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How to get the ‘specialty chemistry’ right and make India, China’s plus one

India has already proved its worth in complex chemistry. But attracting more foreign investments will need fixes on the ground

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Published 21 days ago on Jun 04, 2021 20 minutes Read

Global companies are looking to reduce their dependence on China, and competition among supplier countries is intense. India has an advantage in complex chemistry as also in its large, consuming population, which can give any company propulsion fuel to take off. But there are other considerations such as the cost of infrastructure and supply-chain efficiency, and in these, the score is far from favourable. Can we hope to turn these around? At Advantage India Chemical Summit, Outlook Business talks to an expert panel, including Narayan Krishnamohan, managing director, BASF India and head of BASF South Asia; Janardhanan Ramanujalu, vice president and regional head, SABIC South Asia; Rahoul Sawani, managing director, South Asia, Corteva Agriscience; Amit Chopra, managing director, India and South Asia, Thermo Fisher Scientific; and Ravi Raghavan, editor and publisher of Chemical Weekly. The discussion was moderated by editor N Mahalakshmi and Hardik Joshipura, CEO of Innovassynth Technologies, also a partner for the Summit.

Mahalakshmi: First off, there has been a lot of anticipation over India leveraging the China-plus-one sentiment that has emerged in the past couple of years. Companies want to reduce their dependence on China and are looking to make investments in the region to cultivate additional supply sources. From a multinational perspective, how far do you think this sentiment will translate into investments on the ground for India?

Krishnamohan: First of all, whether it’s a government or a company, you have to run the same way in a competitive environment. In this case, you need to be competitive against other countries, probably ASEAN, who are after the same investment dollars. We have a certain advantage that we have a consuming population that’s going to rise and we will have a baseload which is good for India. It’s about creating competitive advantage within the country in terms of infrastructure, power, and financing capability which are all important for any organisation to run. 

Joshipura: Can we say that in the next couple of years, we’d come closer to China in manufacturing, in terms of providing the right quality of materials at the right time with massive infrastructure?

Krishnamohan: I’m no expert on China, but I can say that it (the country’s competency) was not built overnight. It took about 25-30 years for the Chinese to build the infrastructure — whether it was their ports, electricity connectivity and roadways, all these need to be in place. We’ll take time as well and to expect that it will happen because suddenly you have a government talking ‘Aatmanirbhar Bharat’… it’s not a flip of a button. It requires sustained economic direction and strategic push in the direction.  

Mahalakshmi: Ramanujalu, Krishnamohan talked about demographics and consumption working in India’s favour. Right from Vodafone to Amazon, everybody wants a piece of the action. In specialty chemicals, are multinationals looking at this from the same prism?

Ramanujalu: India’s strength is derived from its own competencies and not because of somebody else’s weakness, like China’s. To answer your question, I’d like to focus on the specialty chemicals industry and what the drivers are. I have six drivers in my mind: Complex manufacturing — Indians are very good. We know how to run a multi-stage chemical reaction and we have skilled manpower to do it. It’s kind of an outsourcing activity because the original molecules are patented by somebody else or branded by somebody else… it’s manufacturing that we are very good at.

Then there is R&D. Most of our companies are $50-100 million companies and they cannot afford to spend on R&D to compete on a global scale. There is large room for improvement here if you want to be a global player.

Third is application development. Most sophisticated application development doesn’t start in India but in the most advanced economies. Therefore, if you don’t have a global reach, you can’t develop products to cater to the global market. This is where multinationals are a little better positioned and they’re more successful because they have the roots there and they can bring it back to India.

The fourth one is, of course, sustainability which is a big investment in the specialty chemical industry. A lot of the molecules have faced a lot of costs related to sustainability, reach, regulations and everything else. While big companies have had the breadth and time to invest, the smaller companies are not able to scale up because the cost of doing business is significant, coming from sustainability.

The next one is that most Indian specialty chemical companies, keeping the multinationals apart, are family-run companies and they need to professionalise over the next generation and need to globalise their mindset. The last one is diversity in our industry. It is male-dominated by the nature of the industry. We need more diversity.

