatics at 32% and bio-industrial at 22%. Bio-agri segment had the lowest exports at 3% in FY10 given a large domestic market owing to India's large agriculture sector.

Key Segments
Bio-pharma is the leading segment in Indian biotech industry while bio-services & bio-agri have been the fastest growing.

Bio-Pharma
Bio-pharma segment grew by 12% over FY09 revenues to reach USD 1,962 million (Rs. 8,829 Cr.). Vaccines (both animal and human) was the largest sub-segment, accounting for 25% of the total bio-pharma market. Vaccines segment is expected to be the key contributor to the growth of the bio-pharma market in the coming years driven by government immunization programs and increased awareness. Bio-generics is expected to be another significant growth driver with several blockbuster drug patents expiring over the next few years. Diagnostics is another high growth subsegment contributing 23% to bio-pharma revenues. This segment is characterized by the presence of a large number of multi-national companies like Roche, Bayer diagnostics etc. and is growing at 15-20%. The therapeutics sub-segment is led by cancer therapeutics with sales of USD 69 million (Rs. 311 Cr.) in FY10. With India emerging as the diabetes capital of the world, Indian insulin market is estimated to be USD 140 million.
Indian Biotechnology Industry Segment Summary (FY10) Biotechnology
Revenue (USD million) Market Share CAGR FY 06-10 -10

Bio-Pharma
586

1,962

62%

17%

Bio-Agri

19%

38%

Bio -Industrial Agri


125

430

14%

34%

Bio-Industrial Bio-Services Bio -Industrial

4%

11%

Bio -Informatics Bio-Informatics

51

2%

18%

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Bio-Services
Bio-services grew 28% over FY09, accounting for 19% of the total biotechnology market. The growth is driven not only by MNCs outsourcing services to India but also by a growing number of Indian firms outsourcing various parts of the drug discovery chain. A significant trend emerging in this competitive market is strategic alliances between players to augment their services portfolio and span a larger section of the value chain. The bioservices segment has been seeing a spate of collaborations and alliances including
o o o o

2010

SIRO Clinpharm alliance with Dream CIS, South Korea Syngene International pact with Sapient Discovery, USA and Endo Pharma, USA Ecron Acunova tie-up with a Japanese CRO Veeda Clinical research agreement with Malaysian health ministry

Bio-Agri
Bio-agri segment has been growing at a astounding rate of 34% over the past five years. The immense success of Bt-Cotton in India has led to increased interest in Genetically Modified (GM) crops pushing Bio-agri in prominence across the biotechnology landscape. At 88% adoption and 8.4 million hectares of total cotton area under Bt, India is the 4th largest adopter of biotech crops in the world after USA, Brazil and Argentina. Bt cotton seed market in India is estimated to be over USD 400 million, with over 30 companies marketing the seeds. However, there is a strong lobby against adoption of Bt food crops in India, limiting segment growth. Inspite of moratorium on Bt-Brinjal, various other crops like Rice, Maize, Mustard etc. are under advanced stage of GM trials. Scientists at ICRISAT and Haryana Agricultural University (HAU) are working towards developing GM Chickpea and Pigeonpea, the adoption of which might provide the much needed boost to India's pulses production. The domestic market potential, combined with scientific infrastructure in agriculture, rich bio-diversity and skilled human-power is poised to make India an important global base for Bio-agri research.
Top 20 Biotechnology companies by revenues: FY10
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Company Biocon Serum Institute Panacea Biotec Nuziveedu Seeds Reliance life sciences Quintiles Rasi Seeds Novo Nordisk Shantha Biotech Mahyco Indian Immunologicals Bharat Biotech Novozymes South Asia Monsanto Syngene International Jubilant Organosys Eli Lilly Bharat Serums Haffkine Biopharma Siro Clinpharm FY10 Revenues (Rs. Crores) 1,180 850 703 477 450 375 359 342 334 312 273 272 268 255 252 249 187 175 169 150 % change over FY09 29% -24% 18% 6% -4% 4% 35% 48% 18% 13% 7% -26% 12% 3% 14% 25% -46% FY09 Rank 2 1 3 4 5 6 11 10 8 14 7 9 15 13 12 18 Segment Pharma Pharma Pharma Agri Pharma, Agri, Industrial etc. Services Agri Pharma Pharma Agri Pharma Pharma Industrial Agri Services Services Pharma Pharma Pharma Services

Source: ABLE, Biospectrum

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Bio-Industrial

2010

Indian bio-enzymes industry grew by 18% over FY09, with revenues of USD 125 million. Indian enzymes industry is witnessing a marked shift in focus from traditional segments like detergents, starch, textiles, leather etc. towards newer applications. The fast growing packaged F&B segment presents a significant opportunity for food enzymes like pro-biotics, lipases etc. Indian F&B enzymes market is expected to reach USD 47 million by 2015. Bio-fuels and Bio-plastics are also seeing increasing interest and investments and are expected to be large markets in the future. Indian biofuels industry is expected to reach USD 1.3 billion by 2015. Even though Enzymes consumption in India is low compared to other countries, their application is increasing in almost all end use industries in India. There is growing interest of MNCs in the market with large players like DSM and CHR-Hansen planning to grow aggressively.

Bio-Informatics
Bio-informatics is the smallest segment with just 2% share. Most of the bioinformatics companies are SMEs based in Pune, Bangalore and Hyderabad.

Major Players
Biocon is the leading biotechnology company in India with revenues of Rs. 1,180 crores in FY10. It is present in bio-pharmaceuticals commercialization and markets a wide portfolio of drugs including Statins, Insulin, Immunosuppresants and a range of biogenerics. Biocon's branded formulations include INSUGEN, BIOMAb EGFR, EPO, etc. It has a robust drug pipeline, led by monoclonal antibodies and has Asia's largest Insulin, Statin and perfusion based antibody production facilities. Biocon has already successfully launched its first anti-cancer drug and is developing conjugated antibodies with a US Biotech start-up, IATRICa, to potentially deliver therapeutic cancer vaccines. Biocon's biosimilar insulin is one of the world's most affordable therapies for insulin dependent diabetes. The top three biotechnology companies in India, Biocon, Serum Institute & Panacea Biotec belong to the bio-pharmaceutical sector and account for 19% of the total biotechnology market. The top 3 fastest growing companies of FY10 are Stempeutics, Lambda Therapeutics Research and Max Neeman International with Y-o-Y growth rates of over 100% in Fy10.

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Government of India

Department of Biotechnology Recombinant Recombinant DNA Approval Approval Committee (RDAC) Committee (RDAC)
Regulatory Regulatory Committee Committee on on Genetic Manipulation (RCGM) Genetic Manipulation (RCGM) Institutional Bio-safety Institutional Biosafety Committees (IBSC) Committees (IBSC)

Ministry of Environment Genetic Genetic Engineering Approval Approval Committee (GEAC) Committee (GEAC) StateBiotechnology Biotechnology Co State Co ordination Committee (SBCC) -ordination Committee (SBCC) District Level Committee Committee (DLC) District Level (DLC)

2010

Regulatory Structure
A multi-regulatory structure has been established to approve bio-tech products related to health and crops ensuring human and environmental safety. Department of Biotechnology (DBT) constituted under the Ministry of Science is the nodal agency for policy promotion regarding R&D, International Co-operation and manufacturing activities. DBT is supported by six competent authorities viz. Recombinant DNA Advisory Committee (RDAC), Review Committee on Genetic Manipulation (RCGM), Institutional Biosafety Committees (IBSC), Genetic Engineering Approval Committee (GEAC), State Biotechnology Coordination Committee (SBCC) and the District Level Committee (DLC). The RCGM established under the Department of Biotechnology (DBT) supervises research activities including small scale field trials, whereas approvals for large scale releases and commercialization of GMOs are given by the GEAC, established under the Ministry of Environment and Forests (MoEF). It is mandatory for every institution engaged in GMO research to establish an IBSC to oversee such research and to interface with the RCGM in regulating it. The SBCCs and DLCs have a major role in monitoring safety and control measures in the various industries/ institutions handling GMOs. The Biotechnology Regulatory Authority of India (BRAI) Bill, 2010 proposes to set up a regulatory authority which will be responsible for managing all biotech products in India including agricultural and pharmaceutical products. It will monitor safety testing of biotech crops and ensure scientific risk assessment and is expected to streamline the safety and efficacy aspects. However, BRAI bill has been facing criticism for nontransparency (negation of RTI) and inadequate representation of stakeholders like farmers, NGOs and consumers.

Future Outlook Growth drivers


India's inherent strengths in Biotechnology: Growing number of international companies are looking at India as an outsourcing l destination with high-skill, low-cost advantage.

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Cost of clinical trials in India is 50% lower in phase I and 60% lower in phase II l compared to global markets; clinical trials take lower time in India. India's diverse gene pool is ideal for clinical research.

2010

Some of the world's most expensive drugs are produced at an affordable cost in l India with labour costs being 50% lower than western countries. With India's expertise in reverse engineering, bio-generics presents a huge l opportunity with several high profile drugs coming off-patent. Bio-generics opportunity in India is expected to be USD 2 billion by 2014.

Favorable IP climate:
Adherence to the TRIPS agreement with regard to the Patent Protection Act l implemented in 2005 has increased the confidence of innovator companies in India.

Strong government support:


Biotechnology Regulatory Authority of India (BRAI) is expected to provide a single l window bio-safety clearance mechanism for all products. The National Biotechnology Development Strategy (NBDS), formulated by the l Department of Biotechnology, aims to help the country build capabilities in sync with international standards to become globally competitive. Department of Biotechnology (DBT) has an outlay of USD 260 mn for FY11 for l biotechnology projects. DBT is providing support for PPP in biotechnology through BIPP (Biotech Industry l Partnership Programme) with an outlay of USD 77 million. DBT, in collaboration with The Wellcome Trust, UK, has announced investment of l 45 million for research and development of innovative healthcare products at affordable costs. Karnataka state government is going to set up 5 new biotech parks and has already l invested USD 240 million towards new initiatives in Fy10. Andhra Pradesh government is going to set up MedTech valley near Genome l Valley in Hyderabad through public private partnership. KSIDC recently announced plans for a state-of-the-art life science park at l Thiruvananthapuram at a cost of USD 65 million through public private partnerships (PPP). The Center for Cellular and Molecular Biology (CCMB) has entered into l collaborations with Deccan Medical College (DMC) and Japan-based Nichi-in Center for stem cell research. DBT is setting up Centre for Stem Cell Research which has been approved by the Indian Council to conduct India's first ever multicentric clinical trials with stem cells. With significant investments by the

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government, the stem cell research opportunity in India is estimated to be over USD 500 million and expected to grow at 15%.

Collaborations and acquisitions:


l There is a strengthening trend of liaising and partnering in order to expand

2010

competencies and capacities and enter new geographies. Also various MNCs are looking to acquire established Indian companies to establish a foothold in the Indian market.
l Merck KGaA acquired bio-services company Bangalore Genei in October 2009. l Lonza Group took over the preclinical cell and molecular biology assets of

Bangalore-based Simbiosys Biowares India, also in October 2009.


l DuPont acquired Nandi Seeds and the cotton germplasm business of Nagarjuna

Seeds to participate in the cotton seed market in India.


l India is partnering with several European countries like UK, France, Switzerland etc

to enable international technology transfer.

Growth forecast
According to a research report on Biotech market in India, the year-on-year growth of the biotech market is expected to accelerate in near future on the back of high demand for vaccines, CROs, bio-pesticides, bio-fertilizers, bio-similars, biofuels and bio-therapeutics both in India and at the global level and take-off of various mega initiatives by state governments and Department of Biotechnology. Indian biotechnology industry is expected to grow at ~23% and reach USD 8.8 billion by Fy15.

Indian Biotechnology Industry (USD Bn)

8.8

22.7% p.a.

3.2

FY10
Source: ABLE, Biospectrum, Tata Strategic estimates

FY15

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References
1. Association of Biotechnology Led Enterprises Survey 2010

2010

2. Global Biotechnology Industry 2009 report by Datamonitor 3. Ernst and Young sector report on Biotechnology, 2009 4. Business Press 5. http://dbtindia.nic.in/index.asp 6. http://www.biocon.com/

This report has been authored by: Pratik Kadakia (Pratik.kadakia@tsmg.com) and Manjula Singh (manjula.singh@tsmg.com)

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Petroleum, Chemical and Petrochemical Investment Regions (PCPIRs) and their impact on Indian Chemical Industry

Current Indian Petrochemical Overview


Indian market for petrochemicals, 2009-14 (Mn tons)
9.2 % 4% 6.5 0.7 10% 9.2 Plastics 5.8 5.6 7.1 1.5 10.1 0.9 4% 11.6% x% CAGR 12.3 1.8

2010

Aromatics

13% 10.5

2009 Demand
Source: Crisil, Roland Berger

2014

2009 Capacity

2014

The Indian petrochemical industry is expected to show robust growth in the coming years, with a strong growth in plastics demand and domestic production. In the 5 year period, from 2009 to 2014, domestic demand for plastics is expected to grow at a CAGR of ~10%. In the same timeframe, India will also see a strong push in petrochemical production capacity with plastic production being a key growth area. The petrochemical production capacity is projected to grow by over 75% till 2014. The strong demand and the even stronger push towards domestic production will result in reducing the trade deficit in plastics by half.

Net trade surplus/deficit in petrochemicals ('000 tons)


-712 Net trade 68 -358 PS

637 33 Surplus Deficit -24 -342 -885 -379 2009 -178


Source: Crisil Research

PP

PVC

PE

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Current Issues Of The Industry

2010

The Indian petrochemical industry has a strong advantage in terms of proximity to the domestic market. However, feedstock availability and feedstock cost are the major issues faced by the industry.

Prices of olefins - estimated delivered cost (USD/ ton)


1,200 1062 1,000

800

600 468 400 283 200

562

Middle East 2008

South East Asia 2009

Source: Deutsche Bank, CMAI Global, Roland Berger

Cost of feedstock is significantly higher in India compared to the Middle East. Deregulation of gas prices has resulted in the petrochemicals sector having no relative advantage for sourcing of gas. Indian petrochemical facilities are comparable to Asian countries in terms of scale of operations but significantly smaller than those found in the Middle East and hence face a disadvantage in terms of economies of scale. Also, the investment needs per tonne is higher in India due to higher interest costs and duties on capital goods. This is only partially offset by low labor costs.
Middle Eastern industrial complex Large area, more than 200 km2 Integrated on-site facilities Area Port Water & power plant Gas pipeline Many plants High capacity

Isolated Indian production facility Relatively small area, <50 km2 Other complementary facilities not on-site

Plants/ capacity

Entire complex is upward and downward integrated in production of petrochemicals Large workforce >5,000 comprised of officials, professionals and workers

At most, a handful of plants with medium to medium-large capacity Small workforce <1,000

Workforce

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Continuing Challenges
Excess capacity currently exists in petrochemical production facilities globally, resulting in lower utilization rates. Also, significant capacity expansion, particularly in the Middle East, is expected to maintain the utilization rates at low levels.

2010

Global polyolefin production capacity1 by region, 2009 (Mn tons)


Asia ex. Japan & India India North America Western Europe Middle East 78% 90% 5.6 10% 83% 78% 17% 37.9 22% 33.5
22%

63.3

79%

21%

91.8

85% 90% 10.5 15% 90% 37.5 10% 83% 84% 2015 30.8 17% 32.1 16%

77% 23% 18.0 2009

Nameplate capacity not utilised Petrochemical production

Note: 1) Only includes HDPE, LLDPE, LDPE, Polypropylene, PVC and Polystyrene
Source: Deutsche Bank, Crisil Research, Roland Berger

Global oversupply will increase pressure from manufacturers focused on exports, especially from the Middle East, constraining the export ability of Indian players.

Delivered cash costs to India - illustrative (USD/ ton)


Cost advantage

Tariff

Distribution Other1) Labour

Raw materials & utilities

Middle East

India

Note: 1) Includes fixed costs and cost of capital Source: Roland Berger, Tata Strategic

Also, strong competition from these players, who enjoy a low cost base, will result in increasing margin pressures for Indian producers.

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Way Ahead - PCPIRs

2010

The PCPIR (Petroleum, Chemical & Petrochemical Investment Region) policy was envisaged to promote investment and make India an important hub for both domestic and international markets. PCPIRs are specifically delineated investment regions with an area of around 250 sq km and planned investments of greater than USD 15-20 Billion. The processing area consists of a minimum 40% of total specified area (i.e. 100 sq km) while the non-processing area would form maximum 60% of total specified area (i.e. 150 sq km). Non-processing area would have residential, commercial and other establishments benefiting the people residing and working in the region. Investments of over USD 280 Bn have been planned across the three approved PCPIRs, Bharuch, Visakapatnam and Haldia and the three planned PCPIRs namely Mangalore, Cuddalore and Paradeep.

Impact of PCPIR
The integrated approach via the PCPIR route could help India redefine the rules of the petrochemicals game and overcome its feedstock disadvantage.
Current status of PCPIRs committed funds and provisions in total area [km2]

Mangalore, Karnataka
> Investment: USD 22.2 bn > Anchor tenant: MRPL/ONGC > Details: refinery expansion; petrochemicals & LNG complex; C2, C3 extraction

Haldia, West Bengal


> Investment: USD 18.8 bn > Anchor tenant: IOC/Spice > Details: refinery; hydrocrackerbased existing refinery

Bharuch, Gujarat
> Investment: USD 23.4 bn > Anchor tenant: ONGC/GSPC > Details: petrochemicals; LNG complex; C2, C3 extraction 264 453 604 300 252 Approved PCPIR Planned PCPIR 284

Paradeep, Orissa
> Investment: USD 68.8 bn > Anchor tenant: IOC > Details: refinery, petrochemicals

Cuddalore, Tamil Nadu


> Investment: USD 60.0 bn > Anchor tenant: Nagarjua Oil Corp > Details: refinery; naphtha cracker

Visakapatnam, AP
> Investment: USD 88.0 bn > Anchor tenant: HPCL/ONGC > Details: refinery and expansion

Source:Tata Strategic Management Group

Economies of scale
PCPIRs can deliver economies of scale to close the cost gap and make Indian producers more competitive. The cost savings are accrued on account of reducing average fixed costs, joint sourcing agreements for power & water utilities and sharing of logistics infrastructure. Higher level of integration at one site also results in reduced distribution costs. This coupled with an inherent labor cost advantage, while not providing for tariffs, could potentially create an advantage in exports for the Indian petrochemicals industry.

