Executive Search Trends: Geopolitical Shifts Create Opportunities In The Indian Chemical Industry

Now is the time to invest in India for entrepreneurs, overseas companies, and domestic manufacturers

The chemical industry is an indispensable part of India’s growth, and it is one of the most knowledge-intensive and capital-intensive industries. The Indian government has called the chemical industry a key area for enticing foreign investment.

More than 10%

Annual growth rate of India’s chemical industry

Annual growth of over 10% is the norm in the Indian chemical industry, and this could even accelerate over the next five years. This represents opportunities for both domestic and overseas chemical manufacturers. However, it is essential to understand what’s driving this growth.

Two geopolitical shifts are underway:

• Stricter environmental regulations and their increased enforcement are shrinking China’s chemical manufacturing base.

• Trade conflicts, particularly between the United States and China, plus the COVID-19 pandemic, are forcing a reassessment of global supply chains.

“Government initiatives encourage investment and expansion while simultaneously making India a more attractive place to do business.”

Domestic chemical consumption is also rising, driven by growth in the construction, textiles, and automotive industries. Government initiatives encourage investment and expansion while simultaneously making India a more attractive place to do business. Meanwhile, emerging digital technologies and a growing emphasis on sustainability are changing the manufacturing landscape.

Understanding the Indian Chemical Industry

India has a diversified chemical industry classified broadly into basic chemicals, specialty chemicals, agro chemicals, and pharmaceutical chemicals. Currently valued at around $160 billion, this has grown more than 10% for each of the past 10 years. This puts India in sixth place globally revenue-wise. India ranks third in agro-chemical production, accounts for 16% of global dye production, and has a significant pharmaceutical manufacturing industry.

5.5%

India’s total exports constituting chemicals

Around 5.5% of India’s total exports constitutes chemicals. India has a well-established presence in the export market of dyes, pharmaceuticals, and agro chemicals. India exports dyes to Germany, the United Kingdom, the United States, Switzerland, Spain, Turkey, Singapore, and Japan. The chemicals industry in India is the largest consumer of its own products, consuming 33% of its output. Domestic consumption is set to rise with favorable growth trends in the chemicals industry.

“While some 50,000 firms are engaged in chemical manufacturing, most are small, family-owned businesses with revenues of less than $70 million.”

While some 50,000 firms are engaged in chemical manufacturing, most are small, family-owned businesses with revenues of less than $70 million. The 400 members of the Indian Chemical Council (ICC), which includes several multinationals, account for some 85% of total sector production. Some foreign businesses have established either joint ventures or their own operations, but many of the largest players are domestic companies.

Nelson Corda, Managing Director of India Ashland Specialty Ingredients, says the ease of doing business in India is a key performance indicator for the government. “It is directly linked with their Make in India initiative for bringing new business opportunities to the country. Seizing evolving opportunities in the specialty chemicals space could positively differentiate India’s chemical companies and the industry.”

Favorable Characteristics

As a nation of 1.3 billion people, India is known for low labor and capital costs and a highly skilled cadre of predominantly young engineers and scientists. With a conducive business environment and policies, India is becoming the hub for chemical industries. Various socioeconomic conditions like education and skilled manpower, government policies, and environment, etc. have been a great contributor toward industry’s growth.

India’s chemical product exports have increased in recent years, and the government sees a huge opportunity for India to leverage its talent pools and available resources to propel the sector. According to the annual report published by the Department of Chemicals and Petrochemicals, the chemical industry (including fertilizers and pharmaceuticals) in India was worth $178 billion as of 2019 – and is expected to reach $304 billion by 2024-25 at an annual growth rate of 9.3%. Fertilizer production increased 6.3% in October 2020 over October 2019. Its cumulative index increased 4.1% during April to October 2020-21.

The trend in the production of selected major chemicals is depicted in Chart 2, which shows continuous growth year-on-year.

The Department of Chemicals and Petrochemicals has set its goal to formulate and implement industry-friendly policies for achieving growth and development. Additionally, the government is eyeing public-private partnerships to further boost investment.

India is a growing economy and has vast opportunities for multiple industries to sustain and thrive. A report by McKinsey notes that despite a late 2019 dip, “a long-term perspective indicates that India has averaged an annual GDP growth of 7 percent for the last 30 years.”

“The Middle East is the world’s source of petrochemicals, and India’s proximity to the region makes it a favorable destination for foreign investment.”

Coupled with the government’s various steps and initiatives, India has a geographical advantage, as well. The Middle East is the world’s source of petrochemicals, and India’s proximity to the region makes it a favorable destination for foreign investment.

Support for Industry

India has long been known for government bureaucracy, but this is changing under the current leadership. Recent reforms have served to reduce regulations and bureaucratic processes and caused India to rise in the World Bank’s “Ease of Doing Business” Index.

