"In India only those who invest in technology would grow at a rapid pace"

...mentions Dr Ramesh Ramachandran, president and chief executive officer, Dow Chemical International Pvt Ltd (Dow India). In this exclusive interview with Nishan Chandran, Dr Ramachandran – appointed to his current role in October 2007 – sheds light on the current scenario of the chemical industry along with some vital tips that would help make India the numero uno destination for technological investments.

The current scenario in the Indian chemical industry...

These are challenging times for the Indian chemical industry because although the GDP growth still exists, it is largely due to tier 2 cities and not metropolitan areas. Hence, a lot of products that address the needs of the tier 2 population, including the chemical industry are growing. The chemical industry is reeling under the effects of the highly challenged automobile sector because this sector is one of the significant consumers of plastics and chemical products. Growth in the infrastructure segment is quite slow and chemical companies that deal with this segment have also considerably slowed down.
With the Middle East capacities rapidly coming on stream and the per capita consumption of plastics in India being quite less as compared to the rest of the world, the growth with respect to volumes would remain intact. However, it is true that 'profitable' growth will remain challenged in this segment.

Emerging trends in the  industry...

The trends witnessed in the Indian chemical industry are similar to the ones seen across the globe. The paints and coatings segment had slowed down in the fourth quarter of last year, but is observing a good recovery in the first quarter of this year. Further, markets like food and pharma are witnessing fantastic growth rates. These segments are picking up extremely well since they belong to the domain of specialty and technologically driven products.
The energy sector is well placed for growth, especially in the sub segments of alternative energy like solar and wind energy. Being a supplier to these industry segments, we can say that the chemical segments that cater to these industries are observing a decent growth. All those companies that supply uniquely tailored products for specialty applications are poised for growth. And, if a company is competing head-to-head in the segment of commodity chemicals then, although growth will prevail, profitable growth is difficult and the pricing is highly challenged.

Effects of the slowdown on the various segments of the chemical industry...

Segments that address the markets of food, water and pharma – the areas belonging to the consumer goods sector – have not been severely affected by the slowdown. In fact, their growth continues to be within the desired range. Out of these, the segment catering to the water requirements is least affected because the need for potable water is high. Moreover, the pharma excipients business is doing quite well because people continue to need these products. However, other segments like pure commodities, packaging, automotive are definitely bearing the brunt of the slowdown.

Current predictions on the slowdown fading away...

The key factor of this slowdown is that it is largely segmental and cannot be generalised. Although the volumes of consumption in India have witnessed a slump, its slowdown is not severe. In fact, the US and Europe are experiencing negative growth rate, and these regions are amazed at the manner in which things are going on in India. If currently we are growing at 15 per cent, next year we may grow at 8 per cent...but we are still growing. Despite the fact that we are starting from a smaller base and keeping in mind the current scenario of the market, achieving the same torrid pace of growth in India would take at least another year.

The secret behind Dow's positive growth rates in India...

Year-over-year, Dow India has continued to grow at a brisk pace of about 15 to 20 per cent through a combination of our product portfolio mix, customer intimacy and technical advantages supplied by our specialty products over those offered by our competitors.

The product portfolio of Dow India comprises around 70 per cent specialty chemicals and 30 per cent commodity chemicals. Although some of the commodity chemicals that we manufacture compete head-to-head on prices, it is not the primary area of focus for growth. Our focus on specialty chemicals is the main reason why we have been able to sustain our growth.

Dow's rationale behind acquisitions and joint ventures...

As long as we are able to invest in technology in this country, we will make our presence felt here. If we have the technology and our partner has the marketshare, then we would like to merge to create a perfect business. If we have both, the technology as well as marketshare then we would not be looking out for a joint venture – instead, we would eye for a complete acquisition. Once again, the broad theme of Dow that one would repeatedly see is that, in all areas – be it feedstock, investment, or corporate social responsibility – if there is no technology to influence it towards profitability, we will not enter them. If technology can assist us on the path towards profitability then Dow would make high investments in it. This has been our strategy – we study the market and then decide how technology can fit into it.

On the acquisition of Rohm&Haas and the challenges of integrating the businesses...

We are still in the learning period of this recent acquisition. However, judging by the manner in which the two companies (Dow and Rohm&Haas) have interacted, we could not have asked for a better partner to grow with. The acquisition of Rohm&Haas fits into Dow's growth strategy because they have the technology and ability to design customer-specific products.
Dow has also been offering custom-made products, but since the core competency of Rohm&Haas is this particular business model, the acquisition is extremely satisfying, and the combined growth will be very attractive. Since the cultures of both the companies are quite similar, there would not be any major challenges in integration. The goal of integration is the growth of business through new technologies and enhanced customer satisfaction.

