Cracking the code
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 TCL.
"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 may 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 cause prices to crash across the world, similar to what happened in 2000.
In terms of investments, TCL's immediate plan is to modernise its entire chemicals complex, which includes a 875,000-tonne soda ash plant, and 500,000-tonne salt and cement plants, to improve efficiencies and increase output by getting rid of manufacturing bottlenecks. Expansion is an option the company is exploring, but will look for 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.