Today, recognizing the potential of the chemical industry, the government and ICC have a goal of doubling revenues to $300 billion by 2025. To help, a host of government initiatives have been rolled out to support manufacturers in various industry sub-sectors. These include:

• Petroleum, Chemicals & Petrochemical Investment Regions (PCPIRS), where the government is investing in infrastructure and services

• A new Central Institute of Plastic Engineering & Technology (CIPET)

• Plastic Parks to support growth of the plastics and polymers sector

• Tax deductions for R&D

100%

Amount of foreign direct investment (FDI) supported by the government

Notably, the government permits 100% foreign direct investment (FDI) and is broadly supportive of mergers and acquisition activity.

The Department of Chemicals and Petrochemicals is implementing the following schemes under the National Policy on Petrochemicals:

(i) National Awards for Technology Innovation in the petrochemical and downstream plastic processing industry: The department has come up with a scheme to reward meritorious invention and innovation in the petrochemicals and downstream plastics processing industry. The department has been providing a grant-in-aid to CIPET each year for administering the award scheme.

(ii) Setting up Centers of Excellence in Polymer Technology: The scheme aims to improve the existing petrochemicals technology and research in the country and to promote development of new applications of polymers and plastics.

(iii) Setting up Plastic Parks: The scheme aims to set up needs-based Plastic Parks, an ecosystem of state-of-the-art infrastructure and common facilities enabled by a cluster development approach to consolidate and synergize the capacities of the domestic downstream plastic processing industry.

The government is further considering launching a production-linked incentive (PLI) scheme in the chemicals sector to strengthen domestic manufacturing and exports of chemical products. The Department of Chemicals and Fertilizers plans to take a more consultative approach in framing policies aimed at supporting the industry and stakeholders.

Sanjiv Vasudeva, Managing Director for India at INEOS Styrolution India Limited, says the rollout of PLI schemes for key end-use sectors will boost petrochemical consumption in the country. “Among the sectors earmarked, seven sectors like mobile phone manufacturing, auto and components, medical devices, textile products etc., use a significant quantity of petrochemicals,” Vasudeva says. “The estimated outlay of Rs 1.41 lakh crores augurs well for the petrochemical industry growth.”

The Impact of Geopolitical Shifts

As China industrialized, many chemical manufacturers paid scant regard to environmental and safety concerns. That led to worsening air and water pollution and numerous high-profile fatal accidents such as the March 2019 explosion at a chemical plant in Jiangsu Province.

As a result, existing regulations are now being enforced rigorously and new regulations have been introduced. Many manufacturers have been shut down completely – in some cases, entire industrial parks have closed – and others have been relocated.

A consequence of this crackdown was that major European, North American, and Asian consumers of bulk and specialty chemicals found that their sources had disappeared overnight. In response, they are now sourcing elsewhere, one of the main beneficiaries being the Indian chemical industry.

A second shift only now getting underway is a realignment of supply chains. For many years European, North American, and Asian manufacturers have looked to China as a source for low-cost chemicals of every type. However, since 2017 and the U.S.-China trade war, these same customers have been concerned about possible tariffs that could negate cost savings.

As a result of these issues, consumers of chemicals are searching for new suppliers for their manufacturing processes and as end products. The opportunities in the Indian chemical industry takes two forms:

• Satisfying rising domestic demand (with domestic production, not imports)

• Increasing exports, particularly in the specialty chemicals sector

From the perspective of chemical manufacturers, domestic growth is driven by consumption of paints, adhesives, dyes, and polymers in the construction, textiles, automotive, and consumer durable industries. In addition, as McKinsey noted, a shortfall in domestic petrochemical production is being met through imports. This is something the Indian government appears eager to address.

“Considering exports, while the emerging supply chain realignments present opportunities for all producers, industry observers expect specialty chemicals to be the big winner.”

Considering exports, while the emerging supply chain realignments present opportunities for all producers, industry observers expect specialty chemicals to be the big winner. Barriers to growth are the capital-intensive nature of chemicals manufacturing, and for those in the specialty sector, the extensive need for R&D. Both of these disadvantages are faced by smaller producers or family-managed businesses. This might present investment opportunities at large but family-owned firms are sometimes reluctant to accept outside partners.  The impact of new waves of Covid related lockdowns and slowdowns also needs to be observed closely.

Changing Regulatory Norms in India

The Indian chemical market is set to change and evolve. More and more private players are looking for ways to enter the Indian chemical sector, and the government is willing to ease regulatory norms to encourage investments from overseas. A recent World Bank report noted that a series of reforms has improved the environment for businesses and entrepreneurs. These include:

• Simplifying the process of getting construction permits

• Improved bankruptcy and insolvency protection for creditors

• Making it easier to pay taxes

• Ease of doing business

While manufacturers would welcome more changes, it is clear the current government is moving in the direction of a more business-friendly environment.