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Cash cost of supplying to Indian market (USD/ ton)

Cost Advantage

2010

India pre-PCPIRs Tariff on Indian exports Tariff

Middle East Distribution Other


1

India post-PCPIRs Labour Raw materials and utilities

Note: 1) Includes fixed costs and cost of capital Source: Roland Berger, Tata Strategic

Downstream chemical development


Ethylene versus VAM capacity increase [%]
25

LAGGED SPIKE IN GROWTH


VAM

20

15

10

2005

2006

2007

2008

2009

Source: Deutsche Bank, CMAI, BMI, Roland Berger

New petrochemicals clusters could also serve as a nucleus for further downstream chemicals development as was seen in China post 2005, which saw a dramatic increase in ethylene production capacity. This was further augmented with development of coal based methanol plants. Three years after this, a sharp spike was seen in VAM (Vinyl Acetate Monomer) capacity, highlighting the fact that development in downstream chemicals is encouraged by greater capabilities in basic petrochemicals.

Potential Risks
The largest potential risks to the success of PCPIRs are FDI availability and feedstock security. Delays owing to global economic crisis and subsequent international shortage of FDI could derail the growth track. Despite large domestic gas reserves being found, feedstock availability and security still remains a concern. Further delays and issues in land acquisition and inadequately meeting environmental concerns can disrupt the mega investment plans.

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Success Factors

2010

PCPIRs can succeed if there is further participation and improvement in cost competitiveness. PCPIR attractiveness can be improved by fiscal policies and incentives such as duty exemption on capital goods, extra support through information and technical expertise and offsetting agreements. Availability of financing can provide an impetus to private investment. Also, development of dedicated industrial training institutes can help build a strong supply of technically skilled manpower. Costs can be further made competitive through increasing scale of operations and attracting further downstream investments close to PCPIRs. Deployment of world class technologies through JVs with leading companies of the world, similar to the Saudi Arabia-China model, can help in technical/ operational know-how and in some case benefit with access to the developed markets. In conclusion, PCPIRs can deliver economies of scale to close the cost gap and make Indian producers more competitive. PCPIRs can be the proverbial 'Philosopher's Stone', providing world class infrastructure facilities at lower costs and also tremendous business potential and growth to the petrochemical players.

This note is based on a presentation made by Tata Strategic Management Group/ Roland Berger Strategic Consultants (RBSC) and delivered by Dr. Thorsten Ploss, Partner - RBSC at Polymer update Global Petrochemical Conference, Mumbai, Aug 2010.

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Process Plant and Machinery

Industry Overview
The process plant machinery sector in India is a heterogeneous industry catering to a wide range of process industries like oil and gas, petroleum refining, petrochemicals, chemicals, fertilizers, pharmaceuticals, metal processing, cement, paper, sugar, food processing and water treatment. The industry at present is equipped with modern machinery, in addition to competent engineers and workers, and is producing sophisticated equipments and systems such as: high pressure reactors, pressure vessels, columns, towers, heat exchangers, multi tubular reactors, evaporators, crystallizers, dryers, road/rail tankers, storage equipments, mineral beneficiation equipments, rotary kilns and separators, etc. for the domestic as well as the global markets. The process plant and machinery industry has evolved primarily on the basis of the requirement to set up core process industries in India post-independence. It had its genesis through the various public sector units set up under the aegis of the Department of Heavy Industry during the early 1950's and 1960's. Subsequently as the liberalization policy was pursued by the government, private sector companies like L&T (HED) and Godrej & Boyce (PED) ushered in the next phase of growth for the industry. Liberalization has helped the sector, granting it access to global markets. The industry today is equipped with state of art processes to engineer and fabricate various complex process equipments across different grades of materials of construction. The plant sizes of these process industries have also increased and at times are comparable or even larger than global plant capacities.

2010

Industry Structure
Pvt. Ltd., 16% Closely held pvt. Ltd., 29%

PSU, 7%

Partnership firms, 6% Public Ltd., 42% Source: Secondary Research

The Indian process plant and machinery industry has grown over the years at a rate of 6-10% p.a.

Industry Landscape
Process plant & machinery is a highly capital as well as labor intensive sector with a strong engineering orientation and products are mostly custom built. Hence economies of scale have less relevance.

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Project cost breakup


Other Costs, 28%

2010
EPC, 12% Equipment and machinery, 60%

Note: 1) excluding land cost Source: Primary Research, Secondary Research

Being heterogeneous, the industry is also very fragmented. Industry studies show that majority of the players in this sector are in medium sized category and only 6% of companies fall in large category holding a market share of 43 percent. These companies operate on a higher technological platform compared to the others based on their expertise and infrastructure facilities.

Chemical Machinery market Share (2008)


Others, 18.80%

Bharat Heavy Electricals, 3.36% Alfa Laval (India), 3.61% Tema India, 4.43% Saraswati Industrial syndicate, 4.58% GE I Industrial Systems, 4.91%

Larsen & Toubro, 40.23%

Bharat Heavy Plate and Vessels, 6.16%

Godrej & Boyce Mfg. Co., 13.92%

Source: CMIE, 2009

The major hubs for process plant and machinery industry in India are at Delhi-NCR, Maharashtra and Gujarat. International companies have started their operations in India through joint ventures like Atlas Copco, Alfa Laval, J.L. Smith, Sulzer etc. Others have tie ups with renowned Indian equipment manufacturers and are considering making India as their manufacturing hub for exports. Internationally renowned consultants in process industries like Flour Daniel, Bechtel, Foster Wheel, LG, Daelim, Jacobs, Uhde and Toyo engineering have offices in India. They are increasingly using the Indian process plant manufacturer's expertise in engineering and manufacturing for outsourcing. Indian companies are also positioning themselves as a low cost manufacturing hub by aligning themselves and working together with these consultants.

Trade
India is benefiting from the globalization of the chemical market due to its lower cost structure, high domestic demand and close proximity to other Asian countries. A few companies have made a mark in the export arena due to their manufacturing skills and quality.

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Exports account for ~30% of the domestic production though the export orders were sharply down in the last two years due to deferment/ cancellation of planned projects across geographies. India's major export markets for process plant include UAE, Saudi Arabia, Nigeria, Kenya and Vietnam. There is intense competition for business from Korea, China and Italy.

2010

TRENDS
Market
As the Indian chemical industry integrates with the global chemical industry, the present day plants are far more complex and larger in capacity. The Indian process plant and machinery sector is geared to take up these challenges and has built capabilities to manufacture very large equipments that weigh up to 1,200 tons to towers that are more than 100 meters long. Indian companies are now moving towards international expansions, e.g. L&T's joint venture at Sohar, Oman for targeting the market in GCC countries. With customers looking for a single supplier to avail end to end services, it is expected that smaller players would play the role of sub-suppliers or sub-contractors to the bigger players. Increase in percentage of bought-outs in total sales is indicative of this trend. Indian manufacturers are no longer confined to fabrication alone and have a strong presence across the entire value chain. They are catering to the needs of the customers, from design and engineering at the back-end to erection and commissioning at the front-end and are competing with global majors for Engineering, Procurement and Commissioning (EPC) contracts.

Value Chain

End-to-end solution provider

Consultants

Raw material Supplier

Designing

Manufacturing

Customer

EPC
Source: Tata Strategic Analysis

Raw material supplies are being secured through joint ventures. The domestic steel industry has the challenge of meeting the requirements of the sector in terms of availability of quality raw materials.

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Equipment cost breakup


Other costs 45% Raw materi al cost, 55% Other Raw materia ls, 15%

2010

Steel, 85% Raw Material

Equipment
Source: Primary Research, Tata Strategic Analysis

Development centers are increasingly working closely with customers for analyzing plant performance and developing ways to improve plant efficiency. With enhancement of quality standards and improvement in delivery schedules, India is developing as a major outsourcing base for complete services right from designing to commissioning. MNCs are using their Indian arms for outsourcing. Global acceptance for Indian goods is increasing with improving quality and adoption of international standards and processes.

Technology
There is an increasing focus on continuous development of manufacturing technology and new products as well as modification of existing products. Up-gradation is important to have a competitive advantage. Companies have equipped themselves with modern machinery and state of the art facilities to face increasing international competition. They are acquiring international standards such as ISO, ASME, CE, etc. to improve productivity thereby reducing costs and improving upon the delivery period. MNCs are bringing newer technologies and processes from within the organization's established foreign arms. Companies are focusing on increasing tie-ups and partnerships for technology transfer but these are limited due to unclear IPR definitions. Improving operational efficiency is a prime area to target during current times so as to be better equipped when industry growth picks up again. This is being done through various measures such as automation of design and drawing activities for reducing the cycle time and improving quality of the design & engineering processes. Automation in manufacturing and operations is also a key area for improving efficiency. Companies are also making use of IT enabled re-engineering to improve systems and processes. Industry has been working on financial management to become cost effective. As a result, the percentage of working capital to sales has been on a steady decline. Companies are stressing on improving talent acquisition and retention to enhance organizational performance. Initiatives are in place for skill/capability building including tie-ups for training, knowledge sharing and up gradation.

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Regulatory
Import duty is very low at ~7.5% but domestic taxes and duties are high. Hence importing equipments and machinery is very convenient for the industry which has increased competition for the domestic equipment manufacturers. On the raw materials side, the local steel manufacturers are lobbying to impose antidumping duty on the import of steel, making it more expensive. Increasing competition along with increasing raw material prices is putting pressure on the margins of process plant and machinery industry.

2010

Risks And Challenges


In its quest to serve the entire value chain the PPMI has exposed itself to higher risks including commodity steel prices and penalties associated with delays. Lack of infrastructure poses a serious threat as delay in deliveries and schedule is mostly attributed to delay in transportation of raw materials from supplier or finished goods to customers. The lack of port infrastructure, leading to higher transaction costs and freight costs, is impacting margins. Power shortage is another reason for inability to meet timelines (Power consumption to sales ratio in PPMI is higher than other manufacturing industries since the products manufactured have higher component of fabricated items).

Future Outlook
In 2009, the Indian process plant and machinery industry was active, in spite of the global slowdown. This was because of execution of planned government projects. In the near future, the market is expected to show marginal reduction in growth rate due to the decline in number of available projects. Also, on-going new projects are on verge of completion and pace of work in new projects has slowed down in the past 2 years. Future growth is expected in efficiency improvement and de-bottlenecking projects for sectors like Petrochemical, Refining & Oil and Gas. Expansion projects as well as green field setups are expected in sectors like fertilizer. However, developments are dependent on clarity in government policies on subsidies and natural gas.

Indian process plant and machinery industry1 23,000 (Rs. Cr.)


16,000

10,000

2005

2010

2015

Note: 1) Includes replacement market (~20-25% of the total market) Source: Primary Research, CII, Tata Strategic Analysis

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Strategy

2010

Reduced active projects coupled with competitive market conditions might increase the pressure on margins in new projects. Companies need to differentiate their offerings by improving quality of products and providing more services along with equipments. Improvement in productivity and capacity utilization can be achieved by continuous improvements in processes and operational methods. Companies could focus on best practices to reduce their manufacturing costs and improve quality standards. Since raw materials are a major cost component of the equipments, companies could invest in IT systems to integrate their supply chain, thereby reducing inventory levels and ensuring cost effective procurement methods. To compete in the industry, companies could provide high quality and service, reduce costs, increase product range and involve in aggressive sales & marketing to build a brand image. Strategic alliances are required from time to time for new product development. The process plant and machinery manufacturers have the right mix of talent & expertise and the opportunity to grow at a fast pace if the much needed investment in the core infrastructure industry takes place. A re-look at operational and management efficiencies can help industry participants bring a competitive advantage and succeed in this industry.

References
1. CMIE report, Industry Market Size & Shares, April 2009 2. CII - Department of Heavy Industry, report on the Indian Capital Goods Industry 3. EXIM report, Indian Capital Goods Industry, June 2008 4. Business Press 5. Company Annual Reports

This report has been authored by: Pratik Kadakia (pratik.kadakia@tsmg.com), Ashwin Rao (ashwin.rao@tsmg.com) and Deepti Gupta (deepti.gupta@tsmg.com)

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Thought Notes

Indian Chemical Industry The Road Ahead

The growth story for the Indian chemical industry remains intact. However post downturn, domestic chemical companies across different segments are likely to face stiff competition either from imports or global giants manufacturing locally to serve the Indian market. There is no common solution to counter such competitive pressures as each segment has different critical success factors. Indian chemical companies would do well to tailor their strategy depending upon the segment in which they operate, say Raju Bhinge, Chief Executive and Ankur Singhai of Tata Strategic Management Group

2010

The worst is behind us


India's chemical industry has come a long way, growing from USD 28 Bn in FY03 to USD 42 Bn in FY09. While it grew at about 7.5% per annum from FY03 to FY08, the recent economic downturn slowed down the growth momentum considerably. As can be seen in Figure 1, only 5.0% growth was recorded during the FY08-09 period, that too on account of the stimulus package announced by the government of India. However, going by the IIP data for the period Apr'09 - Jan'10, the Indian chemical industry has bounced back strongly, growing at about 11.5% during FY09-10.

Figure 1: Past growth of Indian chemical industry and the segment breakup
Indian chemical industry (USD billion) 7.5% 5.0% CAGR Knowledge chemicals 18% 40 40
28 28

Segment share (%)

42 42 Specialty 25% chemicals

57% Basic chemicals

FY2002-03

FY2007-08

FY2008-09

Tata Strategic Management Group

The chemical industry primarily comprises of three segments namely basic chemicals, specialty chemicals and knowledge chemicals. Basic chemical with ~57% share is the largest segment followed by specialty chemicals at 25% and knowledge chemicals at 18%. This has largely remained unchanged over the past few years. Each segment is different, with its own unique set of challenges and opportunities. Therefore each of these segments needs to be looked at in greater detail to understand what the future has in store for Indian chemical companies.

Figure 2 : Indian Petrochemical demand supply projections


Indian Petrochemical demand (in CAGR million tonnes) (FY10-14 12%
5.0 5.0-6.0 -6.0

Indian Petrochemical supply (in CAGR (FY10-14 million tonnes) 14%

5.8

3.3 3.3 11 11 7
FY2009-10 FY2013-14

4.1 10% 7 FY2009-10 Olefins FY2013-14


Aromatics

11.0-12.0

10%

Olefins

Aromatics

Tata Strategic Management Group

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2010

The chemical industry primarily comprises of three segments namely basic chemicals, specialty chemicals and knowledge chemicals. Basic chemical with ~57% share is the largest segment followed by specialty chemicals at 25% and knowledge chemicals at 18%. This has largely remained unchanged over the past few years. Each segment is different, with its own unique set of challenges and opportunities. Therefore each of these segments needs to be looked at in greater detail to understand what the future has in store for Indian chemical companies.

Basic chemicals
Petrochemicals (Olefins and aromatics) form the backbone of basic chemical industry with more than 60% share by revenue. As illustrated in Figure 2, olefins demand in India is expected to grow at 10 % per annum while aromatics demand is expected to grow at 12% per annum over the next four-five years. High GDP growth (7%-8% per annum) and increase in real per capita income (6%-7% per annum) will drive the demand in key end use industries like automobiles, consumer durables, textile, packaging and real estate, thereby stimulating the demand for petrochemicals. As global majors across diverse industries like auto and consumer durable set up manufacturing facilities in India, downstream polymer processing industry is also evolving into a more organized market. On one hand multinationals like Austrian Alpla (Packaging industry) and Italian Meccaferi (Non woven geo-textile) are making a mark in the domestic market while on the other hand domestic companies like Jain Irrigation and Essel Propack are trying to create a global footprint. This will further drive the demand for petrochemicals in India. High growth prospects have led to many companies announcing plans to set up domestic capacity close to market. Reliance Industries recently announced plans to set up a 1.3 Mn to 1.6 Mn tons per annum cracker at Jamnagar by 2014. Similarly Indian Oil and ONGC are setting up petrochemical facilities which are expected to come online in 2010 and 2013 respectively. Further, availability of captive feedstock like Naphtha & refinery off-gases and infrastructure support through development of Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) are incentivising companies to invest in petrochemical capacities. However Indian companies should take note of the wave of petrochemicals capacity (over 13 Mn tons) coming up in West Asia in the next four-five years. Most of this capacity is based on low cost gas feedstock which can render naphtha based complexes uncompetitive. Already plagued by overcapacity, many European capacities like the one at Wilton, Teesside chemical cluster are being closed down. Besides, owing to proximity to India, West Asia companies will target the Indian market. This is a major risk for Indian chemical companies looking to invest/ expand their petrochemical business. As shown in Figure 3, six factors would define the success of Indian petrochemical industry in future. Indian companies will have to review their capabilities along each of these dimensions. They should leverage high growth domestic market and focus on securing access to low cost captive feedstock and world scale capacities to have a meaningful play in the petrochemical market.

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Figure 3 : Critical Success factor for India petrochemical industry


Economies of scale Costs (feedstock and fixed costs)

Infrastructure

Critical success factors affecting the indian petrochemical industry

2010
Global demand supply situation

Downstream and upstream integration

Domestic demand supply situation

Tata Strategic Management Group

Other sub-segments like inorganic chemicals and fertilizers also operate on similar principles. Since the basic chemical segment is mainly commoditized, any company would have to strategize around either being well entrenched in the market (domestic or global) or have a global scale or have access to low cost feedstock or a combination of these to sustain competitive advantage.

Figure 4 : Critical Success factor for India petrochemical industry


END USE MARKET GROWTH PROJECTIONS [% p.a.]
Textiles Construction Glass Paints Automobiles Leather Paper Personal Care 7 9 10 15 6 7 9 15 10 14 12 12 12 17 12 20

IMPACT OF SLOWDOWN
Severe (Exports constitute 40-50%; badly affected) High-moderate (Housing slow down, infrastructure projects stalled) High-moderate (Housing/ automotive slow down) High- moderate (Housing/ automotive slow down) Severe (Cut on discretionary expenses, high interest rates cars expensive liability, some respite due to launch of smal cars)l Severe (Exports affected) Low-moderate High-moderate (Cut on discretionary expenses)

During slowdown

Pre-slowdown

Tata Strategic Management Group

Specialty chemicals
The demand for specialty chemicals industry is driven by a wide range of end use industries. Thus as depicted in Figure 4, global economic slowdown has impacted adversely the growth of the key consumer industries and consequently the specialty chemicals industry in India. Not all segments were equally affected. Chemicals being supplied to consumer industries with relatively higher export dependence e.g. textiles witnessed a much steeper decline in growth as compared to chemicals for industries like paper where domestic demand has a predominant share in the overall demand. However the fundamental shape of the Indian specialty chemicals growth curve has not altered significantly. It is expected to return to pre-slowdown growth rates of ~15 % p.a. in one-two years as shown in Figure 5.

