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Cracking the code
June 2005
In an industry
rendered turbulent by market forces, Tata Chemicals is looking
to ride the wave of competition
For some time now Tata Chemicals (TCL) has been
pursuing new ways to stay competitive. The company has the
largest and most integrated chemicals plant in India, at Mithapur
on the Gujarat coast, and is among the largest producers of
soda ash in the world. But TCL has, in recent years, had to
move from a relatively sheltered environment with a huge market
share and no curbs on production, to a transformed industry
where the market determines production volumes and prices.
The industry has placed new demands on the organisation —
to be market-led and focused on costs and speed of response.
Marked by stiff competition from international players and
swings in global demand-and-supply trends, the industry has
few boundaries and even fewer market barriers to contend with.
Multinationals have access to growing markets and are further
reinforced by their economies of scale. The only determinant
is profitability, and that's the factor driving Tata Chemicals.
"This is pretty much a commodity industry, one where
we have the opportunity to introduce the product in any market
and get access" says R. Mukundan, the chief operating
officer of TCL's chemicals business unit. "The only limiting
factor is the cost of logistics."
Chemicals is a rapidly consolidating industry these days.
Consolidation is taking place on both the buyers' as well
as suppliers' side of the market. Therein lies the difficulty.
With the limited number of suppliers and buyers comes greater
negotiating power, which makes it more difficult to carve
out a niche in the global market.
If a company decides to capture a particular market share
in a given economy, and takes steps to do so, the effects
of aggressive expansion are felt by the rest of the players,
small or big, local or international. This is what TCL is
insulating itself against. "I'd say our strategy is proactively
defensive, but ours is not really a defensive position,"
contends Mr Mukundan. "We have an active process of engagement
with overseas companies, while maintaining a defensive stand
on sustaining our leadership position."
TCL has already made a foray into the Southeast Asian market,
in order to create regional buffer zones that protect it from
the ripples of foreign consolidation. This, Mr Mukundan believes,
will enable TCL to engage with foreign players on an even
footing.
For the soda ash business, the path is clear: future growth
depends on the growth of its customers. "We are serving
glass and fabric wash and care," explains Prasad Menon,
TCL's managing director. "Both these industries have
thrown up robust growth figures and we have responded by increasing
our capacity utilisation. But we need to increase capacity
itself and not just focus on better utilisation."
Today the company pulls in 12-15 per cent of its turnover
from exports. Without an increase in the capacity of its plants,
export turnover could well drop, but merely increasing capacity
at its existing facilities may not be a long-term solution
for TCL. Which explains why the company is not looking at
growing only in India, but at acquisitions that can help it
service the global market, or even setting up additional manufacturing
units. "It's all work in progress right now, but we have
not ruled anything out," says Mr Menon.
Combating competition is not new to TCL, whose stated policy
is to become 'globally competitive'. To evolve into a force
to be reckoned with on the global scene, TCL adheres to the
age-old practice of keeping costs down and quality high. "If
we are not cost competitive and do not deliver the right quality
of product, it does not matter what else we do; we will be
wiped out," adds Mr Menon. "So we have to be at
a level where we can meet global cost levels, and we must
do this before we address the issue of going global."
Though the company does plan to set up international manufacturing
units, for now it is concentrating on bringing up its efficiencies
and quality, setting up beachheads in Southeast Asia with
a view to further bolster its position to take the big step
abroad. TCL might also take the acquisition route, but there
are no definite plans on that front as of now. Says Mr Mukundan:
"In a sense, this is the worst time to acquire. Today
units are working at maximum capacity, we are running a tight
ship."
China is another factor that the industry has to cope with.
"What China was, is and will be are three different things,"
says Mr Menon. "There is a huge internal demand in China
today, and manufacturers are faced with the problem of how
to pass on the increased costs to the customer." But
analysts speculate that by 2010 there could be a disconnect.
Demand within China could stabilise and manufacturers with
excess capacity will find they have to go outside the country.
This scenario could lead to a crash in prices all over the
world, as happened in 2000.
In terms of investments, TCL's immediate plan is to modernise
its entire chemical complex which includes a 875,000-tonne
soda ash plant, and 500,000-tonne salt and cement plants in
order to improve efficiencies and increase output by getting
rid of manufacturing bottlenecks. Expansion is an option the
company is exploring, but will look for a significant value
addition to its existing product portfolio. A case in point
is TCL's acquisition in 2003 of Hind Lever Chemicals (HLCL).
This not only expanded the company's product portfolio to
include sodium tri-polyphosphate (STPP) and fertilisers, but
also gave it a value proposition in both soda ash and STPP.
A secondary advantage was that with Mithapur as its captive
source for soda ash, a raw material for STPP, efficiencies
and competitiveness increased.
Touching on the company's fertiliser business, Mr Menon sees
scope for growth. But, given that the industry continues to
be burdened by regulations, TCL sees it as a challenge just
to stay profitable. The company is concentrating on reducing
bottlenecks and getting into agri-businesses on a larger scale.
Tata Salt, TCL's main earner from its food additives business,
has also been able to withstand the pressure of an increasing
number of competitors, including many large multinationals.
It has sustained its leadership position and increased market
share over the last three years. "But we continue to
be largely an urban brand," says Mr Menon. "We are
now, through various measures, trying to extend to rural areas.
We still have areas where our penetration is not as much as
it should be."
Tata Chemicals does not plan to be left in the wake of the
wave of globalisation. With its growing international activities
and quality products, it is poised to ride the crest with
the best in the industry.
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