Sure, we have a local demand but specialty chemical industries are low capex industries and manufacturing capex is not but high on intellectual property. If we’re talking about investments, about $100-200 million, we need to ensure that intellectual properties also come along with investments. The drivers need to be operated simultaneously if you want to get going and then beat China which has 3x the exports of merchandise market worldwide than India. We are one-third. We are not bad but we could cover more distance. 

Mahalakshmi: I have a follow-up question on that but before that, Chopra, could you take a shot at the same question? What, in your view, can create the condition for companies like yours to stepping up investments and looking at us as a larger manufacturing source base?

Chopra: When companies look at investing in manufacturing, domestic market considerations will play an important role. Manufacturing enables you to become competitive in a large market. For the chemicals industry too, largely that has been the case. If you look at the multinational companies, say ICI or BASF, they have taken a manufacturing-intensive approach and, that has been the way forward. The view from many boardrooms in India is that India is a big market in itself and is just a great place to manufacture for exports. In reality, many organisations have scaled up manufacturing operations in China over the past 15 to 20 years with a view of investing in socalled low-cost manufacturing. China used to be lowcost but may not be so now. But that was the view and there are huge capacities that were created in China. Countries such as Vietnam have been a big beneficiary of FDI from multinationals that are looking for an alternative to China.

Is India the easiest place to do business? Does it have the lowest cost infrastructure, supply chain capabilities? Would you be competitive in exporting out of India if you want to set up a large manufacturing centre? These are the questions which I don’t think every multinational has a clear view. There is a perception gap based on how India was perceived in the past and, I think, a lot more work needs to be done. Not only in actually improving competitiveness of our economy, but also positioning.

India is a great place to manufacture in. If we drive a regulatory or compliance-based framework stating that if you don’t manufacture in India, you won’t be able to do business in India, it could go to an extent in enforcing the hands of companies to drive more localisation. But, I think, for India to be a true Chinaplus-one beneficiary, it has to be more than that. It will have to be driven by the positioning of India as a competitive market where manufacturing is easy with low supply-chain costs, great capabilities on labour flexibility and great infrastructure. 

Mahalakshmi: Sure, in the short- to medium-term can that kind of persuasion (negotiating on market access) really work? That you need to produce at least a certain percentage out of India to be present here… Does India have the size to have that kind of leverage?

Sawani: There is an inherent attraction for the Indian market, given its sheer size, demographics, growing incomes, and the trends that it drives in terms of value consumption. That forms a basis of an attractive market and that’s what drives Aatmanirbhar Bharat in many ways. I would say the key here is you have that attractive base but what are those key competencies that will differentiate India from other countries. If you take a narrow view of manufacturing, not as a continuum, you start thinking of the only individual products. Rather, in agrochemicals, you need to be able to think about the value chain. That itself lends a great deal of momentum to start those supply chains in India, because then you have this attractive market, and you have products and technologies which are more innovative, environmental-friendly and are delivering value to the consumer or the farmer.

Going back to the question, placing things like duties, to me, is not how you play that game. The way to do it might be through incentives. What you don’t want to do is discourage companies from taking even the first step.

For example, there is extremely strong growth in the agriculture sector with a growing population and needs. What’s really crucial is to get innovations to market… products that are safer, complex, environmentally friendly, and deliver greater efficacy. (But) we go through registration cycles in the agrochemical industry which can be really long and, over the last few years, the wait has become longer. To me, unleashing innovations much faster in the Indian market than in many other countries could be a competitive advantage which would result in manufacturing really coming in. To my mind, manufacturing is the result.

Mahalakshmi: Raghavan, you’ve been listening for far too long, time to step in.

Raghavan: I think it’s fallacious to believe that India should make everything for itself. I think, in an industry as diverse as chemical where competitiveness varies depending on what part of the value chain you’re operating in, we have to be extremely judicious in terms of the kind of investments we make in the industry. There is now a kind of euphoria that we need to look at the data of what we are importing, look at the largest volumes of those chemicals and make them here. I think this is an extremely simplistic way of looking at things.

