It is 9 am, and a cold December morning in Gangtok, Sikkim’s capital. The laid-back city has woken up. Luckily, there are no clouds. So the snow-peaked Kanchenjunga is visible from most points in the city. On the sloping roads, hard-working locals are carrying blue-colored LPG cylinders on their backs, to be delivered to hotels. Clearly, life is more demanding in the hills. It is no different for the pharma manufacturers who have set up base in Sikkim over the past decade.
Today, we are to meet the management and workers at a few of these units around Gangtok, and we plan to start with Mankind Pharma. It emerges that, around here, Google Maps itself is a bit lost. We end up relying on good old phone calls to make our way. The drive along the Teesta River is picturesque but the final stretch is rough and we are tossed around inside the car. Often, an oncoming vehicle has to stop or back away at tight turns. This would be one hell of a ride to work every day. Then why do manufacturers head to a place like this? Over conversations, we realise, they came chasing two golden words: fiscal incentives.
From its gate, Mankind’s plant is not visible. After a walk to the edge of the property, we see a towering building complex, rising up from the riverside plains. “This is a Sikkim style of factory construction,” we are informed. Land is difficult to come by and so multi-storey units are common.
It is hard to imagine but, two years ago, there was nothing here. The plant has the potential to produce Rs.14 billion worth of tablets and capsules. It was inaugurated 2017, and only a part of the plant is operational. But Abhay Kumar Srivastava, president (operations), Mankind Pharma, says, “It will be fully operational by this March.” Inside, it is a pretty sophisticated plant. Tablets pass through various stages of granulation, compression, coating, and packaging. Big and modern machines are at work at each step.
Back To Base
The fiscal incentives, which attracted pharma companies like Mankind, came more than a decade ago. In 2007, the central government included Sikkim in the Northeast Industrial and Investment Promotion Policy (NEIIPP). With that came a ten-year exemption from excise duty and income tax, and the beginning of industrialisation of Sikkim. Over the years, around 36 pharma players and other manufacturers have set up their plants in the state. In 2017, the tax holiday was extended for another ten years.
While incentives have been the most significant driver, Mankind waited long before coming here. “We have a plant at Paonta Sahib, Uttarakhand, where the tax holiday is going to cease soon. So we are transferring our production to Sikkim in a phased manner,” says Srivastava.
Usually, pharma companies are amongst the first to set up shop when a tax holiday is announced in a region. It is also not unusual for them to shift base when the incentive period comes to an end. Sikkim today houses the who’s who of the pharma sector in India: Cipla, Sun Pharma, Mankind, Zydus, Torrent Pharma and Alkem, among others. Within a decade of the first pharma unit’s coming up here, the cluster contributes 10-13% to the overall domestic pharma revenue of India.
Gujarat-based Torrent Pharma first set up a unit in Sikkim in 2011. Their plant on the Gangtok-Siliguri highway can match any other world-class facility. Just that it too is spread vertically. Inside the plant, the heavily masked, aproned workers are busy mixing formulations inside gigantic funnels. Towards the end of the line, where strips of tablets fall off the belt, the workers – predominantly local women – cheerfully box the strips.
“It is the most peaceful state with no political unrest,” says Jinesh Shah, executive director, Torrent Pharma. This is an advantage which is cited repeatedly by people at other plants as well. Apart from a brief spell of Gurkha unrest in Darjeeling last year, this part of the country hasn’t seen any significant phase of instability. Shah elaborates on what drew the company to this region: “Apart from excise and income tax exemptions, we also have insurance subsidies and a subsidy on capital investments. There is a subsidy to the extent of 30% of investment in plant and machinery, and interest subsidy on working capital loan at 3%.”
Ups And Downs
Obviously, manufacturing in this remote corner drives up the transportation and labour costs, and caters only to a negligible local market. There are a few guides to follow for a successful business: one, and the most important, is to choose products wisely. FMCG players, which are usually not far behind the pharma companies to take advantage of tax-holiday zones, have mostly stayed away from Sikkim.
“You can’t make a product that offers a low margin but has high transportation costs. Compared to pharma, FMCG companies operate on thin margins and that’s why they have stayed away,” says Srivastava. Interestingly, Mankind too only manufactures tablets and capsules from here, and not their other heavier products such as contraceptives and syrups. If space is a constraint and logistics costs are higher, it is best to make products that offer better per square feet margins.
That said, Godrej Consumer Products is an exception. They were amongst the first to come to Sikkim more than a decade ago. Their guiding principle has been to manufacture lighter products from the state. “We manufacture products that are easier to transport. For example, we won’t manufacture soap here. We manufacture certain men’s grooming products, hair colours and air fresheners,”says Rakesh Sinha, head–global supply chain, Godrej Consumer Products. At its plant, workers can be seen giving final touches to air fresheners. These air fresheners also have a local market.
Sinha explains why they chose Sikkim: “Around 13 years ago, we were expanding capacity. We believed we could cater to the consumer in this area, in states such as Assam, West Bengal and Sikkim. The second attraction was fiscal benefits.” He says that their plant has been operating at 80% capacity.
Godrej may have a local market but Sinha is not oblivious to the pain points. “Transportation costs are high for the entire northeast, including Assam and Meghalaya. Access is a challenge at times. The road leading to Sikkim is quite narrow and gets blocked at times. We face trouble bringing goods from Kolkata and so need to keep a slightly higher inventory since lead time is higher,” he says.
Inadequate infrastructure, some of it because of the hilly terrain, is a limiting factor for most in the industry. “Most of the companies have warehouses in Siliguri. Landslides are common, and we are not able to send goods when they happen,” adds Shah of Torrent. He also points out the lack of a local facility to dispose biomedical and hazardous waste.“We send it all the way to Kolkata by trucks, which increases our transportation costs”. But pharma companies can absorb the profitability impact from logistics — of 2% to 4%, he adds.
