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    Features

    The Indian Paint Industry

    Paint majors continue to invest more dollars in India, which is one of the fastest growing markets across the globe.

    Parthasarathy Devaraj10.17.07
    The Indian paint industry is over 100 years old. Its beginning can be traced back to the setting up of a factory by Shalimar Paints in Calcutta (now Kolkata) in 1902. Until World War II, the industry consisted of small producers and two foreign companies. After the war, the imports stopped, which led to the setting up of manufacturing facilities by local entrepreneurs. Still, the foreign companies continued to dominate the market. Initially British paint companies such as Goodlass Walls (now Goodlass Nerolac), ICI, British Paints (now Berger Paints), Jenson & Nicholson and Blundell & Eomite dominated the market.

    There are now twelve players in the organized sector of India's paint and coatings market and over 2,000 in the unorganized sector. In 2003-04, the organized sector held 70% share of the approximately $1.5 billion (Rs 6,800 crore) industry, while the balance was made up of the unorganized units.

    The major players are Asian Paints, Goodlass Nerolac, Berger, ICI and Shalimar. Recently, world leaders like Akzo Nobel, PPG, DuPont and BASF have set up base in India with product ranges such as auto refinishes, powder coatings and industrial coatings. Kansai Paints of Japan, which entered into collaboration with Goodlass Nerolac in 1984, is now the holding company for Goodlass Nerolac with 64.52%equity holding. PPG has a joint venture with Asian Paints to manufacture industrial coatings. Jenson & Nicholson and Snowcem India are no longer active players because of dwindling sales in recent years.

    In the 1990s, helped by a growing economy, the Indian paint industry recorded a healthy growth of 12-13% annually. This was mainly due to a drastic reduction in excise from a staggering 40% to 16%. However, the growth was restricted in 2002-03 to single digits. There was a revival in 2003-04 with a robust growth of 13%.

    The Indian paint industry has two main market segments-industrial and decorative paints. While industrial paints are used for protection against corrosion and rust on steel structures, vehicles, white goods and appliances, decorative paints are used in protecting valuable assets like buildings.

    The Indian decorative business has a share of approximately 77% in total sales. In foreign countries 50-70% of the business is from the industrial segment.

    The trends are likely to shift in India too, but at a slower pace, in favor of industrial paints. The per capita consumption of paint in India is 700 grams versus 19 kg in the U.S. and 2.7 kg and 5.8 kg in other developing countries like China and Brazil. Because consumption relates to affordability, the low Indian figure is not a surprise.

    Within the decorative segment, the share of exterior paints is 21%, interior emulsions 11%, distempers 30%, solvent-based enamel paint 36% and wood finishes two percent.

    The exterior category, particularly exterior emulsions, is the fastest growing segment at 20% for the last three years.

    The industrial coatings segment includes high performance coatings with 30% market share, powder coatings with ten percent, coil coatings with five percent, marine coatings five percent and automotive coatings 50%.

    While Asian Paints was a clear market leader with a turnover of approximately $420 million (Rs 1,943 crores) in 2003-04, Goodlass Nerolac was second with approximately $220 million (Rs 1,010 crores) during the same period.

    Organization System



    Most of the organized companies in India's paint and coatings market have a nationwide presence with multilocation manufacturing facilities. The companies in the unorganized sector are mostly regional, spread in and around their manufacturing facilities and deal in low value products.

    Asian Paints has created a nationwide marketing campaign focusing on all small interior markets. Not only was the company able to establish itself in interior markets, the demand percolated to main towns allowing the company to enlist support of large customers.

    Being restrained by FERA (Foreign Exchange Regulations Act) and MRTP (Monopolies & Restrictive Trade Practices Act), most players were not allowed to increase production capacities until the Nineties. With liberalization, these shackles were removed and other companies have expanded, though the gap between Asian Paints, which could expand continually and others has widened.

    Another winning point for Asian Paints was its strategy to focus on smaller packs while others were focusing on larger packs. Asian Paints has also been introducing new product categories, which helped in expanding the market.

    This made distribution still more complex as precise forecasts for more than 3,000 SKUs became a challenge for every organization. With the advent of color dispensing machines supported by all paint companies and sophisticated IT enabled distribution tools, the situation has eased considerably.

    Business Reengineering



    With the industry business becoming complex, most companies have restructured and have used information technology as the key driver for reengineering. They have aligned their organized structures on the basis of expanding business and its complexities. This was essential in order to tighten controls. Today, companies have divided their sales organizations into decorative, industrial and high performance coatings business units. The national level organization structure is split into zones, regions and branches.

    Color dispensing machines, both computerized and manual, have transformed the business, particularly on the manufacturing and distribution sides. Earlier, paint companies were required to manufacture all the shades (30-50 depending on a product line) in all the packs (five to eight packs).

