Purchasing chemicals from India: Lots of opportunities
William Atkinson -- Purchasing, 4/1/2004 2:00:00 AM
India is the fourth largest economy in the world, after the U.S., China and Japan, and the country is beginning to use its financial muscle to export products worldwide, including chemicals.
According to K. Ravimurthy, a senior analyst with ARC Advisory Group, Bangalore, India, the development of the Indian chemical industry began in the early part of the twentieth century and currently accounts for 14% of the total output of the Indian manufacturing sector, with exports of $3.5 billion—about 10.7% of the country's total exports. India's chemical industry is the 13th largest in the world and the third largest in Asia.
A 2003 report published by ARC Advisory Group, Dedham, Mass., titled the "Chemical Industry Plant Level Expenditures Worldwide Outlook," found that the worldwide market for plant-level expenditures in the chemical industry, which totalled over $214 billion in 2003, will reach almost $241 billion by 2008.
The report further noted that, as avid customer demand for low-cost products has increased, more and more chemical companies from around the world are being forced to look offshore to lower production costs. Two of the most attractive locations for these plants are China and India. "China and India offer competitive advantages to chemical makers in terms of lower costs of production and growing demand," said the report. "Chinese and Indian companies are benefiting the most from the globalization of the chemical market due to their lower cost structures and close proximity to the fastest growing demand for chemicals worldwide."
Government reforms enacted in the 1990s (such as the industrial policy of 1991, the Foreign Direct Investment Policy, and the Export & Import Policy, 2002-2007), which removed investment barriers, opened trade and provided free access to foreign technology, are expected to generate sustained growth in industrial production for India.
Capacity additions throughout the 1990s shifted India from being a net importer to being self sufficient in many areas, and eventually to being a net ex-porter of a number of commodities, including chemicals. According to the Indian Chemical Manufacturers Association (ICMA), no other developing company has as diverse and comprehensive a chemical industry as does India.
Chemical exports
While India was a net importer of chemicals in the early 1990s, it is now a net exporter as a result of the development of many large-scale chemical plants. In 2002, chemicals accounted for 16% of India's exports.
Exports of chemicals and allied products registered a growth of 23% from April to September 2003 compared to the corresponding period of the previous year.
"India's chemical exports currently account for 0.6% of the total U.S. demand," reports Dilshad Ahmed, director of chemicals for ATTS Inc., Marlton, N.J., an importer and distributor of chemicals that sources most of its products from India, but also some from China.
(See the sidebar on pg 36C2 for details of the export strength of various specific chemical groups.)
On the plus side
When it comes to sourcing chemicals from India, pricing is the greatest benefit, according to Ahmed. "The quality has also been improving significantly in recent years," he adds. "We are seeing fewer and fewer problems in this area."
Thomas Coyne, president of Coyne Chemical, Croydon, Pa., and chair of the National Association of Chemical Distributors (NACD), agrees: "India is becoming a strong competitive alternative to products coming out of China," he says. "Pricing, quality and packaging seem relatively comparable in both countries." In the past year or two, Coyne Chemical has purchased some products from India, one of which is now a regular stocked item. "The overall quality has improved dramatically from where it was even two years ago," he adds.
Nailesh A. Bhatt, managing director of Proximare Inc., Franklin Park, N.J., a management consulting firm for pharmaceutical, biotech and chemical industries, sums it up: "When doing business with India, you can get good products from good companies and very good prices."
Another plus: India is a signatory to the World Trade Organization agreement, which goes into effect January 2005, according to Bhatt.
In addition, Indian chemical manufacturers receive incentives from the government to export. "As a result, they are placing a great deal of effort in this area," states Ahmed.
Another feature that many chemical importers find attractive is that, when it comes to the science of chemistry, "India has some of the greatest brainpower in the world," points out Bhatt. The country has a large number of universities, and science is considered a prestigious course of study. The universities graduate thousands of Ph.D. chemists every year.
India has developed a strong research and development base. Besides national institutes such as the National Chemical Laboratory and the National Institute of Pharmaceutical Education & Research, there are a large number of research laboratories in the private sector, according to ARC's Ravimurthy.
On the negative side
Importing chemicals from India is not without its challenges, though. "One problem is logistics," admits Ahmed. For example, the time from when ATTS places orders until it receives them averages four to five weeks. "Some manufacturers claim they will be prompt, but they usually are not," he continues. "This is still an improvement from five years ago, though, when a prompt shipment was considered eight weeks."