Access to raw materials, especially in the chemical industry space, is critical. In a country which is deficient in raw materials like hydrocarbons, to build plants now and then have a situation where investors go back to the government four to five years later for support by way of all kinds of tariff and non-tariff barriers, we will be doing great injustice to the downstream consuming industries. So we have to make a very judicious choice based on inherent competitiveness and in my view, this lies in complex chemicals. Instead of plonking government money down holes which are inevitable sinks, we should be careful about the kind of industries we want to support. Fiscal support is a good thing, but it is not sufficient. Apart from other issues, land availability is a huge issue today. Maharashtra and Gujarat are chock-a-block, so we need new homes for these industries.

China is an elephant in the room. Roughly speaking, their industry is 5x bigger than ours. China exports more to the world than we produce in total. Those are very large shoes to fill in. Companies will choose India as an option but that’s a de-risking approach that any sensible businessman takes. It’s gone beyond sourcing from one company to sourcing from multiple countries. And, we have to remember that COVID-19 is not the first disruption we have faced.

Mahalakshmi: Fair enough, I can see Ramanujalu smile there! 

Ramanujalu: These are totally valuable inputs but, I want to remind all of us that this is a specialty chemicals discussion. This is why I am putting this in the context of specialty chemicals. In this, there are three things you need to look at to attract investment: If there’s growing domestic demand but there aren’t capacities to address it; if you’re exporting and would like to export more; and thirdly, the import substitution. The specialty chemical industry manufacturing has a lot of hidden capacities. These are batch processors and reactors. These are not big assets. If you want to add modularly, you can add at a low cost. They may not make headlines, but with just $2 to $3 million, one can create a capacity of 20,000 tonnes to 30,000 tonnes of a certain class of chemical. In exports, there are some industries that can’t grow anymore. Let’s be very clear, the textile industry is not growing at more than 1-2% across the world. Can you keep exporting double the number of dyes, colourants and other things related to that industry? You could snatch China’s business, but that’s not going to be easy.

The last one, when government sometimes tries to get quick wins, is import substitution. In the specialty chemical industry, know-how is the biggest barrier, not even the raw material. In the final product costing, the raw material is a much smaller component but availability is a key component. Many of our import baskets facilitate our exports. So, with an incentive, a win will take a little bit longer in the specialty chemical industry. We can’t give up hope. But it won’t happen in a year or two. 

Mahalakshmi: Krishnamohan, you had a plan to put up a large capacity for bulk commodity chemical. COVID-19 has changed that plan. What went in favour of putting up those capacities in India?

Krishnamohan: I presume you’re talking about the joint venture with Adani at Mundra, which is on hold. It was basically a bulk commodity chemical in the propylene value-chain ending up as oxo-alcohols, plasticised alcohols and acrylates which go into the field of, for example, the paints industry or the paper industry. There, size of the market, growth, technologies being used today by the big paint companies which are more conducive to water-borne paints rather than solvent-borne paints, create a demand. That was primarily the driver for BASF to look at India as a destination and we believe in investing in markets where there is demand. We go closer to the markets. There are two options in hydrocarbons — you can either go to the source or ship the hydrocarbons to the market.

Now, in both cases, there are different companies that adopt different strategies. BASF, for a good reason, strategically always prefers to invest in the markets rather than investing on top of a gas well or an oil well. With that philosophy, we saw that India had the critical mass for that chemistry in a joint venture with a couple of other companies which would then take the propylene molecules into polypropylene, a bulk commodity chemical. However, with COVID-19 and what happened to capex across multinational companies, the visibilities and the kind of idle capacities available in the world, it made sense to put the project on hold. 

Joshipura: When you look at BASF, I’m sure globally they must be outsourcing a lot of products from India and across Asia. Since you’re into multiple chemistries, from automobiles, specialty to complex chemistry and pharma, do you see a challenge of patent of particular molecules expiring which is actually driving the value of the products down? And how do you really compete with, let’s say, Taiwanese or maybe Chinese players?

