Vishal Sharma, Executive Director & CEO, GIL Chemicals in an interaction with Mary Janifha Evangeline X, Editor, Asia Manufacturing Review shared his views on the primary drivers pushing chemical companies toward global expansion, and how these impact their strategic goals, how chemical companies can balance the pursuit of global market share with the need for local adaptability and more.
What are the primary drivers pushing chemical companies toward global expansion, and how do these impact their strategic goals? How can chemical companies balance the pursuit of global market share with the need for local adaptability?
In today’s world, the prevailing belief is that bigger is better, with size often associated with strength. However, this is not necessarily true. It is possible for a small company to be the leader in its niche. Unfortunately, many business leaders still place a premium on size. This perception is a key driver of global expansion for chemical companies. Specifically in India, the current environment offers a wealth of advantages for chemical organizations. The country boasts a strong talent pool, low costs of infrastructure and utilities, technical capabilities, and easy access to capital. Today, securing significant capital is more accessible than ever, with companies able to borrow thousands of crores or raise funds through IPOs. The success of recent IPOs in India further demonstrates the potential for growth. India’s market, while large, does have its limits. This is why many companies are looking beyond the domestic market for growth opportunities. Several Indian companies are already pursuing international expansion. For instance, Sudarshan Chemicals recently acquired UBAC in Europe, while Galaxy Surfactants established operations in Egypt and the US over the past decade. The Aditya Birla Group, one of India’s largest conglomerates, has invested heavily in the US and is now the largest investor in the region. As a result, international expansion has become a key part of strategic planning for many companies, with some businesses reporting that their revenue split between the Indian and international markets is now 50-50. The idea of globalizing operations is gaining traction, as businesses seek to expand their reach beyond India’s borders.
However, balancing local adaptability with global expansion is crucial. To succeed in international markets, companies must match or exceed the capabilities of the best local competitors. While strength in the home country is important, it does not guarantee success abroad. Companies must tailor their strategies to each market, as customer needs and market dynamics vary greatly from one country to another. For example, what works in Japan may not work in Australia, and strategies effective in Brazil may not be applicable in the US. Therefore, understanding local consumer preferences and building strong local capabilities is essential. This requires investment in people, infrastructure, and resources in the target market. Businesses must establish a solid local presence before competing effectively. Typically, companies take a gradual approach to international expansion. They often begin with a distribution setup, minimizing fixed costs while establishing market share and generating revenue. As the business grows, they may establish their own company in the r region. This step-by-step approach is often more sustainable than a rapid expansion strategy. While mergers and acquisitions (M&As) can be effective, they come with their own set of challenges. The success rate of M&As is less than 50%, so companies should proceed cautiously when choosing this option. In conclusion, global expansion is an important strategy for growth, but it requires a carefully considered approach. Companies must balance ambition with a deep understanding of local markets, investing in the right capabilities and making strategic decisions at each stage of the expansion process.
What are the key risks associated with global expansion in the chemical sector, and how can companies mitigate these risks? What are the biggest regulatory challenges chemical companies face when entering new international markets?
The biggest risk faced by chemical companies is regulatory risk, specifically the challenge of ensuring compliance in foreign markets. For instance, in Western Europe, the European Union Deforestation Regulation (EUDR), which was set to come into effect on December 31st, has now been delayed by a year. This regulation presents significant compliance challenges, with high costs associated with meeting its requirements. Not all companies will be able to comply with the EUDR, as it necessitates substantial investments in infrastructure to meet the stringent standards.Thus, regulatory risk is the number one concern when expanding internationally, particularly for chemical businesses.
The second major risk is the business model adopted for international expansion. Companies must choose a low-risk model that suits their strategy. Several options are available, each carrying its own set of risks such as Manufacturing in India and shipping internationally, Setting up manufacturing units in foreign markets, Appointing a local distributor and Using a third-party toller. Each of these choices involves significant risks. For example, relying on a toller may involve sharing intellectual property, which could be at risk of theft or misuse. Appointing a distributor carries the risk of losing control over the business if there are issues with the distributor. Setting up a local manufacturing unit requires significant investment - often millions of dollars and if the business fails to scale quickly enough, it may result in negative ROI, making it difficult to repay loans or recoup investments. Therefore, while regulatory compliance remains the foremost risk for chemical companies expanding internationally, the choice of business model is also crucial. Both require careful consideration to mitigate potential challenges in global markets.