On the rationale behind conducting this acquisition during a global financial slump...

The acquisition was negotiated and announced around the mid of last year at a time when there was no threat of a financial slowdown. If one looks at it from a business standpoint, the marriage of these two portfolios was thought about keeping in mind the result – long-term strategic growth. There has been no change in the rationale behind this acquisition due to the slowdown, and apart from the valuation issues that could not have been predicted while the acquisition was announced, everything has sailed smoothly.

On recent innovations by Dow...

Innovations at Dow can be seen from two aspects – one is towards new products that customers want and the other is modifying the manufacturing processes of existing products to offer advantages. In the area of new products, we have launched some food-related products like dietary fibres for diabetic patients, and excipients for the pharma industry. Besides this, we have also launched innovative chemical products for cleanliness and hygiene-related areas. As far as manufacturing innovations are concerned, there is tremendous amount of research happening in the field of catalysis, which eventually reduces the energy required to produce the products. We have also come up with innovative filters that reduce pollution for the automotive segment.

The various social/community initiatives taken by Dow India...

Dow, as a global company, has a strong desire to ensure that we are active in helping countries and communities where we are present. One of our most satisfying initiatives has been the 'Jaipur Foot' initiative. We are proud of applying our polyurethanes technology and modifying the design of the 'Jaipur Foot' to add flexibility at the ankle. This has been an immensely satisfying experience because here we have applied Dow's technology, married it with funding and translated it into an initiative that has benefitted the people and changed their lives.

In another social initiative, Dow has opened four water stations in Gujarat where the ground water extracted through the bore well is treated through our technology and reverse osmosis membranes, thus converting it into potable water. When compared, the quality of this treated water is equally good, if not better than the mineral water available in those areas. So, this has been another initiative where technology has been able to change people's lives.

On the joint venture with GACL and agreement with Royal Castor Products Ltd...

The Gujarat Alkalies and Chemicals (GACL) joint venture is on the right track and we will be able to reap positive outcomes from this joint venture because for the first time in India, chloromethanes would be produced in compliance with the Montreal Protocol. So, once again, strategically, our consistent theme for India would be applying technology and manufacturing value-added products for the Indian market.

With regard to our agreement with Royal Castor Products Ltd, the outcome looks very promising in terms of commercialising various products. As castor is an indigenous Indian feedstock, the ability to upgrade it into areas of different specialty products is quite high. Even today, there are various products in the testing phase or advanced stages of development.Advice to other players in the chemical industry...

 The segment of the industry that is primarily dependent on advantaged feedstock has to be realistic and accept the fact that the Middle East will continue to dominate this segment. It is impossible to compete with the geography or group of entities where the feedstock has about 40 to 50 per cent advantage over our country. This does not mean that others cannot flourish – the chemical industry is large and has a plethora of products.

One should not take the easy way out while manufacturing products. For example, although there are wonderful value-added derivatives that can be manufactured from propylene, manufacturers generally take the easiest way out and make polypropylene out of it. This is because manufacturing value add derivatives requires an investment in technologies as well as skill. If one takes the easiest way out and upgrades propylene (which companies would obviously want to owing to the lowest capital option), the product can be made and sold; however, making profits and sustaining growth would be a challenge.

The future outlook for the Indian chemical industry...

We lack the feedstock advantage in India and it is highly unlikely that we will have it in future also. Thus, technology is our best hope for making products of interest to the market. Policies must be set and investments must be made in order to promote technological breakthroughs, as this would be the best initiative for the growth of the Indian chemical industry. In India, over the next three to five years, only those who invest in technology would grow at a rapid pace.

Since investments in technology will provide a further impetus to the rapid growth in India, the country should encourage them. The Indian chemical industry needs to send out a clear message that the policies in this country must encourage investments such as our proposed world-class R&D facility since these would open up horizons and also be an invitation for other companies to make similar investments in India. If the rest of the world gets the impression that companies cannot invest in technology here, then it will be India's loss. So, as an industry, we need to ascertain that this perception is quickly changed. After all, we in India have world-class scientists, and unlike other countries we focus on technology rather than bulk manufacturing. 

Quotes: All those companies that supply uniquely tailored products for specialty applications are poised for growth. And, if a company is competing head-to-head in the segment of commodity chemicals then, although growth will prevail, profitable growth is difficult and the pricing is highly challenged.