As mentioned earlier, raw materials have to be brought from outside and that adds to the production cost. But there are entrepreneu who have latched on to this opportunity. Mumbai-based Ideal Cures’ MD, Suresh Pareek, is one such.
He set up a plant 18 months ago to cater to companies in the cluster. “There are about 36 units in Sikkim, and we cater to them. Here, we are the only company that makes coating material for tablets. We are also planning to cater to Nepal and Bangladesh from here,” says Pareek.
When he decided to build a plant here, the excise duty exemption facility was also available to units (withdrawn for B2B or third-party suppliers after introduction of Goods and Services Tax, or GST). So, for him and other contract manufacturers, fiscal incentives now mean only income tax exemption and a few initial subsidies. Pareek says fiscal incentives are not the biggest draw for them, adding that the cost of running the plant in Sikkim is 1.5x than that in the plains. “The pull factor is the locally available market for our product,” he says. Ideal has invested Rs.320 million in the facility which has a capacity of producing 75 MT of raw material each year.
“With us supplying raw material locally, it is more efficient for them (pharma companies) to plan. In our absence, they have to keep stock for a large number of days. We also offer competitive prices. The saving in transportation cost is a bonus,” he says. Currently, 35% of Ideal’s capacity is being utilised and Pareek sees it going up in the next year or two. “Customers conduct an audit of our facilities before on-boarding us. As the validation increases, capacity utilisation will go up,” he says.
There are very few contract/third-party manufacturers here. Shangri La is one of them. Its promoter Kamlesh Aggarwal helped build many pharma plants over the last decade. Interestingly, he too set up Shangri La to take advantage of the tax holiday and started building a plant three years ago. It has been operational for two years now. Manoj Singh, plant head, says, “Within six months of starting operations, GST was announced and being a contract manufacturer, we were deprived of excise duty benefits. That upset our calculation.”
Tax-incentive driven investments may have gone for a toss, but power availability is a study in paradox. While the state has a power surplus and sells to other states, investing companies have to build their ownpower lines Power is cheaper than other North Eastern states but the quality of distribution is far from perfect, and plants have to depend on their backup units.
The remoteness of Sikkim also impacts the availability of talent. While most of the skilled executives are brought from outside, semi-skilled and unskilled labor is mostly local. “We give them incentives, additional allowances or attendance benefits (more leave and so on). On an average, the remuneration can be 35% higher compared to other areas,” says Srivastava of Mankind Pharma. Companies such as Sun Pharma also provide accommodation to its migrant employees. Torrent’s Shah says, “When we started our plant, there were troubles. Labour was not trained and work culture was different. In the past five to seven years, we have organised training classes for labour to suit our requirements.”
Since Sikkim is a remote place, skilled labour attrition is also high. “Due to lack of development in infrastructure, the attrition rate at our Sikkim plant is 18%. For other plants, it is between 10 and 12%” says Shah. Some companies have internal mobility policies and they transfer employees from other plants situated in other states. “We transfer employees from our Jammu and Vasai plants to Sikkim,” says Pareek.
Still, pharma companies are upbeat about Sikkim. There may be infrastructure related challenges, but most of them have learned to live with them. Most companies have either already expanded after last year’s tax holiday extension or are planning to ramp up their capacity.
Mankind Pharma which operationalised a part of its plant in 2017, has a current capacity of Rs.6 billion, which will be ramped up to Rs.14 billion in 2019. “We have got space for 15 more lines on the upper floors,” informs Srivastava. Torrent Pharma’s first plant had a capacity of Rs.3.5 billion. The company added another plant in 2017, doubling the capacity to Rs.7 billion. It also acquired Unichem’s local capacity in 2018, boosting the capacity to Rs.8 billion. “We have no plans to increase capacity immediately. This capacity is good enough for the next five-seven years,” says Shah.
But what happens after 9-10 years when the tax holiday comes to an end? Most pharma players are expecting to turn their domestic units into export-oriented units. That is what has been happening across the industry. A higher margin on exports can absorb the higher costs that have to be factored in because of the remote location. “Our plant in Baddi was also going through the same thing. We have converted it into an international plant. We have European and Brazilian approvals,” says Shah of Torrent. Sinha of Godrej says they will continue to manufacture from here. “We do not intend to move manufacturing from Sikkim,” he says.
Unlike other clusters, industry in Sikkim says in one voice that the state government is friendly and accessible. One thorn is Sikkim’s strict adherence to environmental norms. Recently, the government banned private uncertified launderers in Sikkim, whose services pharma companies use for their factory uniforms. But it couldn’t be certified that these launderers don’t release any effluent after washing uniforms, and the industry had to scout for similar services outside of Sikkim. “It would be a non-issue in any other industrial area in the country,” says a person who has worked in several pharma clusters across the country, with a laugh. The industry admits that the environmental rules and regulations are followed more strictly than any other state but they are happy to comply.
This patience of course comes with expectation. A road from Gangtok passes through rough terrain to reach the border adjacent to the Nathu La pass, and it is a hit with tourists. They travel all the way to the border to shake hands with Chinese tourists. This can become a potential trade artery with China. The trade route was opened but was banned afterwards.
“India buys a lot of API (active pharmaceutical ingredient, a raw material) from China. If Nathu La opens for trade, and road/rail infrastructure is improved, it can be a big boost for the industry,” says Srivastava. Perhaps, Sikkim has a lot more to offer beyond fiscal incentives.