How can companies effectively manage compliance with environmental regulations that vary significantly from region to region? How does adapting to multiple regulatory environments impact product development and innovation?
All these factors are deeply interconnected. When a company is considering expansion into a particular country, the first step is to evaluate what makes that market attractive. For example, if the country has a significant customer base for the company’s products, that is a key draw. However, it is equally important to understand the regulatory environment. What kind of regulations will the products be subject to, and what compliance standards must the company adhere to? Failure to meet these regulations could prevent a company from doing business in that market. This understanding is crucial and must be developed well in advance. Once the company understands these regulations, the next step is to review the product development cycle. If the products contain ingredients that are restricted or banned in the target market, changes may be required. While not all ingredients in the chemical business are easily replaceable, most can be substituted. The company must find alternative ingredients that are both cost-effective and capable of delivering the desired product performance.
Moreover, adapting to international regulatory frameworks such as the European Union's REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals), which has been in place for over a decade, is a significant consideration. Countries like South Korea (with K-REACH) and Turkey are also implementing similar systems to manage chemicals. These systems are complex, costly, and can be difficult to navigate. For instance, obtaining REACH approval for a product in the European Union can cost anywhere from $10,000 to $50,000. Companies must be prepared to invest significant resources into ensuring their products meet these rigorous regulatory requirements, making compliance an expensive but necessary part of doing business internationally.
How can consumer preferences in emerging markets influence product innovation in the chemical sector? How does local raw material availability impact the cost structure and sustainability of production in foreign markets?
The importance of understanding customer preferences varies depending on where a company sits within the value chain. For commodity chemical suppliers, customer preferences are not a primary concern. These companies produce basic chemicals that are used in a wide range of industries, with demand fluctuating somewhat across different sectors. As a result, the business can operate smoothly without needing to closely monitor or adapt to consumer preferences. However, for businesses in the specialty chemicals sector, the situation is different. Let’s say a company focuses on the paints and coatings market, producing specialized products for that segment. In this case, understanding customer preferences becomes essential. The company must first comprehend the preferences of its direct customers - paint and coatings manufacturers. But beyond that, it’s equally important to track the preferences of end consumers - the individuals who ultimately use these products. By doing so, the company can anticipate how the buying needs of paint manufacturers will evolve and adjust its product development pipeline accordingly.
Another crucial factor to consider is the sourcing of raw materials. The closer the raw materials are sourced locally, the more beneficial it is. A common strategy in today's business environment is the mantra: “Make where you sell, buy where you make.” This model allows for more efficient operations by placing manufacturing facilities near customer bases, while also sourcing raw materials close to production facilities. This helps reduce costs and shorten production cycles. The further apart the stages of this supply chain are say, producing in India for a market in the U.S. while sourcing raw materials from Japan - the more complex and costly operations become. While this may not always be the case, especially for businesses with global reach, proximity between manufacturing, sourcing, and customers can significantly enhance operational efficiency. When establishing a manufacturing plant, ensuring the optimal alignment of these factors is crucial. A mistake in this area can lead to uncompetitive and unviable business operations, making it a key consideration for companies when expanding or setting up new facilities.
How do strategic partnerships help in overcoming entry barriers in new markets? What role do joint ventures and alliances play in accelerating growth in foreign markets for the chemical sector?
Joint ventures and alliances are various forms of strategic partnerships that offer different ways for businesses to collaborate. When we talk about strategic partnerships, it can encompass a range of arrangements, including technical collaborations where intellectual property is exchanged, financial investments with varying levels of participation (5%, 50%, or even a majority stake), acquisitions, or mergers that lead to the creation of a new entity.
The type of partnership a company chooses largely depends on the value each partner brings to the table. For instance, if one partner provides technology, expertise, manpower, and financing, while the other contributes a unique product formulation or innovation, the value distribution may be 80% from the first partner and 20% from the second. This disparity in contributions often determines the structure of the partnership, ensuring that it reflects the value each partner provides. In addition to the value dynamics, personal preferences and leadership styles play a crucial role. Some companies are not inclined toward joint ventures due to a desire for control over their business operations, while others may prefer joint ventures as a means to share and mitigate risks. These preferences influence the type of partnership an organization is likely to pursue.
To summarize, the two primary factors in determining the nature of a partnership are the value each partner contributes, and the preferences and leadership approaches of the individuals involved. Both are critical in deciding which partnership works best for the business. Despite these nuances, partnerships, in general, are highly beneficial, helping companies’ access resources, share risks, and expand their capabilities.