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Figure 5 :Specialty Chemicals Growth Projections


Demand (NOT TO SCALE)

INDICATIVE

~4-8 quarters projection shift Pre-downturn growth projection CAGR: 15-17% Inv. adj/ demand slowdown

2010
Past growth curve CAGR: 11-12%

Post-downturn growth curve CAGR: ~15% Opportunity to review strategy and build capability

Pre slowdown 2002 Tata Strategic Management Group 2007

Slowdown, demand contraction & recovery 2008 2009

Post recovery Time-year end (NOT TO 2012 SCALE)

2010

Post slowdown some of the key end user industries such as auto, construction and consumer electronics are estimated to grow at an even faster pace. Besides, a number of new applications in each of these sectors will also contribute to growth. e.g. Auto industry is expected to grow at 9% per annum during the next five years from 11.25 Mn units in FY08-09 to 17.12 Mn units in FY13-14. Moreover emerging trends like demand for cost effective fuel efficient cars is driving the usage of performance plastics in cars which in turn would require specialty chemicals like antioxidants to provide thermal stability. While the growth story for specialty chemicals has returned post downturn, the competitive landscape has changed, which domestic companies should take cognizance of. Specialty chemical industry has seen consolidation with global majors like BASF and Dow entering the specialty chemical space by acquiring Ciba and Rohm and Haas respectively. Thus BASF which till now was supplying performance plastics to auto industry would also start supplying specialty chemicals. As a result the domestic specialty chemicals companies will face a much bigger and stronger competitor in the market. Companies need to address four key dimensions to compete successfully in India's specialty chemicals industry. They are as shown in Figure 6.

Figure 6 : Important factors for success in specialty chemical markets


2

Low cost application development capability: Frugal innovation Strong relationship with key end use industries: 1 Understanding of needs COMPETING SUCCESSFULLY IN INDIAN SPECIALTY CHEMICALS INDUSTRY
4

Cost leadership

Leverage local upstream chemicals supply


Tata Strategic Management Group

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Emerging trends in consuming industries call for development of unique local products/ solutions based on an understanding of Indian customer. This factor is critical for companies supplying to the whole spectrum of end user industries. Automotive industry requires chemicals to support emergence of India as a low cost small car hub and green-tech features. Creating products to support growing demand for ultra low-cost housing projects and green buildings is critical for the growth of construction chemical companies. Likewise demand for environment friendly cropprotection solutions/GM crops and processed food creates new opportunities for agro-based chemical companies. Growth of renewable energy sector is increasingly creating new customer segments for chemical players.

2010

Knowledge chemicals
Knowledge chemicals mainly consist of pharmaceuticals and agro-chemicals. These segments were relatively unaffected by economic downturn. Domestic pharma market was estimated to be USD 7.5 Bn in FY2009 and have a CAGR of 14.0% during the period FY08-09 to FY13-14. Besides domestic sales, export of generic drugs and active pharmaceutical ingredients by Indian companies adds another USD 11 to 12 Bn to the pharma market. Similarly the domestic agrochemical market was estimated to be USD 900 Mn in FY2008-09 with another USD 300-400 Mn exports. The domestic agrochemical market is expected to have a modest CAGR of 7.5% during the next four-five years. Both the sub-segments in knowledge chemicals industry have witnessed similar life-cycle trends. It started with a focus on low cost export of generics and gradually moved on to developing contract manufacturing opportunities. Currently the contract manufacturing market presents a USD 2 Bn opportunity for the Indian pharma industry and is likely to grow at 25%-30% per annum over the next two-three years. Similar opportunities exist in agro-chemical space. Rallis has invested Rs.150 crores in a plant at Dahej in Gujarat for contract manufacturing of agro-chemicals for its global partners. Even as India boasts of the highest number of US FDA plants, ANDA (Abbreviated New Drug Application) and DMF (Drug Master File) filings outside of US, it is facing stiff regulatory pressures in those developed markets. In contract manufacturing market too, China is following closely on the heels of India. The agrochemical market in India already has global majors like Monsanto, BASF and Dow competing with local companies like United Phosphorus and Excel Crop Care Thus Indian knowledge chemical companies may need to focus on the following three parameters to become globally competitive: 1. Understand the exact need of the consumers 2. Increase R&D efforts to develop new molecules 3. Develop high quality low cost manufacturing facilities from lab scale to ton scale

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Conclusion
Three common themes are emerging across the segments:

2010

1. Domestic market continues to offer high growth opportunities 2. Competitive pressure is increasing both from imports and from global majors setting up manufacturing facilities in India 3. There has to be an ongoing focus on lowering costs Thus in order to successfully tap the high growth domestic market while keeping the competition at bay, Indian chemical companies will have to tailor their strategies along the critical dimensions depending upon the segments in which they operate.

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IM&A opportunities in Chemical Industry

Introduction
Indian chemical industry is estimated to be ~USD 83 billion in 2010 which is around 2.5% of the global chemical industry. Though global chemical industry grew at around 9% p.a from 2004 to 2008, industry went through a dramatic downturn in 2008-09 due economic slowdown. Demand from large end-use industries like construction, automotives, electronics, etc. dropped by 4-5% of its 2008 levels. Post 2009, as global economy has started recovering, chemicals industry is starting to register volume growth due to restocking and revival of underlying demand. Driven by domestic demand, Indian chemical industry has been resilient and quick to recover from the effects of global economic slowdown. Indian chemical industry is expected to grow at 10-12% p.a to reach ~USD 130 billion by 2015. Specialty chemicals and pharmaceuticals are expected to grow at much higher rates than global counterparts. Low per capita chemicals consumption and growing middle class are the key drivers for sustained demand growth in end-use industries.
Indian chemical industry, 2010
India 2.5%

2010

Growth rate of select segments: 2010 to 2015


Biotech
2.5 2 15

USD 83 Bn. Biotech Agro Chem


Spec Chem

9.6% 7.5% 3.5% 3.4% 6.0% 9.0% 15.0%

22.7%

Agro Chem Spec Chem Pharma

20

Pharmaceuticals

18.0%

Rest of World 97.5%

44

Base chemicals

Polymer Fertilizers

4.0% 4.0% 3.0%

Source: SRI Consulting, Tata Strategic Analysis

2010

Global

India

Resilient and growing economy along with ease of doing business, favorable government policies and matured financial markets are the key drivers for global companies' increasing presence in India.

Drivers For M&a In India


Inbound and domestic mergers & acquisitions (where target is an Indian company) have significantly different drivers than outbound M&A (Indian company acquiring assets outside India).

Drivers for inbound and domestic M&A


Global chemicals companies are keen to establish their presence in India to participate in growing market which is providing significant growth opportunities. They are looking towards merger & acquisition route to derive first mover advantage or to catch up quickly with established companies. Similarly, global companies with India presence and large domestic companies are going for mergers & acquisitions to increase their market presence, product portfolio rationalization and cost optimization.

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Driver 1: India entry Many global companies have started believing India growth story and are keen to actively participate in it. Indian markets have been growing significantly and have become too large to ignore now. In addition, cost advantage due to cheaper raw material & skilled workforce makes manufacturing in India a profitable proposition. To enter Indian markets, Japan's 3rd largest drugmaker Daiichi Sankyo acquired majority stake in Ranbaxy, one of India's largest and fast-growing pharmaceuticals company. This acquisition provided the much needed break to Daiichi into Indian markets which went on to acquire Zenotech laboratories in 2010 to increase its presence. Driver 2: Increase market share in India Many of the recent domestic and cross-border acquisitions in Indian chemicals industry have been done to gain access to new markets. Specialty chemical industry in India in highly fragmented with local players dominating regional markets. Large domestic and global manufacturers have opted the M&A route to acquire these small players to gain access to regional markets and increase their presence. In May 2010, global healthcare company Abott Laboratories acquired domestic pharmaceuticals company Piramal's healthcare unit for USD 3.72 Bn to make it a leader in pharmaceuticals. Acquisition increased Abott's market share significantly along with boosting its manufacturing capabilities. Driver 3: Product portfolio rationalization It is one the key reasons for mergers and acquisitions in chemical industry. Chemical industry is highly technology intensive and R&D driven. New products have high gestation periods and require huge investments in R&D. It becomes difficult for late entrants to catch up with early-movers who have created a niche for themselves. Acquisition of an already established company with supplementary product portfolio becomes preferred way to widen product portfolio and realize synergies like common markets or reduced costs. For example, DuPont subsidiary Pioneer Hi-Bred, which offered corn, rice, pearl millet, sunflower and mustard seeds in Indian markets, acquired Nandi Seeds in 2009 to get into BT and hybrid cotton seeds market. Acquisition was aimed at enhancing DuPont's product line up. Similarly, Piramal acquired leading contraceptive brand I-pill from Cipla to strengthen its Over the Counter (OTC) portfolio. Driver 4: Increase presence along value chain Backward integration to acquire feedstock sources and forward integration to acquire channels and downstream players are preferred ways of deriving value from integrated value chain. Secondly, specialty chemicals become commodities in a relatively short span of time. To maintain profitability, increasing presence along the value chain becomes preferred strategic option. Driver 5: Cost reduction & economies of scale Post economic slowdown, focus has been on cost management with re-evaluation of portfolios and deriving synergies for cost reduction. Improved sourcing of raw materials, better production management and common customers are key economies of scale which chemical companies can derive from alliances/ acquisitions.

2010

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Drivers for outbound M&A


In parallel, domestic chemical companies are looking outwards for foreign acquisitions to grow and compete successfully in global markets. Establishing global presence, entering new markets, feedstock security and latest technology are key drivers for outbound acquisitions by Indian companies. Driver 1: Global aspirations Driven by success in Indian markets, large Indian chemical companies like Tata Chemicals, United Phosphorous, etc. are keen on increasing their global footprint. Tata chemicals acquired General Chemicals in 2008 to become world's second largest soda ash producer. Similarly, Indian oil & gas companies (IOC, ONGC, HPCL, etc.) are acquiring assets globally to increase their global presence. Gaining access to growing Latin American and African markets is another key driver for outbound acquisitions by domestic chemical companies. Acquisition of DuPont's fungicide unit gave United Phosphorous access to growing South American markets. Marico is in talks to acquire Singapore based Skin care firm to enter promising South East Asian markets. Driver 2: Cost optimization (Feedstock security) Companies which are dependent on volatile commodities as feedstock prefer backward integration to own feedstock source. In 2005, Tata Chemicals and Chambal fertilizers acquired one third stakes in Indo Maroc Phosphore S.A. to hedge against the price volatility in phosphorous markets. Acquisition also provided Tata Chemicals a reliable and cost-effective supply of phosphorous. Driver 3: Acquire niche technology or market Large Indian companies are looking outside India for strategic niche acquisitions to acquire intellectual property, technology and technical know-how. Acquisition of shale gas assets in US by Reliance Industries Ltd is a strategic decision to acquire shale gas extraction technology. In addition, acquisition might provide RIL the first mover advantage in India Shale gas exploration. Piramal Healthcare Ltd has gone into definitive agreement to acquire Canada's BioSyntech Inc for USD 3.78 Mn to gain access to patented technology used to repair damaged tissue like cartilage, bone and chronic wounds. Outbound alliances/ acquisitions are also driven by changing regulatory environment in developed economies. Implementation of Registration, Evaluation, Authorisation and Restriction of Chemical substances (REACH) regulation in European Union can have a significant impact on exports of chemicals from India. Indian chemical companies are strategically acquire assets or going into an alliance with existing EU chemical companies to sustain their exports markets.

2010

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149

GROWTH THROUGH ACQUISITIONS: UNITED PHOSPHOROUS LIMITED

2010

United Phosphorus Limited (UPL) incorporated in 1969, is a leading global producer of crop protection products, intermediates, specialty chemicals and other industrial chemicals. UPL has successfully used global mergers & acquisitions as an opportunity for growth and increase share holder value. It has made 26 acquisitions in last 15 years and most of them have recovered investments in less than three years. The buyouts have been across the world, from the US and the UK to South Africa and Netherlands. Many of the UPLs buyouts have been from global leaders in chemical industry like Bayer and DuPont. Access to new geographies and new products were the key drivers for most UPL acquisitions-timeline
AgroDan Denmark

UPL revenues (Rs Cr.) 5300 p.a 35% p.a

1650 500 2002 2006 2010

of these acquisitions. In addition, some of acquisitions helped UPL acquire registrations in these economies successfully.

Cequisa, Spain Reposoargentina AgValue,USA Agricola, UK

Evofarms columbia Fungicide business, DuPont

Devrinol,USA

Advanta BV, Netherlands CorpServe,SA Cerexagri

MTM-Agrochem, UK

1990

1995

2000

2005

2010

Source : Secondary research,UPLwebsite

Characteristics of M&A in India


Value of merger and acquisition (M&A) deals in India rose to USD 33.6 Bn till third quarter of 2010, up from USD 17.8 Bn in whole of 2009. Though telecommunications services, energy and Oil & Gas are the key sectors witnessing mega M&A deals, chemical industry has kept pace with many small sized acquisitions. With 242 deals in last decade, chemical industry accounted for more than 14% of the total deals in top 10 sectors in India, whereas it accounted for only 4% by value of total deals.

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India M&A deals (USD Bn)

43.9

33.5 30.9

33.6

2010

18.6

17.8

5.7

7.0 3.9 3.9 2002

7.8

2000
Source: Bloomberg

2004

2006

2008

2010Q3

Indian M&A: Top 10 sectors by value


(2000-10)
Chemicals 4% Engineering 3% Oil & Gas 15%

Indian M&A: Top 10 sectors by volume


(2000-10)

Software 6% Financial Services 8% Metals 4% Electrical 6%

Engineering 10% Chemicals 14%

Alt EnergyOil & Gas 2% 6% Telecom 12%

Pharma 13%

Pharma 10%

Telecom 44%

Software 18% Financial Services 7% Metals 8%

Electrical 10%

Total (2000-10): USD 206 Bn. Top 10 sectors: USD 134 Bn.

Total (2000-10): 4,754 deals Top 10 sectors: 1,700 deals

Source: Bloomberg, Analysis by Tata Strategic

Till third quarter of 2010, India has witnessed more than 400 M&A transactions with average deal size across industries of USD 82 Mn. In contrast average deal size in chemical industry was ~USD 12 Mn which was lowest as compared to other industries. Annexure 1 lists major deals announced in chemical industry in India in 2010. A comparison of M&A deals in chemicals industry reveals that though petrochemicals and base chemicals have dominated M&A globally, fertilizer & agri-products and specialty chemicals have also been the key focus for M&A activities in India. Premiums for M&A deals in India have been consistently higher than global average which highlights positive outlook for Indian economy among global investors. Similarly, M&A deals in Indian chemical industry have received a higher premium than global chemical deals.

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M&A premiums in last decade - Global vs. India (%)


60%

2010

50%

40%

30%

20%

10%

0% 2002 2001 2003 2005 2007 2009

Premiums - India Chemcals

Premiums - Global Chemicals

CSFs for successful alliance/ acquisition


Mergers and acquisitions involve significant risks leading to low success rates and non-realization of synergies post-merger. Successful acquisition requires clear strategic intent, perfect execution and well-planned integration. Failure in any of these aspects could lead to non-realization of possible synergies and potential value destruction. Successful alliance or acquisition should have three critical elements. Clear strategic intent An extensive self-assessment along with identification of market trends is essential to shortlist the segment in which acquisition has to be done. Selection is primarily driven by company's long term vision and attractiveness of the target segment. Impact of domestic and global trends on shortlisted segments should be carefully understood. Future growth prospects, volatility and sustainability of growth, technological changes, changes in end-consumer industries, regulatory trends are some of the key factors to be studied and understood before pegging on the segments for M&A. Having a clear strategic intent opens up broader set of acquisition opportunities. In addition to publicly available targets for sale, there might be stand-alone companies and business units of large conglomerates which might available for acquisition. As an example, Piramal decided to focus on its core competencies of OTC drugs, CRAMS and critical care segments. As a strategic move, it hived off its domestic formulation business to Abott and acquired Cipla's I-pill brand.

Identify targets and corresponding synergies carefully


Once the attractive segments have been identified and prioritized, identification of suitable partner/ acquisition target becomes critical. Possible synergies should be mapped to the strategic intent. Much has been talked about over-estimation of synergies which leads to over-priced acquisitions.

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Key criteria typically used in assessing potential acquisition candidates include strategic and organizational fit, past performance, growth potential and resource requirements of the acquisition. Exhaustive financial due-diligence of the target to validate the reported facts is essential. This involves examining the financial statements, legal status, inventories, etc., with in-house and outside experts in these areas. Commercial due diligence is required to ascertain the current business fundamentals and future potential.

2010

Risk assessment & mitigation steps


Mergers and acquisitions are attached with significant risks on financial and strategic fronts. Major acquisitions have significant strategic impacts and leave little scope for errors. Risks involved extend financial scope and can impact existing work processes, reduce customer confidence and employee motivation. According to a study, more than 65% of mergers and acquisitions between 1979 and 1990 destroyed value for the shareholders. Major risk factors are highlighted below:

Over-enthusiasm over synergies


Senior management sometimes over-estimates the acquisition benefits which are at best perceived and left unquantified. Acquisitions for cost reduction generally face a significant gap between possible and actually realized synergies. For example, there are practical difficulties related to man-power reduction which could have been identified as a potential synergy during alliance or acquisition. Transfer of best practices and core competencies are hindered due to cultural factors.

Response of customers & suppliers


Impact of acquisition on current customers and suppliers for both target and acquirer should be well understood. If acquisition is made to gain access to key customers of the target, then willingness of the target's customers to retain the relationship should be tested before acquisition. When Lockheed Martin acquired Loral in 1996, it lost business from major customers of Loral such as McDonnel Douglous, which were Lockheed's competitors.

Integration post acquisition


Many mergers and acquisitions fail at the integration stage. To mitigate the risks during integration phase, operating strategy should be developed well before the acquisition process. Integration of systems and people should be the key elements of the strategy. Much talked about acquisition of Republic Airlines by Northwest failed as two companies could not integrate IT systems quickly enough to realize synergies. Organizational structure post acquisition should be decided and conveyed to target management beforehand. Any uncertainties during the integration phase lead to unwarranted fears regarding lay-offs, restructuring and reporting relationships.

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CONCLUSION

2010

Dynamism in Indian economy and favorable government policies are encouraging global chemical companies to expand operations in India. On the other hand, domestic chemical companies are looking towards SE Asia, South America and Africa for new markets and captive feedstock sources. Companies are preferring mergers and acquisitions route to reduce the lead times to set up businesses in fast growing economies. Though M&A route has definitive advantage of quick acquisition of markets and know-how, it should be treaded carefully to realize full synergies.