Krishnamohan: Well, every product has its life cycle. The fact is we all are faced with some challenges at some point in time with expiry of patents and then, valuation of product goes down as competition increases. The question is how do you reinvent products and extend their life cycle? Yes, you’re right, the whole premise of China’s or Taiwan’s existence was outsourcing based on lower costs. We fight for technology and improving the product aspects. Over the past 25 years that I’ve been in the industry, I have seen that the number of new molecules coming out is much lower but the incremental value add, in terms of formulations and development of products, extend the life cycle of these products.

Sawani: You kind of start thinking of the footprint of products. Today in the agrochemical industry, it’s not about how much manufacturing it needs to shift. It’s actually about how I can reduce the amount that’s being used, yet deliver a more efficacious product. What that requires typically is innovation in R&D, and it requires a much more complex manufacturing to scale up. At Corteva, our business model is driven by innovation. Many of the companies are driven by innovation and not just by scale. You have to think of manufacturing in a different way. There are commitments for sourcing that we make and we start these early in our R&D pipeline. With partners in India, it’s getting them newer innovative chemistries’ knowledge that is much more difficult and that, to me, is also manufacturing. Those sourcing commitments and technology transfer are also manufacturing. I would broaden that definition of manufacturing from not just what BASF and Corteva do, in terms of calculation of capex in the ground on a very large scale. 

Mahalakshmi: You have brought in a fantastic point. Even in healthcare and several other industries, there is a huge amount of trust deficit that Indian companies and the Indian ecosystem face with multinationals. That’s also one thing that has prevented a lot of multinational companies from bringing their best products here or from putting up manufacturing units, getting capabilities or putting in excellent centres here. How big is that deficit right now and how do we bridge this gap?

Ramanujalu: I would completely disagree with the statement that there is a trust deficit in India. Just look at the list of multinationals that are flourishing in India and which have R&D centres here developing know-how. That’s a key indicator of trust. We have one of the largest chemical research centres in the world put up in India worth $100 million. Everybody in this panel, especially those in manufacturing, has such centres. I could go on with a long list not just from the chemical process industry but also the engineering part of the chemical industry. I think that’s one of the things you can check when you want to compare yourself with China and feel good about something. 

Mahalakshmi: China here is a bad comparison. Let’s have better standards. Krishnamohan, do you agree with Ramanujalu?

Krishnamohan: We invested in global research centres here as well. These are not isolated research centres, but globally networked research centres with the US, Europe and China, and we have plans to continue investing in this. In the context of research and investments in research, I think, we have all the necessary ingredients for success and this will only continue to increase in the country. Today, it is highly focussed on the life sciences because we do not have much investment in the other areas of the chemical industry. We need to invest more in process technologies. If you were to invest in a PPE or PE plant, these are just commodities, but we still have to go to Shell for technology. Why is it that we don’t have our own technologies for some of these things?

While we talk about China and the inevitable comparison, a lot has been said about how the Chinese design institute gets technologies. There’s a fair amount of technology with them, they are not dependent on licenses and they have developed chemistries. We need to look at the kind of technology that we should indigenously prepare. For example, ammunition or hydrogenation. I mean, many of our Indian companies are doing it but we also need a systematic university collaboration where it would be worthwhile by making it available to the larger masses. 

Joshipura: Companies like ours have challenges. We make products which take 20-25 steps and you need to depend on China. The biggest question is how we can be self-reliant. Is it worthwhile to make those products which are available, let’s say, at $100 in China? How do you look at it, at Thermo Fischer, especially? Would the localisation strategy, of India for Asia or India for India, actually work to serve customers with products which are price-competitive and meet the regulatory requirements?

Chopra: The focus of the company, with manufacturing for the past decade, has been China. We have done a lot in India and, within our peer group, we have the biggest manufacturing base in India. Nevertheless, when compared to capacities in China, we are much smaller. And like I said earlier, the ability for India to be an export hub largely depends on how competitive you can be in manufacturing. We lost the API plot in the ’90s to China because they were much more competitive than us. We are now trying to win it back using the PLI scheme and that will affect all the intermediates as well and that’s the opportunity for all of us. I think what is crucial for the country is the ability to position itself as competitive, with ease in doing business and great infrastructure. I think these are essential for any multinational to look at India very seriously. 