    The demand pattern was difficult to predict even with the support of historical data/trends as consumer preferences were changing fast. The machines altered the production pattern from shades to producing bases thus providing economies of scale, reduced inventory levels and eliminated redundancy of stocks. It has cut down the new products introduction cycle considerably. This has helped expand the range of shades for each product category, offering a choice of shades to consumers in the hundreds. For the retailers also, it eliminated the sales loss for want of range/desired shade. The machines have brought a total change in the way business is transacted and revolutionized business processes as well.

    There are approximately 11,000 color-tinting machines installed at the dealers' end including multiple machines on some counters. Also popular are the gear mixers for 2K finishes in auto refinishes, which are installed at the dealers' end and at leading garages.

    The dependence on information technology has increased remarkably from a corner room EDP operation to playing a pivotal role in the way business in transacted. While Asian Paints has invested in i2 technology, Goodlass Nerolac has backed up IBM enabled APO and has upgraded to the latest 3.1 version to improve its distribution and optimize production scheduling. Both companies are operating on an ERP (SAP R3) operating system through full connectivity across the factories and branches via V-SATS, thus virtually working on live data for sales, accounting and purchasing.

    Goodlass Nerolac has moved one step further by launching its intranet-employee portal to capture knowledge sitting in the minds/desktops of individuals to a common platform, which can be accessed by all employees. It has also invested in advanced business plan performance measurement tools like balanced score cards to track, review and align performance.

    Most companies in the Indian paint industry are functioning on multi-division models with individual functions controlled by business heads. Some manage their business through sub-committees. As in the case of Goodlass Nerolac there are two levels of teams managing/guiding business.

    While all the policy and major decisions are looked at by the management committee (MC), which reviews operations on a monthly basis, there is a parallel team-business analyst team (BAT)-which analyzes the businesses and discusses new initiatives, working as the think-tank for the company. Recently CAT (Creative Analysis Team) has been created to work on new long-term initiatives.

    Product Culture



    Most companies have an identical range of products for the decorativepaint market. In the industrial segment, the range of products is more customized and guided by the technology support provided by the collaborators. In the case of decorative products the technology has been mostly indigenously perfected over the years and the products can be divided on the basis of interior and exterior application or in categories like water-based and solvent-based. Moreover, most companies have been advertising their products in the exterior emulsions category, which has expanded the market and triggered a shift from cement paint.

    While solvent-based enamels are still popular in India, outside India there is a clear shift visible from solvent- to water-based glossy enamels. India will take some time before this change is accepted on account of three hurdles currently faced including cost (water-based is expensive), low level of gloss in water-based enamels and the psychological barrier that water-based coatings cannot be superior to solvent-based coatings for protecting wood or metal surfaces.

    Companies not working on operational efficiency business models have been losing. Asian Paints and Goodlass Nerolac have been aggressively working on cutting costs/operating expenses. Berger has been managing well with economical yet acceptable formulations and low operating costs.

    The industry is not capital intensive and depreciation charges are not significant. Working capital requirements are moderate. However, most companies in the lower rungs are unaware about the realization of debtors. Added to this has been the problem related to collection of installments on color dispensing machines, which are mostly purchased on lease.

    The highest efficiency required is in physical distribution. The poor forecasts of demand result in poor distribution. As a result, companies are investing in sophisticated supply chain management tools. Margins have remained under pressure due to dropping prices, which have been more strategic and forced by the market leader. Companies have been working on improving internal efficiencies to retain profits. The pressure from OEMs to reduce prices has also been a cause for low profits for paint companies. Even with the turnaround of the Indian economy, the pressure has not relented. The customer, or retailer, has also been dictating his terms as most companies have common counters to meet their objectives. So they have no choice but to lure more customers through incentives. Lower productivity of high cost labor in the old units has been another problem. This in totality has increased operating pressures.

    Some of the international players are already present in India's paint and coatings market, but mostly for industrial coatings. They include Akzo Nobel, BASF, Henkel (pre-treatment chemicals), PPG, ICI (decorative) and DuPont (auto refinishes). A few others are present through collaborations like Kansai and Nippon.

    For the decorative range of products, it is difficult for international companies to set up shop on a stand alone basis because of existing barriers such as the strong network of established players, brand image, range of products (Indian context) and required distribution logistics. Therefore, the safer route has been and will be to tag along with existing companies. For industrial products, however, this may not apply and based on their tie-ups in home countries and their OEM customers, the required range can be made and sold.

    There is however room for niche players, with radical and unique ranges of products properly conceived and marketed in the Indian context and supported with machines.

    Current Trends



    The Indian paint and coatings industry is riding high on the growth in the Indian automobile industry, new construction in the housing segment and improving infrastructure throughout the country. Thirty percent of the paint business is comprised of new construction projects. GDP growth projections of six to 6.5% in the current year mean a growth of nine to ten percent in Indian paint business. The growth will be 12-13% in the industrial segment and eight to nine percent for decorative paint. The Indian automobile industry has been performing remarkably well and will benefit the market leader in the segment, Goodlass Nerolac.