Table 1: Major M&A deals in chemical industry in India


Acquirer INBOUND May-10 Aug-10 OUTBOUND Aug-10 RIL Carrizo Oil & Gas NA Acquire technology Increase global presence Raw material access Technology Market access Opening into SE Asian markets for Marico UPL: Access to South & Central America markets DuPont: Focus on core business Piramal: Access to technology Abott Laboratories Daiichi Sankyo Piramals domestic formulations business Zenotech USD 3.72 Bn USD 17 Mn Abott: Increased market share; Piramal: Focus on core business Quickly increase India presence Target/ JV partner Valuation Synergies/ Drivers

Jul-10

Shri Renuka Sugars

Equipav S.A Singapore based Skin care firm DuPonts fungicide business BioSyntech, Canada

NA

May-10

Marico

NA

Jun-10 May-10 DOMESTIC Jul-10 May-10

United Phosphorus Piramal

NA USD 3.7 Mn

Super Religare Laboratories Ltd (SRL) Piramal

Piramals diagnostic services unit CIPLAs i-pill

Rs 600 Cr USD 21 Mn

SRL: Realize synergies economies of scale Piramal: Focus on core business Piramal: Brand extension

NA: Not Available Source: Business press

References:
1. Presentation by IVG partners, July 2010 - US Bound acquisitions by Indian companies 2. DealTracker - August 2010 edition, Grant Thorton 3. Journal of Business Chemistry, 'M&A since Y2K - An overview of chemicals deals involving BRIC countries in the new millennium', retrieved on September 20 2010 4. Business Economics, 'Mergers and acquisitions in the global chemical industry', retrieved on September 19, 2010 5. Relevant business articles in Mint e-newspaper regarding M&A transactions

This article has been authored by: Pratik Kadakia (pratik.kadakia@tsmg.com) Sanjay Shyoran (sanjay.shyoran@tsmg.com)

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Competing successfully in Indian Specialty Chemicals Industry

India's strong position on the critical success factors for the specialty chemical industry could help it emulate the success story of Europe in a similar structural framework. However specialty chemical companies in India must address four key dimensions in their strategy: innovation to meet local needs, channels for effective customer interface, leadership in evolving sustainability trends and leveraging upstream chemicals supply; say Dr. Alexander Keller of Roland Berger Strategy Consultants, Pratik Kadakia and Abhishek Nigam of Tata Strategic Management Group

2010

Global chemical industry, esp. specialty chemicals, moving east


The chemical industry has in the past traditionally grown in the developed countries of the West and Japan. However changing market dynamics over the last 10 years has resulted in global chemical production moving increasingly to Asia (ex-Japan) from the West, as indicated by the gain of 13% points share gain between 1997 and 2007. (Refer Figure 1)

Figure 1: Regional share in global chemicals production


1997: EUR 1136 bn 2007: EUR 1820 bn

10.4%
11.0% 32.2% 28.0%

29.5% 22.2%

11.8%

17.0%

7.5%

30.4%

EU27

Asia

Japan

NAFTA

Others

This trend is likely to continue in the future as growth in the chemical industry in Asia unfolds. Specialty chemicals, a segment with higher than average overall chemical industry growth rate and by definition closer to the customer industries like automotive, construction and others, are a key contributor to this changing global scenario. Some of these key consumer industries are becoming more and more important in emerging countries in Asia. This trend is reflected in the significantly higher growth of key consumer industries like automotive in emerging markets vis-vis in developed countries of West and Japan. (Refer Figure 2)

Figure 2: Sales by region [m cars]


40 Emerging Markets 36 30 27 19 18 15
15

26 19 18 20 20 NAFTA Europe

16

12 6 2007 6 2009 6 2011 6 2013 6 2015 Japan/ Korea

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Beyond the growth of the customer industries requiring additional volumes of specialty chemicals, the local chemicals production replacing imports also contributes to the growth in these countries.

2010

India: A potential global specialty chemicals hub


The specialty chemicals market in India (including knowledge chemicals as active ingredients in agrochemicals and pharmaceuticals) has the potential to grow at a rate of ~15% p. a. to reach USD 40 billion by FY 2014. This growth potential is significantly higher than the overall chemical industry projected growth rate for the world at ~3% p.a. or even that for India at ~10% p.a.

Figure 3 : Consumption/Domestic Energy Production Balance 2008


Oil [m tons]
Europe 1) 85% 626.4 91.4 535.0 161.6 India (2008-09) 79% 33.5 128.1 256.7 425.3

Gas [bn cbm]


Europe 1) 60% 168.6 40.8 India (2008-09) 20%2) 32.8

8.0

ConDom. Imports sumption production

ConDom. Imports sumption production

ConDom. Imports sumption production

ConDom. Imports sumption production

1) EU 15 2) Comparably low gas consumption currently, increasing demand would result in significantly higher imports

Growth in the Indian specialty chemicals industry is driven largely by robust domestic demand with exports based growth in select segments. Local demand for specialty chemicals in India will continue to grow, driven by three main factors. Firstly, key consumer industries e.g. textiles, automotive, construction, etc. are expected to grow at rates higher than the overall GDP. Secondly, emerging customer needs across consumer industries call for products with higher quality/ increased performance products e.g. wrinkle free textiles, reflective glass, cement admixtures, etc. Finally, manufacturing processes need upgrading leading to process and equipment upgrades in many industries e.g. textile, paper, electronics, cosmetics, plastics

European specialty chemicals industry: A similar growth story


The growth potential of Indian specialty chemicals becomes all the more convincing, when we take a look at the evolution of European chemicals industry. Faced with a similar structural framework of limited carbon based feedstock availability, (Refer Figure 3) European chemical industry developed the specialty chemicals segment which has a much lower dependence on raw materials than base chemicals. Today specialty chemicals production catering to both strong domestic market and exports is worth ~EUR 150 billion (~10 times the size of Indian specialty chemical industry) and accounts for around 40% of the total chemical sales in Europe. India could very well emulate the strong position of specialty chemicals industry as witnessed in Europe under similar structural framework conditions.

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India's strengths aligned to achieve success in specialty chemicals industry


If a quantum leap in production and marketing of specialty chemicals is to happen in India, let us review the critical success factors (CSFs) in the business and how India fares on each of them?
l Critical size of domestic market: The recent growth witnessed in the consumer

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industries has created a large domestic market in excess of $20 billion. This now provides the much needed critical size to the domestic industry for large scale investments. Import substitution will lead to additional growth in the future. Critical size in the demand industry supports critical size of local chemical markets as well and makes local production interesting for national and international players
l Customized application development: India is a unique market with its own

distinct needs where customized application development is perhaps the single largest critical success factor. Whether it is supplying innovative products to support India's emergence as a small car hub e.g. plastic body panels to reduce weight or providing products to support burgeoning demand for ultra-low cost housing e.g. quick setting concrete; companies with the ability to meet the distinct local needs exactly have a clear advantage.
l Strong R&D capabilities: A large pool of qualified scientists and supportive

Intellectual Property (IP) protection framework help create strong R&D capabilities as has been demonstrated recently with emergence of India based global R&D centers of several chemical MNCs including Dow, DuPont, GE, etc.
l Established process know-how: A strong technical manpower base of skilled

engineers and proven cost-efficient process know-how are readily available. For example, frugal engineering or 'jugaad' that Indians have demonstrated amply in cost effective processes and plants for Active Pharmaceutical Ingredients (APIs), etc. is now a subject of study in the West. Availability of reliable and competitive feedstock supply: Finally establishment l of chemical clusters including Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIR) with government support has created suitable docking points for the Indian specialty chemicals industry. Already chemicals/ petrochemical majors like Total, Saudi Aramco, Shell, Exxon Mobil, Borealis and Itochu Singapore have evinced great interest in participating in these PCPIRs. For example, in case of Dahej PCPIR, INEOS is exploring options to manufacture and supply catalysts not only to its anchor tenant OPaL (ONGC Petro additions Ltd.) but also to its other clients in Eastern part of the world. In summary, India's strong position on each of the CSFs for specialty chemicals business forms the basis of the strong and sustained growth.

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Emerging discontinuities: Opportunities to change global industry landscape

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As we discuss access to a sizable and growing market and strong position on CSFs, specialty chemical companies in India must take into consideration the emerging technological/ market discontinuities that have the potential to become game changers in the specialty chemicals landscape. Developments in nanotech/ biotech in consumer industries are throwing up new opportunities. For example, development of nano-tech based smart delivery systems for pesticides/ fertilizers and architectural coatings containing nano-particles could revolutionize the landscape of respective consumer industries. Breakthroughs in catalysis using nano-tech could significantly alter automotive engines/ refineries. Increasing concern over sustainable growth and consequently rising preference for environment friendly products is generating possibilities for companies to create green leadership and reducing environmental footprint. For example, consumer preference for products such as bio-polymers and diesel with fuel additives which not only increase fuel efficiency but also cut down the emission of greenhouse gases could have far reaching implications for the industry. Exploring these opportunities can become a unique opportunity for Indian chemical companies not only to fight existing (international) competition by matching the performance of their products but to create new products and businesses that can become internationally competitive thus creating significant export opportunities.

Figure 4 :Competing Successfully


2 Develop channel strategy to effectively interface with customers COMPETING SUCCESSFULLY IN INDIAN SPECIALTY CHEMICALS INDUSTRY 4 Leverage local upstream chemicals supply Address sustainability trends 3

Innovate/adapt products/ services 1 to meet local needs

Competing successfully in Indian specialty chemicals industry


Given India's potential to emerge as a global specialty chemicals demand and production destination, strong position on CSFs and opportunities presented by unfolding discontinuities; what could companies do to compete successfully? Detailed strategy formulation has do be done specifically by each company. We present here some factors which every successful company must address in formulation of a winning strategy. (Refer Figure 4)

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1. Innovate and adapt products/ services to meet local needs Emerging trends in consumer industries call for development of unique local products/ solutions based on understanding of Indian customer. For example, automotive industry requires chemicals/plastics to support emergence of India as a low cost small car hub and green-tech features. Creating products to support growing demand for ultra low-cost housing projects and green buildings is critical for the success of construction chemical companies. Likewise demand for environment friendly crop-protection solutions/GM crops and processed food creates new opportunities for agro-based chemical companies. Growth of renewable energy sector is increasingly creating new customer segments for chemical players. 2. Develop channel strategy to effectively interface with customers Another key factor which determines the success of any chemical company in the near future is the effectiveness of its channels to interface with and service its customers. Companies globally have employed innovative approaches like establishing new web-based channels or leveraging distribution network of complementary products to reach out effectively to their customers. An effective channel strategy would not only benefit through increased understanding of customer needs but also help capture increased value and establish control over a business asset of increasing strategic significance. In particular in specialty chemicals understanding needs of its B2B customers and providing respective services in a cost efficient way is a crucial part of a successful strategy.

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3. Address sustainability trends 'Green Transformation' is becoming a mantra of increasing significance for chemical companies in a business environment with unprecedented levels of awareness for sustainable growth. An integrated approach across the value chain including procurement, product design, manufacturing process and marketing along with adequate reporting and risk management at each stage is becoming critical. Companies could not only create value through green product/ process innovation but also generate end consumer pull through ingredient branding in 'green products'. Companies that establish recognized 'green leadership' among all stakeholders would have a distinct first mover advantage over their competitors. 4. Leverage local upstream chemicals supply A developing chemical industry producing raw materials and intermediates is providing a solid backbone for the Indian specialty chemicals segment. Strong governmental support for establishment of petrochemical clusters (PCPIRs) and further development of specialized intermediate producers is creating a favorable scenario. Chemical companies need to leverage these opportunities for creating sustainable base for their growth. In conclusion, the sizable growing domestic market and limited availability of carbon based feedstock point towards development of knowledge-based specialty chemicals as the most logical way forward for India's chemical industry. Specialty companies in India could revisit their respective growth strategies to factor in all the four dimensions mentioned above to effectively participate in and drive this growth story.

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Chemical Industry needs more 'Explorers'

'Tell people that you work in the automotive, electronics or computing industry and they will pretty much understand. Tell someone, "I work for a company in the chemical industry that produces nitro-cellulose, surfactants and starch-based polymers", and watch the clueless look' - R Gopalakrishnan* Institutions make choices at forks on their journey and embark on distinctive trajectories. The choice made is influenced by its culture and mindset. During the recent crisis, for example, Germany spent a gentle 1.5 percent of GDP on stimulus but set about balancing budgets and restoring confidence. America borrowed big to spend a dramatic 6 per cent of GDP. Germany is recovering nicely with a 9 percent annualized growth in first half 2010. America is emerging, but slowly. The chemical industry is at a fork in its journey. The industry has been obsessed with innovation for many years. The results have been fabulous. For example, thanks to the path-breaking fertilizer process by Fritz Haber and Carl Bosch in 1909, there is enough food for today's 6 billion. This technology arguably made the greatest difference to mankind in the twentieth century. However in the future, there has to be a balance between innovation, consumerintimacy and sustainability.

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Chart1: Industry wise segregation of the top 100 global brands: Interbrand Survey 2009

The image of chemicals


This industry provides products for everyday life: fertilizers, medicines, paints, cleaning products. It also produces value-adding, industrial products for customers: polymers, catalysts, coatings, petrochemicals. However, its consumer connectedness

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and environmental image are less impressive. Two surveys illustrate the chemical industry's lack of consumer connectedness and poor communications. In an image survey by TSMG, the auto industry conjured mobility and evoked feelings of speed, telecom connected with social warmth and communication, and IT associated with computation. The chemical industry evoked an unclear image with a negative hint. To the query on improving the quality of life, respondents admitted ignorance. Tell people that you work in the automotive, electronics or computing industry and they will pretty much understand. Tell someone, "I work for a company in the chemical industry that produces nitro-cellulose, surfactants and starch-based polymers", and watch the clueless look. A 2009 brand survey by Inter-Brand also reinforced the lack of consumer connectedness of the chemical industry. Almost every sector except chemicals finds a mention in the list of 100 leading global brands. (See chart 1)

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Explorers and farmers


Recently I had a philosophical conversation with the President and CEO of Kureha Corporation, Takao Iwasaki, a visionary technocrat. He was sure that the recent crisis and global concerns would trigger an 'environmental technology revolution' that would transform the industrial framework of the world. By 'framework', he referred to a new game with new rules and new players. But what might the new framework be? In my view, as shown in chart 2, it means a triangulation of environmental sustainability, consumer-connectedness and innovation. Successful companies in all sectors are gravitating to this triangulated space. Iwasaki-san said that there were two types of manufacturing companies or activities: hunters and farmers. A company may be one or the other; it may also combine the two types. I prefer the term 'explorer' rather than hunter. Explorer companies produce consumer-facing products as Toyota, Sony and Kao do; consumers are their 'finds'. Being consumer-oriented, explorers are sensitive to the behavioural patterns and expectations of consumers. They use creativity and ingenuity (read innovation) to capture as many finds as possible. Explorers are highly consumer-connected, B2C type companies. Farmer companies are focused on what their land can produce. They sell to markets/customers rather than to end consumers. They monitor market prices and will grow/develop any new thing based on customer demands so long as their land (=technology) can do it. Through product advantage, they improve their customer's offering to consumers. Farmer companies are customer-connected, or B2B companies.

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Chart 2: The new framework for the Chemical industry


Consumer Connectedness

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Chemical Industry

Innovation

Sustainability

Chemical industry
The chemical industry is huge with global sales in 2010 of about $ 3.5 trillion. It retains the appellation of chemistry unlike its peer sciences, which have not spawned physical, mathematical or biological industries! The peer sciences evolved and are today recognized through their applications; for example, physics evolved into engineering, optics, and electronics. Biology manifested as medicine and animal health. Chemicals suffer from inadequate recognition, though the applications of chemistry are vibrant and diverse. Unlike other industry segments, the chemical industry sells as much as 80% of its output to B2B customers. For the large part, chemical companies are faceless and incomprehensible. The chemical industry has too many farmers and too few explorers. Add to this fact the occasional environmental damage, and chemicals become the number 1 villain of the future. That is why the chemical industry is exploring a new positioning within the triangle of consumer connectedness, environment and innovation. Through bio and nanotechnology, the chemical industry will become benign in a transformational journey.

Sustainability
Promoting sustainable approaches makes business sense. Sustainability calls for thought about the long-term implications of activities, and to measure the future performance of investment against environmental and social criteria apart from financial criteria. Sustainability means meeting needs of the present generation, without compromising ability of future generations to meet their needs. ICIS conducted a study in 2009 which spanned over 900 respondents from the petrochemicals, specialty chemicals and polymer segments of the chemical industry, including CEOs. The good news was that the industry was aware about sustainability issues. The worrying news, however, was that most companies did not know what to do or had postponed actions due to more pressing matters. In the ICIS survey, 60 percent of chemicals customers actually expressed interest in sustainably produced chemicals. However cost was perceived as the biggest prohibitive component of a sustainable program, followed by technical capabilities.

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Most CEOs in the developed countries worried that making their operations sustainable and developing green products might place them at a disadvantage vis-vis rivals in developing countries that don't face the same pressure. Hence most executives treat the need to become sustainable as a corporate social responsibility, and not directly related to their business objectives. A study by C. K. Prahalad, Ram Nidumolu and M. R. Rangaswami suggests that sustainability has successfully acted as a spur to profitable innovations. Becoming environment-friendly lowers costs because companies end up reducing the inputs they use. In addition, the process generates additional revenues from better products or enables companies to create new businesses. Smart companies increasingly treat sustainability as innovation's new frontier.

Lenzing of Austria
Lenzing was set up in 1938, committed to natural fibres (like rayon) from wood pulp. They were pitted against giants like Courtalds and DuPont who made competing synthetic fibres, based on polymer chemistry. Lenzing focused on the consumer and environment by developing solvent-spinning to reduce the environmental damage that rayon-like products caused. In 2004, Lenzing bought Tencel, originally developed by giant Courtalds. It is now a focused, environment-friendly cellulosic fibre company, offering absorbency that the synthetics do not offer-a delightful success story of sitting in the middle in the triangle. A four point future agenda for the chemical companies could well be: 1. Communicate comprehensibly and reinforce consumer benefit even for B2B applications rather than industrial use. This will result in better recall and a positive relationship with the end consumer. If sufficient brand equity is established, this could even lead to ingredient branding. 2. Focus on sustainability strategies. Emphasize water, energy conservation, reduced carbon footprints and 'go green'. Even if some technologies are not viable currently, it is only a matter of time before there will be industry standards. Regulations should not be the sole reason to drive sustainability initiatives. 3. Companies should track percentage of sales coming from new products or processes. Research teams should also be tracked on this measure to ensure that R&D spending is effective. Devote a part of R&D to efforts involving sustainability 4. Leverage next generation technologies like biotech and nanotech.

(* The author is Vice Chairman of Tata Chemicals and acknowledges the assistance of Pratik Kadakia and Jeffry Jacob of Tata Strategic Management Group. The views are personal.)

