In spite of being one of the leading chemicals market in the world, India is still not a big market for many of the European companies. But things are changing as the consumption of end-user products continues to rise at a robust pace. Many of the European companies are devising strategies to tap the growing chemicals market in India, says Dr Joerg Strassburger, founder & CEO of Go East Advisors – which specialises in business consulting for European companies who are looking to venture into India and source chemicals (such as chemical intermediates, raw materials, speciality chemicals, etc) from the country.
Dr Strassburger has more than 20 years of experience in the international chemical industry, which includes nine years of working in India as the managing director of German specialty chemicals major Lanxess India. Dr Joerg Strassburger spoke to Rakesh Rao on various aspects of Indian chemical industry and dilemmas before overseas companies while investing in manufacturing assets in the country.
How do you view the current economic situation in India?
GDP statistics shows that there has been improvement in growth this year compared to previous year. The change in government regime in May 2014 changed the mood. The new government has announced a slew of policies & initiatives with an intention to improve the business environment in the country. PM Narendra Modi has also been more articulate in positioning India as a potential investment destination on a global platform through his overseas visits. Investors are keenly watching these developments. Investments will increase manifold once the government starts implementing these initiatives on the ground.
Has there been an increase in investments in India in last one year?
We are not seeing any major increase in business inquiries specifically from European countries. One of the reasons for this could be that European chemical companies (especially German firms) have made major investments in India in preceding years, a period when other companies were reluctant to invest given the global economic slowdown.
In last couple of years (before the new government came to power), India could not grow at the same pace as it did in 2005-2008 period. Hence there are lot of spare capacities. Once these get filled up, we can see expansion taking place again.
However, overseas companies will make big investments in the country only when they see changes (in terms of implementations of new policies and market growth) on the ground.
Was the investments (made by the German companies in India) targeted to cater to only India?
It was a mixed strategy. Some invested keeping in mind the domestic market, while others did it for tapping domestic market as well as exporting products from India.
How is the demand for chemicals in India?
Chemicals go into every end-user sectors, hence growth in demand is across the industry. Some end-user sectors grow at the same pace as that of the GDP, while growth rate in others may be 1.5 times (or even higher) of the GDP. Across the board you need capacities. During the period of 2006 and 2013-14, chemical consumption in India has gone up by 50 percent, which is not bad given that there was economic crisis in between this period. However, if you dig deeper into this statistics, you will realise that the imports have grown five times faster than the domestic production during this period. So there is a mis-match in terms of local demand and domestic production.
There could be multiple reasons for this. May be importing chemicals cost less than producing them locally or the quantum of chemical demand in India is too small for global companies to justify asset investment in the country.
Which are the key factors based on which MNCs invest in a manufacturing set up in overseas country? Is India in a position to meet these criteria?
Some of the factors include market size, future growth potential, cost position, availability of feedstock, etc.
For chemical companies, availability of feedstock is one of the most critical criteria for setting up a production base. It is here that lot of companies in India face a challenge. Either the feedstock in unavailable or is limited (given the monopoly scenario) in the country. This is hindering growth of the chemical sector.
Government should initiate policies to boost growth keeping in mind the sectors that they are targeted at. For example, in case of commodities, raw materials account for a huge share of the production cost (may be as high as 80 percent). Hence, policies should be framed such that cost-competitive feedstock is easily available to the manufacturers. Feedstock may not be a challenge for the manufacturer of special chemicals, where focus is more on R&D and innovative products for end-user applications. So, the government has to adopt different strategy to attract investors in specialty chemicals space.
Should there be a different SEZ approach for chemical industry?
To give a boost to investment, the government should focus on how to attract upstream (refinery/crackers) projects to ensure availability of cost-competitive feedstock in the country.
Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) policy, which was launched by the previous Government in 2007, is good. But, it needs to attract more investors for ensuring that feedstock is available at a competitive price for the downstream chemical manufacturers. The integrated approach of PCPIR is right, but to convert that into reality, the government will have to conduct in-depth analysis for preparing the blue-print of PCPIR and then approaching relevant companies to invest in PCPIR. Singapore has been successful in attracting overseas investor with this approach.
The government is campaigning hard for ‘Make in India’. How optimised are you about it? Is the government framing right policies to make ‘Make in India’ a reality?
It is a right step. With 1.3 billion population, demand for end-user industries’ products will continue to rise. The question is will this demand be met through domestic production or imports? There are lots of challenges in producing in India which include long approval process, high-cost of production, availability of feedstock, infrastructure, taxation issues, land & labour issues, etc. The new government is aiming to improve ease of doing business in India through various initiatives. If they are able to walk the talk and implement these initiatives, investors will surely take note of it and invest in manufacturing assets in the country.
Because of some unfortunate decisions in the past, the level of trust of investors on the Government of India has gone down. In addition to feedstock and other requirements, the government has to restore the trust of investors so that they have the confidence of investing in the country.
If government is able to implement GST in April 2016 and amended Land Acquisition Act, it will be a big signal to investors.
Source : Business Standard