    As for the future, the industry has predicted a CAGR of eight to nine percent for the next five years compared to last year's growth levels of 27.4% for cars and 8.9% for two wheelers. The Indian housing industry is likely to do well in the current year as well, recording a growth rate of 35% last year. As a result of the overall health of India's economy, it is safe to predict a nine to ten percent growth rate for the Indian paint industry in the next five years.

    Consumers can look forward to new product launches, some for application in special areas. Companies will be increasing the value added services available to customers by offering a variety of finishes through specialized and trained applicators. There will be more options like ranges of colors/finishes for wood applications through the tinting machines. Additionally, the trend towards water-based coatings is likely to set in both for industrial and decorative applications. While India has not yet embraced the DIY concept as cheap labor is still available, exclusive retail chain stores sponsored and run by Indian paint companies will become a reality.

    The Indian paint industry has progressed well and moving ahead is likely to be influenced by several factos including new technologies, new innovative products, new associations, consolidation of industry and poor performers getting out of the market. Ultimately, in the years ahead there will be only four or five key players operating in the Indian paint market.

    Sidebar



    Valspar eyeing the Indian market



    Valspar Corporation, the $2.97-billion global paint manufacturer, is planning to enter the Indian paint market. The Minneapolis-based company has held talks with Baroda-based Grand Polycoats, an unlisted firm that specializes in making protective industrial coatings.

    Grand Polycoats CFO Maulik Mehta confirmed talks with Valspar, but said it was not up for sale. "Many companies, including Valspar, have approached us but we have our own strategy for growth. There's no reason to sell out at this point.''

    He could afford to say so. Grand Polycoats, whose protective coatings are used in auto parts, engineering and capital goods, chemicals and petrochemicals, has been growing at almost double the industry's average growth of ten to 12%.

    The company is among the top five players in protective coatings and has given paint majors like Akzo Nobel, Kansai Paints, Asian Paints and Berger Paints a run for their money, according to experts. Valspar didn't respond to an e-mailed questionnaire.

    Valspar, a leading paint and coatings manufacturer, is looking to expand overseas. Though Valspar makes a wide range of coatings, paints and related products, it is known for its coatings, which are used in protecting many iconic brands from the green that defines John Deere's tractors to Coco-Cola's red cans and Caterpillar's machines.

    Valspar has grown through acquisitions in the 1980s and 1990s, and is now trying to grow beyond the U.S.-currently, 30% of its sales come from outside the U.S. compared with five percent a decade ago. Its success in China has pushed its annual sales growth in excess of 20% per year.

    The acquisition-led strategy has helped Valspar post good results increasing its net profit 19% in 2006 due to 9.7% growth in sales. In July 2006, Valspar acquired an 80% stake in Huarun Paints, a supplier of furniture, decorative and achitechtural coatings in China, for $200 million.

    In October 2006, Valspar also acquired H. B. Fuller's powder coatings business, marking its first powder manufacturing facility in Europe. It plans to use this to serve its industrial customers worldwide. In 2006, the company also entered into a joint venture with Tekno S A to supply coil coatings in Brazil.

    With the Indian paint market growing at ten to 12% and most of its global peers already here, it can hardly ignore this market.

    ''What's attracting global majors is the growth prospects here. In infrastructure, India is trying to build in the next five years what it has built over the last 60 years,'' said Mehta.

    For the protective business, which is Grand Polycoats mainstay, infrastructure is the main driver for growth. This has a trickle down effect on the demand for capital goods and equipment, according to Mehta. If Grand Polycoats doesn't materialize, Valspar could explore other opportunities in India, including setting up a greenfield plant.

    Sidebar



    Major Paint and Coatings Manufacturers Ride India's Real Estate Boom



    Riding on the back of a real estate boom, paint companies are extremely bullish on India, which is among the fastest growing markets across the globe.

    Among the international companies that are increasing their investments is the Japanese paint major, Nippon, which is investing approximately Rs 80 crore for manufacturing facilities in Gurgaon and a 25-acre unit in Chennai.

    With Akzo Nobel likely to acquire ICI Paints globally for $16 billion, the Dutch giant will also increase its business in India.

    Akzo already has a powder coatings business in India through its acquisition of Courtaulds in July 1998, and it has also entered the decorative paints segment.

    DuPont is also expected to expand its presence in India.

    Industry experts expect other companies like Behr and BASF to set up shop in India as well.

    The Rs 11,000-crore Indian paints market is growing at double digits and the decoratives segment, which accounts for 70% of sales, is growing in excess of 20%.

    Asian Paints, the country's largest paint manufacturer, also has major expansion plans. The company is setting up its largest facility at Rohtak in Haryana. It will focus on emulsions.

    "The demand has exceeded our capacity and hence we are looking at this new plant," said Ashwin Dani, vice chairman and managing director, Asian Paints.

    Competitor Kansai Nerolac is also planning an 18,000-ton plant at a cost of Rs 68 crore, which will start production in two or three years. Berger Paints has 75% of its business in decorative paints. "In India, the housing sector is booming and this has provided a major boost to the decoratives business. This segment is expected to grow at 18-20%," said Abhijit Roy, vice-president marketing, Berger Paints.
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