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Hazardousness of Chemical Industry

Negative perception of Chemical Industry


Until the early '80s the chemical industry used to enjoy a positive reputation. The industry was recognized for its ability to improve the quality of life of people, Over the past few decades, however several accidents have contributed towards an unfavorable image. Extensive media coverage and negative publicity have cemented this negative image that the chemical industry has acquired starting in the 80s. In a recent study by Covalence, ethical research institute, the chemical industry ranked lower than most other manufacturing industries, including automobiles, personal care and industrial goods. This study was based on a perception of working conditions, impact of goods, production and institutions. Similarly, in a public image study by Cefic, the chemical industry ranked 6th out of the 8 industries surveyed. Water and air pollution, environmental damage, health risks and factory accidents were perceived to be the most significant risks in turn impacting perception. These surveys raised some interesting questions: Is the chemical industry more risk prone than other industries? Is this perception l matched by reality Are there some sectors within the chemical industry that are more risk prone or l hazardous than others? Tata Strategic Management Group undertook a research to determine the answer to the above two questions. The first step was to clearly define 'risk' and then develop a structured framework to assess risk across various industries. Further, various sectors within the chemical industry would also be evaluated on the same framework to understand the relative ranking of the various sectors on the 'risk' parameters.

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Fig. 1: Chemical Industry Perception - Trend


60 50 40 30

Pasadena USA

Unfavourable Favourable

Proportion of respondents

Victoria Touluse Australlia France Bhopal India Basel Switzerland Enchede Netherlands

Seveso 20 Italy
10 0

1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

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Fig. 2: Risk Assessment-By Industry


High
Chemical

Health & Environment Risk

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Basic metals

Paper products

Food products Electric equipment Fabricated Industrial metals machinery Wood products Textiles Transport equipment

Low

Occupational Risk

High

Risk Assessment Framework


The ICC defines hazard in chemical industry as 'an inherent physical or chemical characteristic that has a potential to cause harm to people, environment or property'. Safety and control mechanisms lower the intrinsic hazardousness. The risk of a hazard can be assessed using exposure in conjunction with the potential hazard. Risk can be of the following two types 1. Health & Environment risk 2. Occupational risk Health & environment risk depends on the toxic chemical discharge and air pollutants discharge by industries. Occupational risk depends on injury incidence rate (fatal/ non-fatal) and illness incidence rate. On comparing various industries using this framework (Fig. 2), the chemical industry ranked higher on health & environment risk but lower on occupational risk. The parameters of 'health and environment risk' and 'occupational risk' were further studied to understand the areas on which the chemical industry ranked higher.

Chemical Industry vs. other Industries


The chemical industry ranks the highest in terms of total discharges and second (after primary metals) in terms of air pollutants released. However this is due to the large number of chemical industries and its contribution to total industrial production in the world. On a per facility basis, waste discharges and air pollutants are lower than primary metals, petroleum and paper industries. In the last few decades despite increasing production, toxic releases per facility in the US have reduced by 60% and GHG emissions have also reduced by 30%. This is due to several safeguards being implemented by the industry in the recent past. Injury incidence rates are fairly low in the chemical industry. In other manufacturing

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industries, transportation accidents and contacts with objects comprised 70% of all accidents, whereas in the chemical industry fire & explosions and transportation accidents accounted for over 60% of all accidents. The Illness incident rate is amongst the lowest in the chemical industry. In all other manufacturing industries, ~30% of all occupational illnesses pertained to hearing disease, while in the chemical industry skin diseases was the highest, with ~26% of total occupational diseases.

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Sub-segments within Chemical Industry


Intrinsic hazardousness of petrochemical sub-segment is the highest due to the large volume of flammable and toxic chemicals handled. However due to safety and control mechanisms, it ranks amongst the lowest in terms of health & environment as well as occupational risk.

Fig. 3: Toxic Chemical Discharge - By Industry (Indexed)


Release: Toxicity x Volume Discharges per facility
218 188 124 100 23 14 12 10 7 4 1

Industry
Primary Metals Petroleum Paper Chemicals Transportation Equipment Fabricated Metals Industrial Machinery Electrical Equipment Wood Products Food Products Textiles 3 2 2 2
0

Total discharges
99 32 16

9 11

Fig. 4: Air Pollutant Emissions-By Industry (Indexed)


Air Pollutants 1 Emissions per facility
235 228 108 100 38 37 23 17 7 6 5

Industry
Primary Metals Paper Products Petroleum Chemicals Wood Products Food Products Textile Mills Transport Equipment Electric Equipment Industrial Machinery Fabricated Metals 3 2 6 3 9

Total Emissions
121
90 66 100 23 31

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Fig. 5: Occupational Risk-By Industry (Indexed)


Injury Incidence Rate Non Fatal: India Industry
Basic Metals Paper Products 1.75 0.89 Non Metallic Mineral Prod Wood and Wood Products Fabricated Metals Chemicals Motor Vehicles, Trailers Industrial Machinery 0.15 0.12 0.11

2010
287

Fatal: India
0.2
167

Fatal: US
222

1672

2.64 4.53

0.04 0.03 0.07 0.07 0.05 0.03 0.02 0.02

111

133

56

122

111

1.76

0.09 0.09

100

100

1.58 1.22

100

77

0.08

89

146

2.31

0.07

78

Within the chemical industry, fertilizers and paints are amongst the highest on occupational risks while dyes and organic chemicals are the highest in terms of health & environment risks. At an overall level as well as on a per facility basis, dyes have the highest toxic chemical discharges. In terms of air pollutants released, organics segment is the highest while on a per facility basis dyes still continued to lead the rest.

Fig. 6: Risk Assessment-Chemical Industry Sub-Sectors


100

Organic Chemicals

Health and Environment Risk


Toxic chemical discharge Air pollutant emissions

Dyes

Inorganic Chemicals Fertilizers Petrochemical Pesticides Paints

Pharma

Occupational Risk
Non fatal injury incidence rate Illness incidence rate

100

Inferences
Overall the chemical industry is perceived as more hazardous than other industries. But this perception is not matched by reality. The chemical industry is amongst the

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lowest on occupational risk parameters, comparable with paper and textile industry. On the health & environment risk, the chemical industry is high, next to primary metals. This infers that perception is based more on health and environment risks. However on a per facility basis, it is still lower than other industries such as primary metals, petroleum and paper. This clearly identifies the need for communication so that perception can be more accurate and aligned to reality.

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Way forward
Changing public perception is a very difficult task and needs concerted and collective action by the industry. While any major crisis could lead to a drop in reputation, the recovery is dictated by the nature of activity undertaken by the industry. The chemical industry needs to make serious efforts to develop more sustainable products and processes, as well as reduce environmental discharges. Various safety mechanisms and industry initiatives, including Responsible Care, have resulted in a decrease in health & environment and occupational risk over the past few decades. The industry should continuously engage with its customers and communicate the value that chemicals add to their daily life. Sustainability and innovation will be the two mantras that could go a long way in changing public perception and creating a positive image of the chemical industry.

This article has been authored by: Pratik Kadakia (Pratik.kadakia@tsmg.com) and Jeffry Jacob (jeffry.jacob@tsmg.com) Note: This article is based on the results of a study done for Tata Chemicals/ Rallis and has been reproduced here with their permission

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Acting green - Philosophy to results: An Indian perspective

Going green will no longer be a matter of choice but will become a strategic imperative for Indian chemical companies. Companies in India employing innovative approaches to capture economic, social and environmental benefits of green chemistry can establish a competitive advantage say Pratik Kadakia, Abhishek Nigam & Ashwin Rao of Tata Strategic Management Group.

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Global evolution of green chemistry


Green chemistry is not a novel concept; though it started gaining popularity in the 90s when Paul Anastas and John Warner popularized it through their 12 tenets.1 Green chemistry is today acknowledged as a science based, economically driven approach to 2 environmental protection and sustainable development. In their efforts to ensure sustainability, companies are increasingly looking at reducing waste generation and energy usage while attempting to manufacture chemical 3 products in a more sustainable manner from renewable feed-stock. For example DuPont, a global chemical company set well defined, measurable goals for reduction of their environmental foot-print as early as 1989. They took the second leap in 2006 when they also committed to initiatives with market facing goals, targeting USD 8 Bn annual revenues for products manufactured from non-depletable resources by 2015.4 GE, as part of their 'ecomagination' campaign is implementing GHG and energy reduction projects at their global sites and realizing cost savings through the same. They are also developing profitable products and services to help their customers meet environmental goals. In 2008, they generated revenues of USD 17 Bn from their 'ecomagination' portfolio.

Economic Improved top lines Reduced manufacturing costs

Input Reduced raw material costs Reduced dependence on non-renewable feedstock

Process Increased energy & material efficiency Reduced waste management costs

Triple Bottom Line

Environmental Savings on Regulatory & compliance costs Damage due to negative press Litigations in case of chemical disaster Output Improved product quantity & quality Product differentiation green marketing

Social Healthy satisfied work-force Community well-being

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AstraZeneca realized that waste management costs comprised almost 40% of total production costs. By driving a waste minimization programme and further reducing the hazardous waste produced at their Huddersfield site, they were able to save ~ 5 USD 5 Mn over four years. Similarly, Dow Chemical recognized sustainable chemistry as an important component of their corporate strategy, defining it as a "cradle-to-cradle" concept that drives efficient use of resources, minimizes environmental footprint and delivers solutions for customer needs. Further to manufacturing from renewable resources, the Indian arm of Dow Chemical has signed an MOU with a local company, Royal Castor Products, for research in sustainable, bio-based products & solutions using castor oil.6 An increasing number of global collaborations and growing consciousness on environmental and health fronts are driving innovations in green chemistry in India.

Green chemistry: India story


Reducing the environmental footprint is gaining momentum in the Indian chemical industry, amongst both end users and suppliers. The textile industry has adopted microbial decolourization and degradation, exploring biodiversity for natural dyes and 7 developing eco-friendly methodology for synthetic dyes. Hindustan Petroleum Corporation Limited (HPCL), a leading refinery, has stated its intent to bring to market, green lubricants developed from renewable feedstock.8 DuPont, as part of its R&D strategy, has set up a knowledge centre in India focusing on areas like green technologies for refinery processes.9 GNFC, a public sector company, has developed and implemented Environment Management System (EMS) for its fertilizers, chemicals and supporting services at Gujarat. Due to EMS, they have achieved reduction in energy, water and lube oil consumption and increase in revenue from scrap sale due to better segregation. Tata Chemicals, a leading Indian inorganic chemicals and fertilizer company, has established an Innovation Centre to focus on green technologies in emerging areas such as nano-technology, fermentation and bio-fuels. The centre plays a dual role, greening existing businesses by researching bio-chemical processes that are more environment-friendly and energy efficient, as well as developing new green products. These are just some examples of various initiatives in green chemistry being pursued by the Indian industry.

Enabling infrastructure
The initial success of green chemistry in India is also attributed to the active role played by other stakeholders, including government and research organizations. The green chemistry programme started by the Department of Science and Technology in 2004 supports industry led research and training in the form of workshops. Currently

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the department supports research in several fields including ionic liquids, nonhazardous bromination and degradable polymer composites, packaging plastics and 10 bio-surfactants. While large companies may have the wherewithal to undertake research on their own, small & medium enterprises (SME) would need more support. Organizations such as the Gujarat Cleaner Production Centre (GCPC) recognize this need, and in association with United Nations Industrial Development Organization (UNIDO) identify and provide consulting services for SME projects in the green chemistry space. Several companies have tied up with academic institutions such as Mumbai University Institute of Chemical Technology and research organizations such as National Chemical Laboratory, Pune. As a result, active research is being conducted in areas, such as oxidation of alcohols to carbonyl compounds, green synthesis of amides from nitriles and making ionic liquids more effective for promoting organic reactions, to address industry specific concerns. 'Enviropreneurs' or entrepreneurs with business models built on addressing environmental concerns profitably are providing a wide range of solutions in the areas of yield improvement and solvent recycling to minimize waste. Also, special environment funds are looking to invest in green technologies, especially in enzymatic 11 production routes and bio-polymers. Emerging business models which capitalize on the likely disruptions in the Indian chemical industry will successfully drive the growth of green chemistry. Companies that understand the market, regulatory and technology trends, which have the potential to alter the landscape of the Indian chemical industry, will be in a better position to take advantage of the same and establish a strong foothold.

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Game changers
The growth of the global bio-renewable chemicals market, which was reported to be USD 1.63 Bn in 2007-08 and is further expected to increase to USD 5 Bn by 2015, could offer significant opportunities in India.12 This is largely fuelled by increasing consumer demand for environment friendly products and awareness of chemical ingredients used. In addition to this increasing market awareness, several Indian chemical companies are also actively participating in voluntary initiatives such as 'Responsible Care'. Companies which are at the forefront of the green movement will be able to capture greater mindshare of the customer which will translate to larger market share in the future. REACH has been a game changing regulation in the past and has impacted the way chemical companies do business. Companies need to be prepared for more stringent regulations in the future, which could mean investments in technology. Companies which pro-actively take steps to ensure sustainability and go green will be able to

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ensure unrestricted access to markets, boost their reputation and gain competitive advantage in the marketplace.

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Recent developments related to bio-synthesis of some widely used industrial solvents increase the possibility of companies replacing oil-based derivatives in their processes and products. Carbohydrates, fatty acids and fatty alcohols from oil crops are also 13 being used to generate bio-surfactants with the help of microbial enzymes. India, with its vast bio-resource potential, offers a good opportunity for production of green specialty chemicals from agri-based raw materials. While the concern over use of land for food versus non-foods is not yet resolved, these technological advancements nevertheless have the potential to create a significant impact in India as well as alter the sourcing landscape. Companies which invest in R&D in India will have a competitive advantage, both in terms of availability of qualified resources and raw materials as well as access to a large pool of consumers. Besides being in a position to bring green products to the market quickly and enjoying a first mover advantage, companies could also leverage the gains in other markets.

Competitive advantage for leaders


Leading the green charge successfully will require companies to devise innovative approaches to deliver economic, environmental and social benefits. CEOs need to place their bets today on whether they will lead the way in adopting green chemistry and create a competitive advantage or be content being a participant in an already crowded space in the future. A case in point is Dow Corning, which started 'Materials Conversion' to recover value from waste, scrap and off-specification silicone materials i.e. materials that cannot be reused in their original form, by converting them to usable products. In this way, they both protected the environment by keeping materials out of landfills and incinerators and met customer needs in new and existing applications.14

Benefits of adopting green chemistry


Chemical companies in India have the opportunity to lead the way in adoption of green chemistry today over passively following the green trend as it gains momentum. Companies which choose to take leadership will be in a strong position to leverage the external discontinuities emerging from the regulatory, technological and market fronts. Companies need to have a comprehensive and well thought out plan for achieving sustainability and green objectives. A three point agenda for Indian companies to accelerate their journey to go green could be: 1) Build sustainability goals into vision statements, with clear objectives cascading down to market facing goals. These could take the form of clearly defined revenue targets for green products - manufactured from renewable feedstock or

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fully recyclable products and operational goals such as reduction in carbon footprint 2) Communicate and demonstrate top management support to green initiatives. This is necessary for innovation to flourish, which is a key enabler in the path to go green. It will also help the management resist short-term pressures from derailing long-term strategic intent 3) Undertake a life-cycle assessment of existing products and look for opportunities to introduce green products/ services, based on an understanding of current and evolving customer needs. This could throw up areas within the supply chain that are environmentally deficient and most probably economically inefficient Companies could initially face cost and scalability issues for green technologies and products. However, a clear roadmap with prioritized actionables will help companies achieve their triple bottom line and realize the benefits of green chemistry long before competition steps in.

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References
1. Paul Anastas and John Warner, "Green Chemistry: Theory and Practice" 2. Upasana Bora, Mihi Chaudhuri and Sanjay Dehury, "Green chemistry in Indian context - Challenges, mandates and chances of success" 3. ICIS Chemical Business article, "Are chemical producers engaged in the drive to use green chemicals?" 4. "DuPont 2008 Sustainability Progress Report" 5. The Royal Society of Chemistry, Green Chemistry Journal, "Lean, mean and green chemistry - can we have it all?" 6. MoU signed during Vibrant Gujarant Global Investor Summit 2009, "Dow India and Royal Castor Products Ltd. join hands for research and innovation in Gujarat" 7. M Kidwai, "Green chemistry in India" 8. Article in Economic Times, Mumbai edition

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9. Business Standard Nov 24, 2008, "DuPont knowledge centre to focus on green tech"

2010

10. DST Presentation at SCI conference, Apr 15 2009, "Green Chemistry programme of DST" 11. SACEF presentation at SCI conference, Apr 15 2009, "Constraints of investing in the green chemical industry" 12. Frost & Sullivan report citing demand for green chemicals 13. MISTRA, "Greenchem - Specialty chemicals from renewable resources" 14. "Dow Corning Sustainability 2004 & 2006 Summary Report" and 'Materials Conversion' webpage 15. Respective company and association websites and annual reports

Pratik Kadakia is the Head of Chemical & Energy Practice at Tata Strategic Management Group, a leading Indian management consulting firm. The author can be contacted at pratik.kadakia@tsmg.com

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Will India be the next big green growth market?

By 2020 India aims to generate 15% of its electricity from renewable sources, excluding large hydroelectric power plants, a goal that could pave the way for overseas investment. India In 2009 India's installed renewable energy capacity, excluding large hydroelectric power plants, was about 16 GW. In terms of installed wind capacity it ranked fifth in the world with more than 11 GW. But despite this impressive set of figures, total power produced by this capacity currently accounts for less than 2% of the total power produced in India. Assuming continued strong growth in electricity consumption, India would need an installed renewable energy capacity of some 100-110 GW to reach its 2020 target, meaning a capacity ramp up of about 8 GW/year. As challenging as this may seem, other countries have already successfully demonstrated how to quickly increase renewable energy growth rates in a relatively short period of time. For example, since Germany's renewable energy law was passed in 2000 its installed renewable energy capacity has grown at a compound annual rate of 16% from 11.9 GW in 2000 to 39.9 GW in 2008. Over the same period, the total power produced in Germany from renewable sources soared by over 150%. Before the law was enacted, the country had only managed to achieve single digit growth rates for renewable installations between 1990 and 2000. Meanwhile, China has for the past five years doubled its installed wind capacity yearon-year, adding 13 GW in 2009. Latest official Chinese statistics show that the nation's renewable energy capacity is now increasing at a faster pace than that of its coal plants. Investors might look back and remember how India has in the past failed to achieve declared ambitious growth targets in its power sector. For instance it fell about 40% short of its 2007-2008 capacity addition programme target, while the implementation of several of its infrastructure projects have been beset with troublesome issues such as land acquisition. However, there are five good reasons to believe that India will achieve ambitious renewable energy growth rates soon.