Joshipura: Ramanujalu, you offer products across industries — agriculture, electronics to consumer goods and healthcare. What is your localisation strategy and how is your talent pool supporting that strategy? Do you have any ‘Make in India’ initiatives planned?

Ramanujalu: From the specialty end, if you’re into hydrocarbons, it doesn’t matter if it’s a commodity or specialty. If you don’t use c1, c2, c3, c4, you will need c16, c18, c20. And, if you don’t have a cracker complex to start with, then the whole value chain cannot be addressed. The way the specialty chemical industry in India operates is they need to source it from wherever it’s available. Here’s the answer to your next part of the question. What’s important, not just for SABIC but for India as a country, is strategic self-sufficiency, that’s Aatmanirbhar Bharat — if you are to source a product that is only available in one country, be it China or anybody else, you need to do something to make yourself strategically self-sufficient and that needs a different set of drivers. Maybe a PSU has to invest. Policy intervention should encourage people to find opportunities faster. During the past three years, one standard request from the chemical industry has been regarding making changes to products. A company has to approach the ministry of environment and pollution control to get the product approved before it can make even the smallest change. The industry needs flexibility, and this is a challenge for the specialty chemical industry in India. We need to look at Aatmanirbhar Bharat from various angles, including strategy, operation, facilitation and policy from the government. 

Joshipura: Sawani, what is your broader innovation strategy to support the unorganised farming sector in India? Is there a global corporate view on that?

Sawani: Given the nature of our industry, localisation becomes really important for us. India has extremely positive trends. It finally comes down to what it takes to unlock the potential. We’ve invested in R&D and have multiple agrochemical products that are being developed and tested at various stages in India too. There are multiple new products in our pipeline that we will launch over the next three to four years. We are already working with local Indian manufacturers to be able to build the capacity to produce them in India and that’s where we do need support. But do regulations and policy frameworks allow us to move a lot faster? In case I’m going to be the 50th country to launch a product out of Corteva, globally, am I going to produce it in India for other countries? Not really, right? How do you accelerate those new R&D molecules?

It’s good for the farmers locally and better in terms of an environmental footprint. They are safer and also more complex and that makes them more difficult to replicate. You’re building a capability that will be differentiated from other countries. In the conversations I’ve had with stakeholders, there is a recognition that what is needed more than incentives is getting policies to move faster and being able to give more certainty. Other basics such as infrastructure have to be addressed. Without that, there is no way you would be able to scale this. There is positivity and to me, it’s about how we work with stakeholders, policy stakeholders and academic stakeholders to make it a reality. 

Mahalakshmi: Briefly, what is the one thing that you would want from the government over the course of this year to take this industry forward?

Raghavan: Make land available, ease environmental regulations, and let entrepreneurial spirit reign. I think, in industries, the so-called downstream industries, India can be hugely competitive. When the cost base of chemical manufacturing in China will rise, India will become a viable option.

Ramanujalu: I think a lot more can happen in specialty chemical industries and I’d recommend the Ministry of Environment to have a focussed special cell. Chopra: It would help to broaden the PLI scheme if you are incentivising manufacturing. If you are going down that path, then clearly, there’s a lot more potential to attract investment through incentives. I think, there’s certainly a lot more potential for the specialty chemicals industry if the PLI scheme were to be broadened.

Krishnamohan: I think chemical parks make a lot of sense. I would look at it holistically, in terms of land and infrastructure. The government could facilitate these things and you have some kind of central effluent treatment parks that are functional. The second thing is a level playing field, in terms of imports and exports. I believe, growth is more important and hence, we can’t invest in everything at one go. So, we need to allow international trade and, in that context, having a level playing field where we are competitive with our regional counterparts is what I would ask for.

Sawani: The only addition I would put in is fast-tracking of approvals for newer chemistries, newer molecules, innovations with provisions for incentives for local manufacturing rather than customs duties and things like that. While you’re doing that, really being able to look at manufacturing holistically which means partners as well as companies that are investing and new technologies that are coming in. Policy and regulatory frameworks that allow them are key to it.