India to become the Global Manufacturing Hub for Specialty Chemicals
Viejay Bhatia
Director
AVA Chemicals Pvt. Ltd

Specialty chemicals, which comprise high value, low volume chemicals with specific applications, are a significant part of the Indian chemical industry, which is today valued at USD 25 billion according to industry analysts. The industry has already delivered 13 per cent growth over the past five years led by domestic consumption. With increasing demand for value added high performance products in all spheres of life domestically, the demand for specialty chemicals that add such functionalities to products is expected to grow backed by a relatively strong GDP growth outlook. At the same time, a shift of manufacturing to the East and the rise of India as an export hub is expected to further cement India's position as a manufacturing base for specialty chemicals to cater to markets abroad. A glimpse of India's emergence as a major export player is already seen in segments such as agrochemicals and colorants, in which a significant portion of India's products are exported.

The growth for specialty chemicals is driven by both domestic consumption and exports. Domestically, specialty chemicals finding applications across consumer, industrial and infrastructure segments are further propelled by the overall growth of the Indian economy. The growth of the agrochemical segment has a strong correlation to the growth of the rural economy.

In other segments, such as agrochemicals, flavours and fragrances, dyes and pigments, a significant portion of the production in India is sent out to markets abroad. Exports have risen rapidly as India is fast becoming a dominant manufacturing hub for such chemicals.

Tightening environmental norms in developed countries and a slowdown in certain segments by China are contributing to the increase in exports from the Indian market. The government's 'Make in India' initiative is and the consequent flow of foreign direct investment (FDI) to this sector expected to help accelerate India's journey to emerge as a manufacturing hub for the chemicals industry in a few years.

Trends in the Segment

Regulatory and environmental factors:
Developed markets have tightened their import regulations due to environmental concerns and also to safeguard interests of their domestic manufacturers. The regulation which has had the greatest impact on exports from India is the European Union's REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals), which came into effect on 1st June 2007 and addresses the production and use of chemicals and their potential impact on the environment and human health. A significant impact of REACH is expected with the implementation of Phase3, which is slated to come into force by 1st June 2018 and would dictate the regulatory standards for any chemical supplied to EU at quantities of 1 tons p.a. or more. REACH is aimed at increasing the safety, health and environmental compliance lookout of chemicals manufacturers supplying to EU, and as a result affecting the underlying process costs. While most scaled up exporters are already underway to become REACH compliant, mid to small scale Indian companies are likely to find this difficult to achieve. This would result in the well prepared companies to gain an edge over the rest of the players and would be a critical source of differentiation.

Shift of production to Asia
As a result of tighter environmental norms in the west, many MNCs are focusing on Asia, particularly India and China, as their manufacturing hubs. Coupled with a lower cost of production and abundant availability of skilled manpower in Asian countries, the shift has been more lucrative for companies . This is particularly evident in the relatively standardized products with low differentiation, such as textile chemicals and dyes and pigments, wherein IP protection isn’t seen as a significant threat.

A recent drive to tighten pollution control norms in China have led to multiple plant shutdowns in the country in chemicals and other manufacturing segments. As a result of this, Indian chemical manufacturers have benefited from production shift to India, especially seen in segments such as Dyes and Pigments.

M & A activity on the rise M & A activity in this sector has been abuzz with players being driven by several strategies.

Going forward, inbound M & A are anticipated to be more rampant than outbound and domestic transactions. Several MNCs have been present in India for some time (Bayer, BASF, Nalco, Clariant, Huntsman, etc.) and are considering both organic and inorganic strategies to capture the growing opportunity in this space. Some Indian companies (Dorf Ketal, Kiri, UPL etc .) have acquired companies overseas to expand their presence. There have also been a number of acquisitions by other Indian companies (Rallis, Oriental Aromatics, Coromandel International, etc.) to expand their product offerings and also grow their India footprint.

As ambitions and opportunities expand, heightened levels of M & A interest by players is being witnessed across the spectrum of specialty chemical players. The increased globalisation of the sector, sustained market opportunities and the emergence of Indian leaders are combining to create an ideal concoction for specialty chemicals industry to blossom.

Challenges

Despite the demand side growth drivers, there are still several hurdles for the industry. While some are segment specific issues, there are three overarching challenges the sector is faced with -commoditization, fragmentation and lack of scale and regulations.

Commoditization:
Globally, the specialty chemicals industry is usually separated from bulk chemicals by extensive R & D and innovation. However, such a differentiation is almost non-existent in the India due to the 'genericized' nature of the Indian specialty chemicals industry. Several older products in the sector have already been commoditized or are at risk of lacking any differentiation features. Specialty chemical manufacturers need to strengthen their focus on niche applications and product innovation in order to protect their margins and carve a brand value.

Fragmented industry structure with few large Indian players:
Most players operating in India are still small in scale operating at a low level. On the global platform, however, there is significant level of concentration. Most segments in India witness a dominating effect of a few global leaders who have made inroads. This has implications on the competitiveness Indian players can offer. Only a few Indian players have been able to scale or build capabilities to compete with the global giants in terms of product development and innovation. As the global companies look to enter and strengthen their presence in the Indian market, they will also invest in distribution, marketing and production systems that local companies may find hard to match.

Regulations:
The cost of compliance might make operations increasingly economically unviable for smaller players. Only a handful of players have been able to meet and overcome challenges to build leadership positions. The ability to scale up, offer differentiated products through innovation, implementing an effective marketing and sales strategy while simultaneously maintaining high levels of regulatory standards clearly separate winners from the rest of the crowd in this space.

Segment Attractiveness

Across the specialty chemical segments, we clearly see emergent leaders outperforming their peers on the back of differentiated and niche offerings. Agrochemicals, Flavours and Fragrances (F & F) and Personal Care have emerged as the three most attractive sectors in. Characterized by strong product differentiation/specialization and strong end industry growth, agrochemicals and F & F have a large market to cater to.

Agrochemicals - India is the fourth largest manufacturer of agrochemicals after the USA, Japan and China. Decreasing arable land, increasing global population and consequent requirement to improve crop yields have driven up the demand for specialty chemicals in this segment.

Flavours & Fragrances - Increasing acceptance of natural flavours and fragrance ingredients globally is beneficial for Indian players as India is one of the leading suppliers of natural ingredients. India accounts for 30% of the world's production of F & F ingredients resulting in the export of almost 85% of the domestic production.

Personal care - The Indian market for personal care active ingredients grew at 12% CAGR, from USD 0.1 bn in 2009 to USD 0.3 bn in 2014. Over the next five years the industry is expected to grow at 15% to reach USD 0.5 bn by 2019.