2010

Vast Renewable Resources


India is very rich in wind resources and official estimates predict the country's installed capacity at about 50 GW by 2020 but some industry experts believe this figure too conservative and suggest levels could be as high as 150-200 GW by the same year. India also has huge solar potential. The daily average incident solar energy over the country varies from 4-7 kWh/m and the country benefits from 2300-3200 sunshine hours per year, depending upon the location. In addiiton, as the cost of building solar

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technologies continues to fall over the next 5-10 years, a significant scale-up of solar generation, in multiples of tens of GW, is a very realistic possibility for the country.

2010

There is also vast untapped potential from different biomass sources. Agro-residue has a potential of generating approximately 18 GW of energy in India, while bagasse has the potential of generating about 4 GW. And, about 60 GW of power can be generated from energy crops in the country's degraded wastelands, while the country's renewable energy minister has identified 15 GW of potential generating capacity from small hydroelectric power plants.

Energy Security Remains Key Concern


Driven by consistent economic growth, India's power requirements are expected to grow at a rate of 6.4% per year and are anticipated to reach 1600-1800 TWh by 2020. This would imply that the country's total installed capacity will soar from about 160 GW in 2010 to about 450 GW by 2020. Coal is expected to remain the country's principal energy source in the coming years and despite India holding almost 10% of the total global reserves of coal, imports rose from nothing five years ago to more than 50 million tonnes in the last fiscal year. It also imports somewhere in the region of 75%-80% of its crude oil requirements and, until recently, a significant amount of LNG. Given its market exposure, the vulnerability of the country to international oil price volatility is another threat to India's energy security which renewable energy resources could help guard against.

Rural Electrification Rates are set to Increase


India has come a long way in the past two decades in terms of rural household electrification with about 52% electrified as of 2010, against 43.5% in 2001 and 30.5% in 1991. Distributed generation from green energy sources can help in fulfilling the government's stated 'power for all' policy objective, under the terms of which it is envisaged that still further efforts to develop rural electrification systems at an accelerated pace will take place.

Development as Renewable Energy Manufacturing Hub


India's wind turbine industry clearly shows that the country has developed into a global hub for manufacturing renewable energy equipment. Its current wind turbine generation manufacturing capacity is some 4 GW with the potential to increase capacity to 15 GW annually. As a result, this growing industry could potentially employ 400,000 people in India and generate revenues of up to US$12 billion/year for the country. Players such as Suzlon have already emerged as global leaders and the company, which also includes a majority holding in German manufacturer REpower, is the third largest supplier globally and in 2009 held 10% of the market.

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Threats from Climate Change


India is the fourth largest carbon emitter in the world and if its reliance on conventional energy continues, emissions will increase further. The country's carbon dioxide emissions are expected to triple by 2030 if the current dominance of conventional resources in the energy mix continues. The country's National Action Plan on Climate Change has categorically called for keeping the per capita greenhouse gas emissions below that of developed countries at any given point in time. By 2020, India aims to reduce its emission intensity to 25% of the 2005 levels. Power from green energy plays an important role in the portfolio of options pursued under the National Action Plan on Climate Change. However, players in Indian green electricity generation still face a number of critical challenges today, some of which traverse all renewable technologies. These include inconsistent and unreliable incentive schemes; limited grid infrastructure/connectivity; difficulty in passing on the additional cost of renewable power to final consumers; outdated or unavailable resource maps; as well as the currently limited size and scale of domestic component production. Meanwhile, some issues are more technology-specific. Wind faces hurdles in grid infrastructure and power evacuation, a shortage of human talent and R&D capability, as well as difficulties in recovering payments from distribution utilities. Solar's problems, meanwhile, come from the high initial capital expenditure required and the fact that a significant number of the most suitable sites are in remote regions which can add complexity to the output transportation issue which may require additional transmisison infrastructure. Elsewhere biomass has feedstock availability issues and low feed-in tariffs, while small hyrdoelectric power plants face complex bureaucratic hurdles.

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2010

These challenges mean that decisive steps need to be taken in order to overcome the growth barriers first and foremost by adapting the legislative framework and the introduction of a set of renewable energy laws with clear guidelines. In addition, the industry would benefit from focusing on creating a market for renewable energy by introducing renewable purchase obligations and securing preferential grid access for renewable energy output. The industry could also draw support from the strengthening of country's grid infrastructure through the introduction of a strict grid code and clear roles and responsibilities for the evacuation infrastructure along with ownership and maintenance. Evolving the grid infrastructure into smart grids would facilitate net-metering, which in turn could significantly increase distributed power generation from renewable sources, especially wind and solar. And by introducing land reform, sites that are rich in renewable energy resources could be reserved for power generation. The issues raised could be overcome with government support and industry leadership in the near future and therefore investors should be positioning themselves already today to benefit from this growing market.

Klaus Peter Mller is Partner in the Global Energy & Chemicals Competence Center with Roland Berger Strategy Consultants. Pratik Kadakia is Practice Head Energy & Chemicals with Tata Strategic Management Group.

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Emerging opportunities in Indian Pharmaceuticals industry

Higher R&D costs, relatively dry pipeline for new drugs, increasing pressure from Governments for reduced healthcare costs and a host of other factors are putting a lot of pressure on global pharmaceutical companies. The industry is bracing itself for some fundamental changes in the market place and is looking at newer ways to drive growth. These global trends will have serious implications for domestic pharma companies. However with the right strategy, Indian companies are very well poised to take advantage of these changes and successfully navigate the future, say Pratik Kadakia-Practice Head, Chemical & Energy; Jeffry Jacob-Engagement Manager and Ankur Singhai-Project Leader, Tata Strategic Management Group

2010

Even before the current economic downturn set in, global pharma companies were under pressure. Global pharma majors are facing the dual impact of drying New Chemical Entities (NCE) pipeline and patent expiry of top selling drugs over the next few years. In 2007, the FDA approved just 19 new drugs, the lowest in over two decades. Declining productivity, relatively dry pipeline for new drugs, higher cost of approval for new drugs, and a host of other factors have been leading to lower profitability. The developed markets comprising of US, Europe and Japan, which have traditionally been the stronghold of patented drugs, are expected to witness lower growth going forward. Impending policy changes promoting use of generics is expected to further dent the top-line and bottom-line of global pharma majors. The global companies have responded to the dwindling sales and dry product pipelines by acquiring their peers and in the process creating global pharma goliaths. In order to sustain growth, most companies are looking at M&A as the way forward. Innovator companies are increasingly buying out generic companies (eg. Daiichi Sankyo's acquisition of Ranbaxy) or entering into strategic alliances (eg. GSK-Aspen) to participate in the fast growing generics market. As per Richard T Clark, Chairman and CEO, Merck, the $ 41 billion acquisition of Schering Plough will provide Merck 'benefit from a formidable research and development pipeline, a significantly broader

CONTRIBUTION TO GLOBAL PHARMA GROWTH


Contribution to Global Growth (% of Total) Share of Sales, 2009F (% of Total)
10%
18% 17%

11% 17% 9% 13%

13% 23%

8%
32% 34% 14% 9% 14% 12%

14% 7% 16%

39% 13%

15% 3% 17%

51% 27%

15%

2006

-1%

10% 20%

2007

2008

2009F

US & Canada Rest of Europe

EU5 Pharmerging

Japan Rest of World

Source: IMS Health

Note: Pharmerging countries refer to Brazil, Russia, India, China, Turkey, Korea and Mexico

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GLOBAL PHARMACEUTICAL COMPANIES: STRATEGIC IMPERATIVES


Focus on emerging markets

2010
Focus on generics STRATEGIC IMPERATIVES Outsourcing - Contract research & manufacturing

Mergers, acquisitions & alliances to achieve desired scale and market reach

Reducing complexities in supply chain

Rationalization of manufacturing setup

Source: Tata Strategic Analysis

portfolio of medicines and an expanded presence in key international markets, particularly in high growth emerging markets'. Leading pharma companies are also looking at newer areas like biologics and increasing their presence in emerging economies to fuel future growth (eg. sanofi aventis's acquisition of Medley S/A Industria Farmaceutica, a Brazilian generics company, in April 2009). Cost competitiveness has become more important than ever and companies are looking at outsourcing all non-critical elements of the value chain.

Implications for Indian pharma


Global companies are actively entering new markets, including generics in emerging economies, which innovator companies had earlier stayed away from. Differentiated pricing strategy across different markets will lower the cost differential vis--vis local generics manufacturers. Global companies are increasingly looking at buying out domestic companies who will now also face the risk of hostile takeovers. Some of the far reaching implications for Indian pharma companies across the entire value chain arel Competition in the domestic market

With growth expected to taper off in the US and other developed countries, emerging economies like India are expected to drive future growth. The key growth drivers in these countries are increasing per capita income, growing insurance penetration, better health awareness, higher government expenditure, adherence to IPR norms and shifts in disease profiles. The Indian pharma market consisting of domestic formulation consumption, formulation exports and bulk drug exports was estimated at $ 17 billion in FY2008. The domestic formulation business which comprised of $ 8 billion in FY2008 is estimated to grow at over 12 percent annually to reach $ 14 billion by FY2013. Overall growth in domestic formulations is expected to be driven by lifestyle related or chronic therapeutic segments, such as cardiovascular, anti-diabetic, respiratory and gastro-intestinal, which are expected to grow at a much faster pace than the more traditional acute segments. Increasing stress levels and changing/ unhealthy eating habits of a burgeoning population are expected to result in significantly higher incidences of lifestyle ailments. This has led to MNCs such as Pfizer, GSK, Roche and

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India: Domestic Formulation by Therapeutic Category (FY 2008)


(Rs. Bn.) Expected Growth FY 2008 to FY 2013 18.8%

Anti Diabetic Anti-infectives Cardiovascular Dermatology Gastro Intestinal Gynaecology Neurology Pain/ Analgesics Respiratory Nutrients/ Vitamins Others

16.0

57.3 14.0% 34.8 17.5 35.0 18.1 17.6 28.4 28.8 26.3 41.2
15.9% 12.4% 14.0% 14.0% 12.4% 7.4% 10.4% 8.8% 12.6%
Source : Crisil

2010

sanofi aventis launching almost 15 on-patent products in India with an eye on high value life style related therapeutic segments.
l Changing focus in CRAMS

India is today recognised as a global manufacturing hub, with nearly 40-50 percent lower production costs than the US and the largest number of FDA approved facilities outside the US. Several Indian companies jumped on to the Contract Research and Manufacturing Services (CRAMS) bandwagon during the first phase, which was characterised by manufacturing low value high volume intermediates, APIs and carrying out clinical trials. Strong domestic and international competition has already brought down margins in these traditional segments. The global consolidation may trigger optimisation of assets both in manufacturing and research thus affecting the future business of contract service providers. CRAMS companies could be at a disadvantage during negotiation of contracts with the consolidated entity as the quantum of work offered by a single entity would potentially increase.

Break up of Indian Contract Manufacturing Market


Intermediates 11%

Solid 17% Dosages 34% API 55% Liquids 5% Injectables 12%

Source: Frost & Sullivan

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2010

CRAMS players are increasingly looking at niche areas such as oncology and other high-potency APIs. Antibody drug conjugates (ADCs), which are monoclonal antibodies linked to cytotoxic small molecules, is another area where contract manufacturers are looking to expand. Increased outsourcing in the biopharmaceutical space also presents the contract manufacturing companies with new avenues for growth. Finished product/ dosage form, injectables manufacturing and lypholisation services are the other areas where globally contract manufacturers, such as Lonza, are moving up the value chain and looking at fortifying their positions in China and India.

Global Biopharmaceutical Market (USD billion)


160 140 120 100 80 27 60 40 20 0 2006 2007 2008E 2009P 2010P 2011P Microbial 2012P 2013P 2014P Mammalian 22 24.5 25 25.5 103 57 68 78 88 37

% 11.6
29 28

32

36

40

44

50

Source: Frost & Sullivan

l Biologics

The biologics market was estimated to be nearly $ 70 billion in 2008. Though this appears small compared to the overall pharma market, there were 150 deals announced in 2008 alone worth nearly $ 94 billion. These deals mostly involved pharma majors like Roche (Genentech), Eli Lilly (ImClone Systems), etc. Closer home, sanofi aventis recently acquired Shantha Biotech. Four biologics made the top ten and seven biologics made it into the top twenty selling drugs of 2008. US biopharma companies alone spent over $ 65 billion in R&D last year. This has led to a very robust product pipeline with several drugs in late stages of development. Regulatory and market acceptance of biosimilars (generic version of biologics) will lead to an even larger market post patent expiry of biologics. M&A, strategic alliances to increase l Increasing number of global acquisitions have been made in the recent past by Indian companies for strategic objectives like market entry, technological or manufacturing expertise and distribution facilities. The global market continues to offer these opportunities for domestic companies looking to expand their international presence. Strategic tie-ups with global companies offer several opportunities for Indian companies to create 'win-win' situations, particularly in R&D and distribution.

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The consolidation amongst global majors is expected to translate into stronger competition for Indian companies, especially in the global market. This may result in more frequent and longer litigations for generic drug manufactures, thereby increasing costs and making them financially vulnerable.

New success stategies


Indian companies are well placed to adapt to the changing scenario and identify emerging opportunities where they can effectively compete and succeed. The Indian industry needs to take immediate action to protect its home turf and partake of the huge domestic formulations opportunity of $ 14 billion by FY2013. Indian companies need to broaden their product portfolio to include growing therapeutic segments such as anti-diabetics, central nervous system and cardiovascular. Companies can now sell premium products to aspiring Indian middle and high income classes, while at the same time continue their focus on low value but high volume bottom of the pyramid class. India has already made a mark in CRAMS with contract manufacturing of generic drugs. Indian companies need to sustain their competitive advantage by consistently focusing on reducing costs and moving up the value chain. Contract manufacturing of innovator drugs is an area that offers great potential for the future. Focusing on meeting end to end needs of innovator companies and moving up the value chain to higher value segments like cancer related drugs or high potency APIs would enable Indian companies to provide better value and charge higher margins. Contract manufacturing of final dosage forms and injectables offer the opportunity for better margins and lower competition from other low cost countries. Biologics is an area where Indian companies can look at actively serving the market and taking leadership. Indian companies cannot afford to miss the bus on biologics. This market is still in nascent stage and offers a first mover advantage to companies which can get their product market strategy right. However unlike the traditional pharma segment,

2010

MOVING UP THE VALUE CHAIN IN CONTRACT MANUFACTURING


Indian companies positioned to serve high value markets Specialty Opportunity to share in value creation

Cytotoxic and high potency APIs Innovator APIs

Reg. intermediates and complex chemistry

Generic APIs non registered intermediates (simple chemistry) Basic Raw Material Tactical Likely Domination of China

Generic

Nature of customer relationships

Strategic

Source: Kotak, Tata Strategic Research

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2010

entry barriers are very high in this space due to the investment involved. Biologics based companies in the west, which have previously received funding from venture capitalists may now find it difficult to raise cash under the current economic scenario. This presents a good opportunity for Indian pharma companies with significant cash on their balance sheet to scout for suitable targets to gain market and technology access. Indian pharma companies need to accelerate the transition from reverse engineering of generic drugs to development of new molecules. The Indian industry needs to develop and improve capabilities in novel drugs and delivery mechanisms. Several companies are developing their capability in NCEs but the inflexion point for the domestic industry will be the launch of its own patented drugs. Domestic companies should continue their focus on innovation to develop New Chemical Entities/New Molecular Entities (NCEs/NMEs) which will offer sustainable revenues going forward. Increasing collaboration with global pharma companies help in sharing costs and risks, while ensuring better results. In-licensing/out-licensing by pharma companies is an area that should be actively considered. The current environment is challenging, but at the same time it throws up several new opportunities for Indian pharma companies. What worked in the past may not necessarily hold them in good stead in the future. Companies which take advantage of the fundamental changes the industry is going through and re-jig their strategies accordingly will be able to not only successfully navigate the future, but also rewrite the rules of the game.

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Contract research - Deriving strategic value from emerging markets

Global pharmaceutical companies are re-looking at their R&D processes in order to leverage the opportunity presented by emerging economies, such as India, in contract research. Besides offering the opportunity to save costs tactically in the short term, this is also a strategic move to improve productivity and develop further capabilities in order to compete successfully in the future, while staying close to geographies which will drive future growth; say Aleksandar Ruzicic of Roland Berger Strategy Consultants and Jeffry Jacob of Tata Strategic Management Group

2010

Matching R&D footprint with long-term growth in emerging markets


Globally pharmaceutical companies are under immense pressure with existing business models under threat. The growth is expected to taper off in the US and other developed countries while emerging economies are expected to drive a large part of the future growth. Until 2020, pharmerging countries will represent more than a quarter of the healthcare and pharma market value globally. These markets will contribute almost half of the absolute growth for both the healthcare and pharmaceutical markets (Refer Figure 1). Hence, it does not come as a surprise that pharmaceutical companies have started to boost their footprint and presence in these locations and also elevated these regions organizationally. For example, GlaxoSmithKline has created an Emerging Markets unit in June 2008 headed by Abbas

Fig. 1: Geographic shift towards pharmerging markets (USD Bn)


Assessment of shift Share of healthcare and pharma market value of pharmerging countries more than doubling between 2009 and 2020 Share of absolute healthcare and pharma market value growth between 2009 and 2020 larger than 40% Healthcare market Pharmaceutical market
1,250 1,500 29% 450 700 17% USA 38% 14% 19% Europe 22% Top 5 Japan 7% Pharmerging 12% Other 16% 2009 6% 43% 26% 5% Europe 19% Top 5 Japan 11% Pharmerging 12% Other 20% 2009 22% 2020 23% D 7% 4%

5,400

9,900

4,500 26%

800

USA 43%

35%

14% 8% 49% 27%

14% 2020

12% D

Source: EIU; OECD; WHO; IMS; Roland Berger

Hussain and executed numerous acquisitions and direct investments resulting in a significant part of its workforce being located in emerging markets. Declining productivity, relatively dry pipeline for new drugs, increasing penetration of generics and margin pressures have been leading to lower profitability for global pharmaceutical companies. This trend is expected to further intensify going forward into the future. This has forced companies to continuously adapt their cost structures,

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Fig. 2: Core competencies across the value chain


Distribution/ logistics 1% Research Sales 12% 22% Discovery 6% Pre-clinical 3% development

Quotes from Top Executive Interviews "We have paid for the same preclinical work USD 120,000 in China, which would have cost us USD 5 million in the US" "Data management can already be outsourced to places like India, for example leveraging IT companies such as Tata Consultancy Services" "Emerging markets do provide cost savings potential for clinical development which need to be balanced with the demand for clinical data generated in the US/EU"

2010

24%

16% Clinical development 6%

Marketing

Regulatory 1% Active ingredient Pharmaceutical production production 9%


Production Distribution

R&D

Marketing and sales

QUESTION: What are the top 3 core competencies of your company concerning the following steps along the value chain?

