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The Rediff Business Special: / Mukesh Ambani

Time for India to leave cottage industry mindset behind

The Asian market is poised to be the battlefield which will determine who will be the global winner in the chemical industry. India has two choices -- either it faces the powerful world of super majors or it surrenders the great Indian opportunity to them.

My vision about the future essentially focuses on four main areas: the global chemicals industry (including size, structure and growth); global forces of change and evolution of a new era; major global trends in the chemical industry; and impact on the Indian chemical industry and imperatives.

The global chemicals industry:

With more than 70,000 commercial products, few other industries approach the degree of complexity and diversity of the chemical industry.

The global chemical industry is valued at $ 1.5 trillion today -- about 6 per cent of the global GDP of $ 28 trillion. In terms of size, it is five times the size of the Indian economy.

The total world trade in chemicals is valued at $ 400 billion -- 10 per cent of the value of global trade. The global chemicals industry's growth has consistently been outpacing GDP growth by a factor of 1.5.

Geographically, western Europe accounts for 35 per cent, the USA for 26 per cent, Japan for 15 per cent and the rest of Asia for 12 per cent of its output. In terms of sectors, petrochemicals dominate the global chemicals industry with a share of 40 per cent.

The '90s have seen a lot of activities in consolidation of the business globally along product lines, departing from the diversification era of the '80s.

At the same time, the oil industry is seeing a frantic and unprecedented merger activity -- the $ 75 billion takeover of Mobil by Exxon and the mega merger between BP of the UK and Amoco Corporation of the US being only two examples.

Hard economics seems to be the driver behind these moves. Also, the concept of anti-trust and monopoly is outdated today. Similar trends are visible even in the life sciences field with pharmaceutical and agrochemical companies joining forces and recreating themselves as enterprises based on biological innovation.

The trends of the future indicate a move away from creating new capacities: spinning off to focus on core business/segment; merging for synergy; regrouping for segment leadership.

We may see a mitigation of the boom and bust cycles which bedeviled the commodity chemicals business in the past.

The chemical industry in the developed world is adopting strategies which are centred around a global marketplace. The biggest challenge it faces is value creation. In its quest for value creation, it will bring its full force into play in terms of organisation, technology, finance, synergy and specialisation.

This will result in fewer larger companies -- we may have half the companies we have today in the next decade.

Global forces of change and evolution of a new era:

Asia is poised to emerge as the world's centre of economic activities. Notwithstanding the current Asian turmoil, which will retard the growth for three or four years, two of the largest countries in the region, China and India, together accounting for 25-30 per cent of the world's population, would continue to achieve GDP growth of over 5 per cent over the next few decades.

Consequently developing countries' aggregate GDP should triple by 2010. It is likely that China will overtake the USA as the world's largest economy in less than 40 years in GDP terms, or even sooner in terms of purchasing power. This shift in the market concentration would have a profound impact on the structure of the global chemicals industry.

While new players in the Asian region are emerging to play a global role, major global players faced with saturated markets in their home turf would seriously be muscling for dominance in the region for next level of growth.

Therefore, the ability to attain supremacy in the Asian markets will determine the winner in the chemicals/commodities industry.

Major global trends in the chemical industry:

The way research is done and technology acquired is changing. The changes are in two major areas -- organisational as well as in the content of the research.

The organisational changes will result from the increasingly global make-up. The classical model of chemical industry research -- discovery work in a single company's laboratory, in single discipline, followed by 5 to 15 years of product development -- will be of limited usefulness in the future.

Instead, a global company will have to have a "global, collaborative approach" to research and development to meet the constantly growing demands for a higher quality of life in developed and emerging markets around the world.

That new model for research will be built on the convergence of disciplines such as chemistry, biology, materials science and engineering.

Impact on the Indian chemical industry and imperatives:

The Indian chemical industry has been a marginal player in the global arena. With $ 22 billion in terms of output, it forms only 1.5 per cent of the global chemical industry. In terms of trade, the participation has been only 1.3 per cent of the global trade in chemicals. The chemical industry in India contributes to about 7 per cent of its GDP and 5.6 per cent of its exports.

But it is highly fragmented with 6,600 firms.

The chemical industry in India is likely to be on the high growth phase in the next few decades with growth rates at around 15 per cent per annum, growing at double the Asian growth rate and five times the worldwide growth rates. The low per capita consumption of polyester fibres of 0.7 kg against the world average of 2.2 kg, only 1.9 kg of plastics consumption per capita against the world average of 16 kg, gives us tremendous hope for the future.

We could be looking at several hundreds of billion dollars of chemical business 15 to 20 years from now.

In the coming millennium, India has two choices -- either it faces the powerful world of the super majors or surrender the Great Indian Opportunity to them. There are no soft choices.

The India strategy should be to develop a new mindset to match dynamic external initiatives. Thus, India needs to plan for world class initiatives in manufacturing, business and support functions. We need to benchmark ourselves with the best in the world and leave our cottage industry mindset behind.

We also need to focus on niche areas in the Indian market that give competitive strengths. Also international competitiveness is a must in all ventures.

And finally, since chemical plants are cost intensive, we must leverage India's significant capital cost advantages over the developed world.

India has the opportunity to create history in the chemical industry in the next few decades. The large domestic opportunity, its inherent strengths in intellectual capital, access to global financial markets, strong knowledge of chemistry, strength in software engineering and its rich biodiversity provide us this great opportunity to make India a global force in chemical industry.

Mukesh Ambani, vice-chairman and managing director of Reliance Industries, delivered the Foundation Day lecture on "Chemical Industry in the Next 50 Years" at the National Chemical Laboratory golden jubilee celebrations in Pune on Monday.

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