Some other concerns: According to Asian Chemical News, political instability, protectionist measures, and sometimes inadequate infrastructure stand in the way of investments in India by chemical manufacturers. Infrastructure improvements are taking place at a "snail's pace," often due to competing political interests and drawn-out legal processes.
Ravimurthy sees technical challenges, too. "Reliable performance and profitability are two important requirements for any chemical industry," he explains. In order to achieve a high level of reliability and excellent performance, several issues related to design, materials selection, fabrication, quality assurance, transport, storage, inputs from condition monitoring, failure analysis etc., have to be adequately addressed and implemented by Indian chemical manufacturers. "Technology related to nondestructive testing and monitoring of plants is also essential for precise identification of defect sites and to take appropriate remedial decisions regarding repair, replacement or modification of process conditions," he adds.
Furthermore, issues related to life estimation and extension of existing plants have to be addressed to overcome the loss in production and to conserve raw materials. "As new plants are constructed and existing plants modernized and automated, every possible effort is needed to cut costs and increase efficiency," continues Ravimurthy. Maintenance of components is becoming increasingly expensive and complex due to several advances that have taken place by way of modernization or for increasing profitability, and for avoiding unexpected failures of critical components. "As a consequence, maintenance is increasingly critical, downtime of the plant is less tolerable, and reliability and safety of the equipment components are becoming increasingly important," he adds.
Another potential concern: There are some predictions that, as is already the case in China, domestic demand in the high-fueling Indian economy will soon begin to eat into export capacity. Recently, for example, India saw a 14% increase in durable goods consumption, as well as significant increases in automobile output, both of which are increasing the domestic demand for chemicals.
Compared to China
Both China and India offer competitive advantages to chemical makers in terms of lower costs of production and growing demand, according to Ravimurthy. Emerging Asian nations are widely recognized as major cost-effective producers of bulk generic chemicals for worldwide distribution, but they are also becoming known for their rapidly growing local demand for chemicals. "Chinese and Indian companies are benefitting the most from globalization of the chemical market due to their lower cost structures, huge and growing demand for chemicals worldwide, in addition to availability to key inputs," states Ravimurthy.
According to Proximare's Bhatt, a legislative program is in place that will put India in compliance with the intellectual property rights of the General Agreement on Tariffs & Trade (GATT). No such program is in place in China, meaning that manufacturers would have no legal recourse if formulas for new products ended up becoming generic.
An additional concern with China is that it is not a tested market, according to Ravimurthy. "There is a big question mark with respect to the internal supply chain," he explains. "China has yet to finalize on the need for a national chemical emergency response system and balanced enforcement of environmental standards."
Getting started in India
How you buy chemicals from China may depend on the size of your company. "Large companies often set up their own buying offices in India," states Ahmed.
"Every one of my large clients used to be afraid to source from India," adds Bhatt. "Now they are all becoming very interested in the idea and doing so successfully. They are not only sourcing, but many of them are setting up their own manufacturing, R&D, and distribution facilities."
Buyers should perform due diligence, rather than relying on agents or other middlemen. "They should identify ten or so companies to consider, then visit India, meet supplier management in person, and visit their manufacturing facilities," emphasizes Bhatt. "Indian businesspeople like to create personal relationships. For example, when you visit, you can expect to be invited to their homes for tea or supper."
Whether you are a large, medium or small company, if you aren't able to perform due diligence, and if you have a relationship with a large U.S. bank, Bhatt suggests that you ask them for assistance. "They should have some contacts or people in India who can do some due diligence for you," he explains.
Small and medium-sized companies, which probably don't want to deal with the costs of setting up offices in India, can purchase from a U.S. distributor that sources from India, according to ATTA's Ahmed.
"There are numerous brokerages and agencies available to get started sourcing from India," adds Coyne.
Regardless of how you start, Bhatt strongly recommends against awarding a large, long-term contract to a supplier right from the beginning. "Start with a small order," he suggests. "Then take it from there."
Perspective
If you're ready to do business with India, it is ready for you. "There are a number of very good chemical companies in India ready, willing and able to develop positive, long-term relationships with U.S. companies," states Bhatt.
Something else to consider: In the past year or two, Proximare has helped a number of large pharmaceutical and other chemical companies take almost $100 million worth of R&D work to India. According to Bhatt, the average "loaded" cost of a Ph.D. in the U.S. is $125,000 to $150,000. "You can hire one in India through a contractor for $65,000, or you can hire your own for no more than $25,000," he points out. "This is really the biggest value proposition in India."
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