Source: Top executive interviews; Roland Berger Survey 2007/2008

Fig. 3: Pharmaceutical Companies R&D Budget Split


R&D Budget break-up (%) Clinical Budget break-up (%)
16

Phase IV

4 20

11 38
67

27

Phase II and III

Clinical Development Non-clinical Others

Discovery Regulatory

18

Phase 1

A study by the Tufts Center for the Study of Drug Development concluded that: Pharma companies with high reliance on CROs stay closer to schedule than others CROs expand the speed and capacity of product development pipeline w hile maintaining high levels of quality CROs help companies reduce costs

Source: Secondary research, Zinnov, Tata Strategic Analysis

as exemplified by major multi-billion cost cutting/restructuring projects in all major pharmaceutical companies, as announced most recently in September 2010 by the Roche group that is not affected by imminent significant patent expirations. The pharmaceutical industry is fundamentally re-evaluating the make-up of its value chain, differentiating clearly between core capabilities and those that could be potentially outsourced. Within R&D, particularly pre-clinical and discovery seem to be representing potential outsourcing opportunities, also driven by huge cost differences (Refer Figure 2 & 3). In the future, the pharmaceutical industry will be forced to capture the increasing benefits from emerging countries, particularly given the longterm benefit from matching better its global work force footprint to the future geographic distribution of revenues. The initial wave of pharma outsourcing was successfully witnessed for manufacturing of Active Pharmaceutical Ingredients and off patent drugs. As late as 2006, contract

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manufacturing accounted for over 70% of the revenues of the Indian CRAMS market. However post compliance with WTO norms on intellectual property, there has been a spurt of off-shoring activities in the areas of clinical development and manufacture of patented APIs and formulations, as well as discovery and pre-clinical services.

2010

Multitude of key success factors in R&D drive relevance of emerging countries


Many key success factors for pharmaceutical R&D apply equally to all phases, such as the availability of highly skilled English speaking staff, adherence to quality and compliance, flexibility and agility given significant attrition, costs per unit (related for example to activity, FTEs, patients) and tight project management. In addition, exploratory R&D also requires IP protection, trained/ experienced scientists/ researchers, speed of learning/ know-how development, access to academia/ basic research labs, as well as access to funding whether public or private. In case of confirmatory R&D, the key success factors are driven by fast access to patients, local regulations for animal/ clinical studies, overall speed for critical path activities, e.g. data analysis upon database lock of clinical trials, access to product approval regulators and cost/benefit assessment agencies in key markets as well as strength of relationships with medical opinion leaders driving product adoption through international and national guidelines. Pharmaceutical companies need to decide on their geographic footprint by assessing the various locations rigorously against the suggested key success factors. In addition, we suggest differentiating outsourcing decisions by activity type (differentiating ongoing/ repetitive tasks from projects) and outsourcing option (off-shoring leading to a strategic cost advantage vs. outsourcing within US/ EU/ Japan). Near and offshoring seems to be equally driven by unit cost advantages, e.g. animal studies, as well as critical resource access, e.g. patients meeting clinical trial inclusion criteria, experienced medicinal chemists.

Fig. 4: Selected R&D examples by outsourcing option and activity type


Complexity

Competitive Intelligence Low cost off-shoring


Outsourcing option

Medicinal Chemistry Animal Studies Pivotal Trials

CMC for Optimization

Outsourcing to US / EU / Japan

Pharma IT Services Advertising Reporting Ongoing/ repetitive tasks

PMS Studies

Projects

Activity type

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India's strong positioning on the key success factors

2010

India's large population of 1.15 billion people translates into a vast patient pool and faster patient recruitment for clinical trials, which go a long way in meeting overall timelines faster. This results in substantial acceleration of the drug development time in addition to lower costs per patient. In addition, India has a large population of doctors and scientists, representing the largest English-speaking talent pool in some disciplines. For example, India produces three times as many master graduates annually in chemistry than the US. With the large number of DMF filings, technical competency is well established. It has the largest number of USFDA approved facilities outside US with GMP and GLP certifications. Intellectual property is respected and the laws are conducive to IP protection. Moreover, Indian strength in synthetic and medicinal chemistry makes it a lucrative destination for contract research, even for early research and discovery activities. Given the advantages of focus, cost and speed, the question is no longer about whether to outsource but rather of finding the right partners. Overall, clinical development, discovery and nonclinical services costs account for 85% of R&D budget which can be reduced by using CROs. In addition to cost advantages, multinational pharmaceutical companies benefit from staying closer to schedule and their ability to expand speed and capacity of their R&D operations while maintaining high levels of quality resulting in a much required boost of R&D productivity (Refer Figure 4).

Moving up the value chain ladder


Contract work in research/ discovery has evolved from low end research activities to more value added high end research. Reputation for research quality, speed in project execution, world class infrastructure, quality manpower, patent protection and strong client relationships are critical for growth of CRAMS. Currently clinical trials account

Fig. 5: Indian CRO Industry


CRO segments in India Break up of Development stage in India
(Focus on generic drug development)

Break up of Clinical studies


Phase IV, Phase I,
10% 7%

Discovery, 20%

BE/ BA Studies, 37% Clinical studies, 63% Phase III, 53%

Phase II, 30%

Development stage (Clinical), 80%

(Focus on new drug development)

Availability of large patient population in diverse therapeutic category is the major driver for growth of CRO - Clinical Trial in India Cost of clinical trials is a fraction compared to developed mark ets like US

Source: Crisil Research, Tata Strategic Analysis

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for the largest share of the Indian CRO market (Refer Figure 5). Increasingly, Indian CRAMS such as Jubilant Biosys are striving for end-to-end solutions, integrating a large array of services into a holistic offering, particularly within Discovery/ Preclinical. Furthermore, Indian CRAMS have also started to engage in performancebased contracts enabling them to retain a larger share of their value-added, as exemplified by the collaboration between Jubilant Biosys and Endo on the area of oncology. Outsourcing in drug discovery occurs mainly in the following segments - broad based screening, genomic targets, chemistry and gene therapy. Therapeutic areas involved include oncology, infectious diseases, CNS, cardiovascular disorders, autoimmune/ inflammation and metabolic diseases. Currently Phase II-III has emerged as the most established component of clinical development. The adoption of new tools and techniques such as biotechnology, bio informatics, genomics etc. along with new IT solutions has brought about a change in the way new drugs are being developed and brought to market. This will increasingly drive outsourcing of research and development to India, also due to its strong IT services sector (Refer Figure 6). Data management and early phase trials offer immense opportunities for CROs. There have been several Private Equity (PE) investments in the recent past, driven by current attractive returns and future potential. Actis' investment in Veeda Clinical Research, Kotak Private Equity Group and 3i Capital in Siro Clinpharm, OrbiMed in Ecron Acunova and MPM Capital in Sai Advantium are some examples. Actis Biologics is working together with the Malaysian government on new molecules for diabetes, anti-cancer diagnosis, and asthma and also jointly building the Bio-City Park in Malaysia. 'Developing country' diseases offer another area of huge potential where the focus of Western drug companies is currently limited. The long term arrangement between the Malaysian government and Vivo Bio for manufacturing malaria vaccine is one such example.

2010

Fig. 6: Indian CRO Industry


Indian CRO Revenues, 2002 -2010e (USD Mn.) Leading Indian CROs

C AG 62%

R
1020

485 22 2002 70 2004 202 2006 2008 2010e Illustrative list of areas addressed eg. GVK Bio: Medicinal chemistry Informatics Biology Process R&D Clinical research BA/ BE Studies Knowledge process outsourcing

Source: Secondary research, Zinnov, Tata Strategic Analysis

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Contract research (and manufacturing) offers a long term strategic advantage

2010

The nature of relationships between Indian CRAMS suppliers and the pharma companies is transitioning from transactional based to long term partnerships, often involving sharing and creation of joint intellectual property triggering performancebased milestone payments. Big pharma companies are also acquiring stakes in their CRAMS partners to secure supply and develop a stronger relationship. It is a foregone conclusion that pharmaceutical and biotech companies need to relook at their business models if they have to successfully compete in the new environment. Contract manufacturing was just the tip of the iceberg. If companies have to be really successful and optimize their operations for better business results, they need to revamp their R&D process and capture the opportunity presented by emerging economies. Price realizations that the pharma companies have got used to may be a thing of the past, especially with focus on reducing final cost of dose by payers and governments even in the developed world. Off-shoring contract research (and manufacturing) services are therefore an opportunity to not just save costs tactically for the short term, but also a strategic move to improve productivity and develop further capabilities, while also moving closer to the future healthcare customers in developing markets.

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Raising India's 'Pulse' rate

With a focused and integrated approach, India has the potential to produce more than double the current output of pulses, say Pratik Kadakia and Jeffry Jacob of Tata Strategic Management Group

2010
A lot has been written about the sharp rise in pulses over the past few months. The government too has announced several measures to control prices. While these short term measures may succeed in controlling the prices to some extent, we need to take a long term perspective if we are serious about developing a sustainable solution to this issue.

Pulses or 'daal' are an integral part of the average Indian meal. A large proportion of the Indian population is vegetarian and pulses form the main source of protein. The protein content in pulses is about 18-25%. This makes pulses one of the cheapest sources of protein for human consumption. However, the per capita domestic production of pulses has declined from 60 g/day in 1970-71 to 36 g/day in 2007-08. This is despite India being the largest producer of pulses in the world with 25% of total production, 30% of total consumption and 32% of global acreage under pulses. Productivity of pulses in India has been very low at 638 kg/ha, compared to best in class yields of ~1,900 kg/ha in Canada and USA.

India: Potential for Pulses Production (Mn tons)


9 2 3 4 4 28 15

Indicative

37

Current Production

HYV Seeds
25% increase in yield due to use of HYV seeds (Potential 3540%)

Pest Management
25% increase due to pest management (Potential 30 40%)

Irrigation/ Storage/ Increased Nutrient supply Transportation yield


20% increasedue due 15% increase 20% increase to supply of of due to proper irrigation and and storage irrigation nutrients (Potential 20%) nutrients (Potential 20-25%) (Potential 20-25%)

Additional Area
Increase due to additional area (Rice fallows & intercropping)

Total Availability

(c) Tata Strategic Management Group

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The World Health Organization recommends 80 g/capita/day of pulses consumption for India. Based on expected population growth, India will require ~38 Mn tons of pulses by 2017-18 to avoid protein deficiency. Considering the current domestic production levels (15.1 Mn tons in 2007-08), this is a huge gap which needs to be addressed if we have to be self-sufficient in pulses. If India has to meet the above projected demand, it would have to either double its acreage at current yield levels or double the yield keeping acreage constant. Since either of the above may not be feasible in isolation, the country needs to look at a mix of both. There are several reasons why pulses have not received the attention they deserve. Pulses in India are considered a residual crop and grown under rain-fed conditions in marginal/ less fertile lands with almost no focus on pest and nutrient management. Heavy weed infestation, blue bull and pests destroy over 30% of standing crops before harvesting. In addition, there are post harvest losses during storage due to attack by pulse beetle. This has resulted in pulses being considered a risky crop by farmers and yield levels being amongst the lowest in the world. Tata Strategic Management Group recently undertook a study in the area of pulses and looked at some of the best practices prevalent in other countries; some of the important observations of the study are:

Market development and ensuring profitability


Pulse growers associations in USA and Canada focus on developing newer markets (eg. animal feed, food ingredient industry). Governments ensure easy access to credit including providing non-recourse market assistance loans.

Promoting good agronomic practices


Pulse growers' associations in Canada educate farmers on timely seeding, fertilization and pest control for every crop cycle. Mechanized harvesting, usage of High Yielding Varieties (HYV) seeds and recommended seed replacement practices are followed.

Focus on R&D
Investment in research is made by the Government and through growers' levy collected from pulse producers. High yielding varieties and short duration crops suitable for local conditions are developed and popularized.

Increasing area
Fallow substitution in irrigated lands has resulted in increased production in several countries.

Improving efficiencies through aggregation


Pulse growers' associations help realize economies of scale along the value chain, leading to better adoption of technology and infrastructure. India has the potential to increase acreage by encouraging production of pulses in rice fallows. A substantial part of rice fallow land can be targeted for cultivation of pulses during the rabi season. Intercropping and growing short duration varieties

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between kharif and rabi season, by relay cropping and intercropping, ensures further utilization of existing agricultural land. Replacement of upland paddy with pulses is another viable option which has the potential to give better net returns to farmers. India's yield can be brought to world class levels by a mix of good agronomic practices and farmer education. Usage of HYV seeds has the potential to increase yields by 2535%. Innoculation of seeds with Rhizobium bacteria helps in better nitrogen fixation and improves yields. Improving seed replacement ratio and ensuring timely availability of certified seeds will help increase production further. Proper pest and nutrient management are very important levers to increase production of any crop. Appropriate nutrients, such as sulphur, zinc and phosphorus help in improving plant biomass for pulses and result in better yields. Currently only 15% of the total area under pulses is irrigated as compared to an average of 46% for all foodgrains. Providing scheduled and controlled irrigation can lead to increase in yields. Irrigation requirements for pulses are much lower than other crops and could be provided through sprinklers, etc. Pulses need to be stored at optimum humidity conditions to prevent post harvest losses due to attack of pulse beetles. These insects mainly attack whole grains and not split pulses. By shortening the cycle time from harvesting to milling and storing pulses in split form, these losses can be reduced drastically. By extending crop insurance to pulses effectively, farmers would stop perceiving pulses as a risky crop. Providing efficient sourcing mechanisms will provide the farmer with security on assured off-take, which could further encourage farmers to grow more pulses. Considering the measures listed above, India has the potential to produce over 37 Mn tons of pulses. If India desires to achieve its true potential in production of pulses, we need a focused and integrated approach to address these barriers.

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Water is everybody's business

"Water, water, everywhere, nor a drop to drink" - Samuel Taylore Coleridge's Ancient Mariner was stuck in the middle of an open ocean. Although there was water everywhere, it was not fit for consumption as it was salty. One can draw a parallel from the poem when referring to the status of water resources in the world today. Water is generally considered a "free good" that is abundantly available and unlimited in supply given that three-fourth of the Earth is covered with water. But the fact is 97% of the world's water is salty. Out of the 3% fresh-water only 0.5% is available for human consumption (rest is in form of ice caps and glaciers). Population growth and rapid urbanization, increasing affluence and living standards, industrialization and expansion of business activities and climate change are globally increasing the demand for water. Thus even though the world is not "running out of water", it is not always available when and where it is needed. Also there is a wide disparity in distribution of the water resources globally. China and India, with more than onethird of the world's population, have less than 10% of the world's water.

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Water Issues in India


India has nearly 4% of the world's water resources. Of the average annual 1,869 Billion Cubic Metre (BCM) of available water in India, only 1,120 BCM is available for consumption. Surface water accounts for nearly 60% of the available water resources while groundwater resources account for the rest. Due to some of the reasons mentioned above, demand for water has been growing at a rapid pace in the past. The water demand, currently estimated at 710 BCM, is expected to increase to nearly 1,180 BCM by year 2050, thus exceeding the supply (Fig 1).

Fig 1 : Water Demand (in BCM)


1150 843 710

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2025 E

2050E

Total Water Availability = 1,120 BCM


Source : Planning Commission, Ministry of Water Resources, Tata Strategic Estimates

Fig 2 : Per Capita Availability of Water (Cubic metre) vs Population Growth


1,600 1,200 800 400 0 1991 2001 Year 2025 2050 2,000 1,500 1,000 500 0

on P op u lati

Source : Ministry of Water Resources, Govt. of India

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Per Capita Availability of Water (Cubic Metre)

2,000

Population (Mn)

Cap i Wat e t a r A va ilabi li ty

P er

2,500

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Fig 3 : Annual Per Capita Availability of Water per year (Cubic Meter / Population)
10,837

2010
Global Average of Annual Per Capita Water Availability (2002) = ~ 7,700 Cubic Meter 4,624 2,259

1,820 1,154 118 Saudi Arabia South Africa India

1,878

Germany

China

Mexico

USA

Source : FAO: AQUASTAT (2002)

Though India currently has adequate water resources, an analysis of the water availability on a per capita basis indicates that India is moving towards 'water stressed' (i.e. < 1,700 m3 / Capita / Year) level (Fig 2). Also, India compares lowly in terms of per capita availability of water when compared to the global average (Fig 3). The spatial unevenness in water availability across the country, given the wide variation in rainfall, only exacerbates the situation. Also, the present infrastructure in the country is limited, in terms of long-distance transmission lines or network of canals, to carry water from water surplus regions to water scarce regions. Thus in arid regions in India, women and children wake up early to travel long distances to collect water. The situation in urban India is also quite dismal with most of the cities receiving very limited quantities of water. Often the freshwater that is available in form of rivers and lakes are contaminated as untreated industrial or household waste water is released into them. All these have led to increasing dependence on groundwater. The result has been a steady depletion in the groundwater levels in many parts of the country. In Punjab for example, while groundwater has helped flourish the agriculture sector, there are reports of groundwater being overdrawn in several blocks of the state. This has led to alarming deterioration in the quality of water leading to diseases like flourosis and cancer. Similar cases of over-drawing of groundwater are also extensively prevalent in waterstarved states like Gujarat and Rajasthan. So what are the solutions to this impending water crisis?

Emerging Solutions
There could be many ways one can address the issue of saving and conserving water. For that, it is critical that users of this resource namely the agriculture, industry and the household sector become aware of the fact that water needs to be conserved and used efficiently. Large costs involved in building dams and rapid depletion in groundwater levels are forcing newer means of water provision/ conservation of existing water. In this regard, one of the solutions is Rainwater Harvesting, an age old technique of

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Fig 4 : Water Regulatory Environment


Govt. policies governing Water Supply National Water Policy (2002) Prioritises rights on water Promotes PPP in water projects Supports rationalization of water tariffs at ULB level State level Ground Water Control / Regulation Act Control usage / withdrawal of ground water and stipulates recharging of ground water Rain Water Harvesting Regulations (City level acts) Stipulates rain water harvesting through roof and ground water recharging through open wells / bore wells Provides norms of rain water harvesting Govt. policies governing Water Pollution Water Prevention and Control of Pollution Act, 1974 and Environment Protection Act (EPA), 1986 Defines strict norms for sewage and effluent discharge Established pollution control board at State level to enforce effluent standards MINAS (Minimum National Standards) standards defined for effluent discharge for a wide range of industries National River Conservation Scheme Central Public Health and Environmental Engineering Organisation (CPHEEO) Guidelines (Centre) Custom duty exemption for import of treatment equipments

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Regulatory Environment

the collecting, storing and recycling of rainwater (surface/subsurface) for irrigation and other uses. In India, several state governments have made rainwater harvesting mandatory. For example in cities like Ahmedabad, Mumbai, Bangalore and Indore, rainwater harvesting is mandatory for all buildings covering an area of over 1,500 square metres. Rainwater harvesting is also practiced globally. At the Frankfurt Airport, Germany, water is collected from roofs of the new terminal in underground tanks and is later used for toilet flushing, watering plants and cleaning. This results in savings of approximately 100,000 m3 water/year. The need to reduce water footprint in irrigation is leading to the emergence of low pressure micro-irrigation techniques such as drip irrigation and sprinkler irrigation that save about 40% water as compared to traditional methods. The wastewater treatment represents a promising solution in addressing the water scarcity issue. The wastewater treatment consists of physical, chemical and biological treatments leading to generation of recycled water, which can be used in variety of non potable applications in the industry and agriculture sector, environment & recreation and also for groundwater recharge. With usage of suitable technology, treated water equivalent to drinking water can be obtained. In Tokyo, municipal wastewater is treated through sand filters and then chlorinated for use in toilet flushing in business facilities. Florida uses treated wastewater for more than 50% of its requirements. While there are several innovative ways to manage the existing water resources, there is also a need to explore newer sources of water. Many coastal regions are looking at the desalinated seawater as the alternate source of water. The fact that Desalination technology is an expensive option, in comparison to conventional sources of water, has been the main reason for its limited adoption. Government of India, through various policies and regulations, is trying to encourage conservation of water as well as reduction of water pollution (Fig 4). It is also encouraging solutions like rainwater harvesting and wastewater treatment. Schemes like Jawaharlal Urban Renewal Mission aim to develop infrastructure in cities and towns with financial assistance in forms of grants. Water and sanitation sector account for nearly 50% of the total allotted projects.

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Fig 5 : Potential Private Sector Opportunities in Water Sector


1 Water Infrastructure
Water extraction projects like construction of dams, canals Laying of pipelines for water supply & distribution Sewerage collection pipelines

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1
Water Infrastructure

2 Treatment Technolgoies
Potential Potential Opportunities for Private Private for Sector Sector
Installation of water treatment plants Installation of sewage / effluent treatment plants Installation of desalination plants

Water Conservation

Treatment Technologies

3 Water Conservation
Drip irrigation Rainwater harvesting Watershed Management

Water as an Investment Opportunity


The solutions to addressing the water scarcity need large investments. These investments may be for creation of new water assets or for operating and maintaining the existing assets. In this regard, private sector can play a major role in bringing in the necessary financial resources as well as technical and managerial efficiency in managing such water projects. Govt. of India is encouraging private participation in this sector through PPP arrangement. Measures like Viability Gap funding are in place to enhance attractiveness of water projects. Tata Strategic estimates the water sector investment potential ~ USD 10-12 Bn (constant price) annually over the next 10 years. A major share of these investments will be in civil work projects in irrigation and water supply/distribution space. Also, increasing Government focus on reducing water pollution and the need to tap into new water sources are creating lots of opportunities in segments like water and wastewater treatment and desalination (Fig 5). Examples of such initiative include Tirupur Water Supply project on BOT basis, Service Contract for Navi Mumbai domestic water and Chennai water desalination plant on BOOT basis. Given the abundance of demand across the value chain, the water sector is truly emerging as a "Sunrise sector" of the next decade. This certainly presents business opportunities for the private sector. In this regard, the Government should create an enabling policy framework for PPP in water sector with particular emphasis on the rationalization of water tariffs. This would go a long way in boosting the attractiveness of water projects and create solutions much necessary to avert the impending water crisis.

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Well being in India: Disparity and surprises across districts

The issue of income versus well being has been highlighted by Prof Stiglitz and others. Well being, in the Indian context needs to consider a range of indicators representing material and social factors. Computing a Well Being Index by district reveals wide disparities - even in the same state. Even more surprising diversity amongst districts is revealed by a Female Security Index. All organizations - Government bodies, NGOs and businesses - need to look at relevant indicators at the district level for effective action planning and results, say Raju Bhinge, Chief Executive and Harsha Kapoor, Practice Head- Analytics Solutions of Tata Strategic Management Group There is an ongoing debate on whether per capita income adequately reflects the quality of life and well being of a person or society. Eminent economists like Joseph Stiglitz and Amartya Sen have suggested the use of a broader indicator covering monetary, social and wellness dimensions. In applying this approach in the Indian context, it is clear that such an indicator will have to include ownership of basic amenities as well as access to quality of life factors like hygiene, education and healthcare. Moreover, given the disparities across the country, it is essential to look at a smaller geographical unit say, a district, instead of a typical state. A Well Being Index (WBI) has been created for India using eight key categories (defined in Table 1) that broadly cover all aspects of well being. The categories are: (1) Home amenities, (2) Kitchen facilities, (3) Education, (4) Hygiene, (5) Entertainment, (6) Communication, (7) Transportation & (8) Healthcare Using NSSO household surveys data, a rigorous scoring methodology was used to compute the WBI for each district in India. Map 1 represents the district wise WBI colour coded for each of the five quintiles (from best to worst). Eastern and Central India are markedly worse than the rest of India. The Northern states of Punjab, Haryana and Delhi are amongst the best. Evidently, some districts

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Table 1: Definitions of Categories comprising Well Being Index (WBI)

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Well Being Index (WBI)

Map 1

Female Security Index (FSI)

Map 2

2010

are better off than others. Even within the same state there is significant disparity amongst districts. For instance, huge variation across districts in Karnataka is noticeable: while Bangalore is amongst the 'Best', Bellary and Gulbarga are 'Bad' and Bijapur, Koppal and Gadag are amongst the 'Worst' While the WBI captures all major material and social parameters, it does not include a very important reality of Indian society - the well being, status and treatment of women. A number of parameters can be considered for this purpose. But there is a paucity of reliable, consistent data, especially at the district level. With these constraints, a Female Security Index (FSI) has been created using gender ratio (Census 2001) and crime against women (National Crime Records Bureau 2006, 2007). Map 2 reflects the FSI colour coded in terms of quintiles (best to worst). As more reliable data becomes available, the FSI can be redefined to make it more comprehensive. In terms of Female Security, there is a clear divide between North India on one side and South & Eastern India on the other. The 'Worst' rating is found in Punjab, MP, West UP, Haryana and Delhi. However, Uttaranchal and Eastern UP fare comparatively better. Peninsular India is generally well placed. Some large states exhibit huge disparities among districts. For instance, in Rajasthan, Dungarpur is classified as 'Best', Bhilwara is 'Good' while Alwar and Kota are among the 'Worst'. A comparison of Well Being Index (Map 1) and Female Security Index (Map 2) reveals some interesting and contra intuitive findings. There seems to be no correlation between these two indices. Some of the most well off parts of India (Punjab, Haryana, Delhi, & Western UP) as reflected in the Well Being Index have the worst rating in terms of the Female Security Index (FSI). Likewise, some of the states having districts ranking 'Bad' or 'Worst' on WBI (eg. Orissa, Eastern UP, WB, Jharkhand, Chhattisgarh and Bihar) are better placed on Female Security. Surprisingly, MP scores badly on both indices. In contrast, districts in Uttaranchal, Gujarat and Kerala are consistently in the 'Good' to 'Best' range. The districts in the large states of Maharashtra, AP and TN are 'Average' or better on both counts. This analysis of well being vividly illustrates the diversity and disparity across districts, often within the same state. Clearly, the typical state is too large a unit for any meaningful conclusions to be drawn. The breadth of consumption patterns captured at the household level in NSSO surveys enables a wide range of analyses at and within a district. Clearly, insights on district wise parameters and trends should be the foundation for action planning and effective performance. This applies to all types of players whether a policy maker wishing to improve 'well being' in rural India, or an NGO aiming to improve gender equality or a business house planning to increase the penetration of its goods or services in the domestic market.
(Research and analytics inputs provided by Sachin Somaiya and Rituparna Dasgupta of Tata Strategic Management Group)

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Are family-owned businesses sustainable?

Discussions and articles on management of family owned businesses (FOBs) often focus only on corporate governance norms or effective succession planning as key initiatives. However, several other challenges of growth and talent management do not find adequate mention. Tata Strategic proposes a 'Composite Approach', as a comprehensive framework to help FOBs in effectively managing key business challenges of growth, continuity and stability while also addressing family and talent issues say Sona Rajesh, Practice Head-Organization Effectiveness and Amit Bajpayee of Tata Strategic Management Group. Family Owned Businesses (FOBs) have played a significant role in the growth of most economies around the world. Leading Indian family businesses like Tata, Reliance, Birla, Bajaj, Mahindra & Mahindra, etc have contributed immensely to the growth of the Indian economy. Similarly, in developed economies, the contributions of family businesses like Cadbury, Johnson & Johnson, Walmart, Ford etc. are tremendous. In India during the pre-liberalization licence era, FOBs emerged as powerful businesses adept at surviving in a protected economy. Post-liberalization, growing business opportunity coupled with rising competition saw both the rise of several FOBs and the fading away of others that failed to adapt (refer Exhibit 1). For the purpose of this discussion, FOBs are defined as enterprises where family members:
l own a controlling stake in

2010

the business, and

l have full time involvement in management either through board membership or

by occupying senior executive positions

Challenges of FOBs
Caselet: Research indicates that the likelihood of family businesses surviving under family control declines significantly with every successive generation (Among family owned businesses only 15% survive beyond the 3rd generation and only ~ 5% by the 4th generation) In their quest for growth, continuity and stability, FOBs face certain challenges which are unique to such businesses. They must address these to succeed and sustain over a period of time. These challenges are as summarized below: 1. Family Challenges - Research on FOBs has shown that the unique strength of FOBs in terms of strong family bonds prevails upto the 2nd generation but starts diluting with generations thereafter. Family dynamics in an FOB can become weaknesses with growing distance and, family being unable to focus on business priorities. 2. Business Challenges - A multitude of business challenges ranging from pressures on sales & profitability, increased competition, etc. are part of any business and FOBs are no different. To effectively deal with such business pressures it is imperative to have a cohesive top management and governance mechanisms with clear roles, accountability, deliverables and authority for involved family members and professional talent. 3. Growth Challenges - Economic reform has brought with it many growth opportunities for businesses. However, growth leads to increased scale, diversity of operations and often brings in varied investors, business partners and professional employees beyond the family circle. Maintaining family traditions and values in the FOB while letting go of some control to company management can pose a serious challenge.

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Exhibit 1: Leading FoBs (1964-2009)


ASSET SIZE
Tata
369 290 109 71 65 61 60 58 54 54

MARKET CAPITALISATION
7546 7235 3241 1829 1763 1297 1228 1192 Tata Premji (Wipro) Ambani Parvinder/ Malvinder Bajaj A Birla Munjal Mohan Wadia Raju's Satyam 22345 Reliance Ind 18439 16060 7970 7667 7204 3715 3173 2985 4220 Tata ADAG Bharti A Birla DLF Jindal Adani Jai Prakash UB

(Figure in Rs. Cr) 432419 239689 185176 158513 82448 67174

Tata Birla Ambani JK Singhania Thapar Mafatlal Bajaj Modi

2010

Birla Martin Burn Thapar Bangur Sahu Jain Shriram Bird Heilgers JK Singhania Sarabhai

41282 38021 30457 27251

MA 1032 Chidambaram TVS 909

MRTP Established (1964)

Liberalisation (1991)

Open Markets (2000)

Open Markets (2009)

4. Talent Challenges - Business & growth challenges create dependence of FOBs on professional talent for business success. However, talented and dedicated professionals with growth aspirations expect a clear understanding of their growth path, especially in senior management roles. Managing their professional interests along with aspirations of involved family members is a key challenge. Further, family dynamics directly impacting business can make an FOB less attractive to talented professionals. Ensuring long term sustainability requires l

successfully resolving the multiple challenges of family, business, growth and talent ensuring interests of all key stakeholders are addressed

The Composite Approach


Tata Strategic has developed a 'Composite Approach' as a suitable path towards creation of sustainable FOBs (refer Exhibit 2). 1. Family and Business Governance: Delinking ownership from management There are sufficient examples of business families demonstrating that dissent and family disputes can directly impact business decisions and could hinder not only daily operations but also future growth. Maintaining the delicate balance between effectively handling family interests and business imperatives requires the company to create an appropriate structure and guidelines to manage both these critical aspects. a) Corporate Governance Structure: A board of directors has the key responsibility of protecting the stakeholder's interests, taking key business decisions and providing direction to the businesses of the company. Regulatory guidelines and global best practices provide a wealth of data on appropriate Board structures, their membership and role of Board Committees. While only publicly listed FOBs are required to comply with the corporate governance requirements, other FOBs will do well to comply with the same in their long term interest. b) Family Governance Structure: In addition, FOBs can be further strengthened by establishing a 'Family Council' alongwith a 'Family Constitution'. The Council provides a platform for family members to debate issues among themselves, express agreed views through their appointed spokespersons and understand viewpoints of family executives. Further, it acts as a channel for family executives to explain the firm's

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Exhibit 2: The Composite Approach


Business Challenges

& Business Governance

& Talent Development

Growth Challenges

plans, policies and progress at Council meetings and gain support for the firm's strategy and major decisions from the family. The Constitution provides the guidelines for membership of the Family Council, its role and selection, induction and development of family members in the business. Caselet: A prominent FOB in Saudi Arabia has transitioned over successive generations from a single owner to siblings to a consortium of cousins as the promoter family. To sustain growth, the FOB was assisted by Tata Strategic and the following governance structure was created:
l

Family Governance: Family council working as per a Family constitution and a Junior Forum for training and coaching of young family members

Business Governance: A holding company board to provide Group wide agenda supported by sector boards to drive sector wise initiatives through operating companies.

The Cadbury governance model laid out by Sir Adrian Cadbury provides an effective model. The Family Council, as proposed by Sir Adrian Cadbury, provides a link between the family and firm. It also provides a forum to keep the family informed and engaged with the business. Such governance models are highly effective in defining how to:
l l l l

Delink ownership from management control

Develop a governance structure and an effective Board

Plan for transition during succession or addition of talented manpower

Create synergies among managerial resources through an effective structure

2. Talent Development & Succession Planning: Developing a capable talent pool and next generation of leadership Talent Development is an established need for any business to develop and effectively utilize its human capital. In an FOB there is the added complication of simultaneously managing family and professional talent and delicately balancing the interests of both. a) Family Member-Induction & Career Planning: Key issues in the development of family members are their induction, growth path and assigning of appropriate roles especially through their early and mid-career years. FOBs could choose between several options whereby young family members gain valuable experience outside the FOB or directly join the FOB. In some FOBs, family members join at entry level positions while in some others they enter mid-management positions directly. A close look at some examples from Indian businesses shows that the growth of family

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Talent Challenges

Family Challenges

Family

Succession Planning

2010

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members joining a business is often accelerated but the training and performance feedback is not always structured. Family councils and their constitution can define these aspects to ensure clarity and standardization of policies on such sensitive issues. Caselet: "Any of the 21 members of the third generation who intends to join Hero Honda will have to work for a company outside the Group and then go through a step by step training process.. Once a family business crosses the third generation, it generally survives for many generations after that".. Brij Mohan Munjal, Chairman Hero Honda Group b) Succession Planning: Succession is a contentious issue especially when there is more than one contender for a role. It is in the interest of both the family and business that development of family talent and succession be professionally managed to bring in the best prepared talent into key roles. Caselet: As an FOB, the Murugappa Group has put in place some good practices. The Group has several family members, across generations, involved with the business. Over the years, the Group has streamlined the entry of family members into business and succession issues through defined policy guidelines. A family member comes into the business in a mid management role after completion of formal education and with some industry experience outside of the Group and grows in the hierarchy, over a period of time. The Murugappa Group has defined the retirement age as 65 years and succession discussions are initiated by the Chairman with the Board. c) Professional Talent Management & Development: Like all businesses, FOBs depend significantly on professional talent to manage several strategic and operational roles. While it is generally acceptable that family members will occupy several key senior management roles, professional talent must see this as a fair practice, if they are to be kept motivated and retained. Hence, induction of suitable family talent, it's grooming, timely performance review and coaching must follow the highest standards for them to be seen as competent to succeed. With regard to its professional workforce, FOBs must invest in their development and growth if they aspire to attract the best talent. Long term commitment from professionals can be expected by FOBs only if they are seen to provide fair and equitable opportunity for growth and some share in the profits like their peers from the family. In the future, family talent and professional talent may have to compete with each other for key roles as competition intensifies and Boards look to bring in the best talent to grow the organization and maximise wealth for the owners.

Conclusion
Today's tough business environment coupled with governance and talent issues can pose a major challenge for growth and effective functioning of FOBs. By adopting the 'Composite Approach', FOBs can de-risk themselves from such challenges. FOBs that are able to adapt and implement these practices will be well positioned to seize emerging business opportunities while sustaining their family heritage.

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2010
The Voice of India's Business Community
Established in 1927, FICCI is the largest and oldest apex business organisation in India. Its history is closely interwoven with India's struggle for independence and its subsequent emergence as one of the most rapidly growing economies globally. FICCI plays a leading role in policy debates that are at the forefront of social, economic and political change. Through its 400 professionals, FICCI is active in 39 sectors of the economy. FICCI's stand on policy issues is sought out by think tanks, governments and academia. Its publications are widely read for their in-depth research and policy prescriptions. FICCI has joint business councils with 79 countries around the world. A non-government, not-for-profit organisation, FICCI is the voice of India's business and industry. FICCI has direct membership from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 83,000 companies from regional chambers of commerce. FICCI works closely with the government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialised services and global linkages. It also provides a platform for sector specific consensus building and networking. Partnerships with countries across the world carry forward our initiatives in inclusive development, which encompass health, education, livelihood, governance, skill development, etc. FICCI serves as the first port of call for Indian industry and the international business community.

Contact
MR. R K BHATIA HEAD, CHEMICALS DIVISION FICCI
FEDERATION HOUSE, 1 TANSEN MARG NEW DELHI-110 001 Tel: +91-11-2331 6540 (Dir) EPBX: +91-11-2373 8760-70 (Extn 395) Fax: +91-11-2332 0714/ 2372 1504 E- Mail: rkbhatia@ficci.com

MS. RANJITA C. SOOD ASST. DIRECTOR, CHEMICALS DIVISION FICCI


FEDERATION HOUSE, 1 TANSEN MARG NEW DELHI-110 001 Tel: +91-11-2335 7350 (Dir) EPBX: +91-11-2373 8760-70 (Extn 474) Fax: +91-11-2332 0714/ 2372 1504 E- Mail: ranjita@ficci.com

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Tata Strategic Management Group is the largest Indian Owned Management Consulting Firm. Set up in 1991, Tata Strategic has completed over 500 engagements with more than 100 Clients across countries and industry sectors, addressing the business concerns of the top management. Today more than half the revenue of Tata Strategic Management Group comes from working with companies outside the Tata Group. We enhance client value by providing creative strategy advice, developing innovative solutions and partnering effective implementation.

Our Offerings

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