Disruptive Impact of Emerging Technologies

Industry 4.0, which adopts digital technologies to increase the capture and analysis of manufacturing data, promises a radical transformation of every branch of manufacturing. In “Catalyzing The New,” global consulting firm Accenture says, “40% of chemical companies are using digital technologies to increase efficiency and 32% are applying digital technologies to drive growth. But, perhaps unsurprisingly, it’s the 11% which are doing both that are also financial high performers.”

These digital technologies encompass:

• Artificial intelligence and machine learning that improve process performance and support new product development

• Digital twins of virtual manufacturing plants that enable low-cost, risk-free work on process optimization

• Data analytics to increase plant utilization and lower costs through identification of unrecognized patterns

Notably, geography is no barrier to the adoption of these technologies. Thus for chemical manufacturers in India they are both an opportunity and a threat; the options would be to deploy them and gain a competitive advantage or do nothing and watch others advance.

Waste Management and Sustainability in India

The recurring problem of waste management has become a matter of concern. Petrochemicals, pharmaceuticals, chemicals, fertilizers, and general engineering produce hazardous waste in considerable quantities. The study also states that approximately 10 to 15% of industrial waste in India is hazardous. India produces approximately 51.1 MMT of waste annually, with around 7.46 MMT of hazardous waste generated from 43,936 industries. Approximately 3.41 MMT (46%) is landfilled, 0.69 MMT (9%) is incinerated, and 3.35 MMT (45%) is recycled. Quantities of solid hazardous waste are rising at around 2–5% annually. Coal ash from thermal power stations accounts for more than 70% of all industrial hazardous waste. These types of waste pose serious health threats to the population as well as to the environment.

The management of hazardous solid waste in the country is largely ineffective due to multiple factors including limitations in governance systems, inadequate treatment facilities, limitations in compliance and regulation, and a shortage of trained and skilled stakeholders. Could Indian chemical manufacturers meet the same fate as their Chinese rivals? This is a burning question, but it seems unlikely. Environmental protection is enshrined in the Indian Constitution, and the government is taking multiple initiatives to tackle climate change.

Several companies are developing technologies for management of non-hazardous/ hazardous industrial waste through an economically feasible and environment-friendly method.

According to hazardous and other waste (management and transboundary movement) rules from 2016, state governments need to allocate land for recycling sheds for hazardous waste, ensure proper registration, skill development, equipment supply, and payment for workers engaged in the collection of hazardous waste, and the establishment of monitoring agencies to check the production and recycling of hazardous waste from each state. The Environment (Protection) Act from 1986 is a key piece of legislation to protect and improve the environment and regulate the management and handling of hazardous substances and chemicals. There are also various rules under this act.

In addition to several acts and policies, the government is taking various steps to dispose hazardous waste more effectively.

• Setting up a quality management system: Quality management is an important aspect in hazardous waste management system that should start with the procurement of raw materials through process optimization, waste minimization, final treatment, and disposal.

• Setting up common hazardous waste treatment, storage, and disposal facilities: Common facilities are proposed to help small and medium enterprises (SMEs) to dispose of their hazardous waste in an environmentally safe manner. Common facilities have been planned on the polluter-pays principle. An integrated waste management facility has all the components right from the collection, transportation, centralized storage, treatment (physical, chemical and thermal) and landfill disposal.

India is increasing production of renewable energy. A report from the UN Division for Sustainable Development Goals noted, “Globally, India stands third in renewable power, fourth in wind power, and fifth in solar power.” To achieve emissions-reduction targets, India had a goal of installing 100GW of solar power capacity by 2020. In addition, to help address air pollution, public transportation infrastructure, although still lacking, has grown substantially and will continue to do so.

Growth Prospects and Opportunities Ahead

For many years, consumers of chemical products have looked to China as a low-cost source. Today, that view is changing. Increasingly, India is seen as a viable source of bulk and specialty chemicals. For those in the industry, opportunities take two forms:

• The Indian economy is on a growth trajectory and the government is actively trying to replace imports with domestic production.

• While some domestic chemical producers lack the resources required to take advantage of export opportunities existing in Europe, North America, and Asia, this creates opportunities for others. As the McKinsey report notes, “India’s chemical industry remains an attractive hub of opportunities.”

Despite having a conducive environment for the chemical industry to thrive, managing talent poses a big challenge. Jobs in this industry are not as lucrative and fancy as tech jobs in upscale offices. The experienced pool of talent is retiring, and new talent misses the skills set and grit required for this industry. Developing the new generation of leaders will require a thorough and well-considered effective strategy to attract and retain talent. Leaders will have to work more closely with human resources departments, education and industry bodies to develop contemporary talent management practices. This might be the beginning of an evolution in the industry to rethink new strategy to make it appealing to skilled talent.  

Another roadblock that chemical industry will have to overcome is gender inequality in the workplace. Even as women are progressing in every industry, traditional industries like chemical and manufacturing have remained tacitly male-dominant. Having a diverse workplace will help traditional industries to innovate, grow and adapt to the changing work environments and a new generation of leaders will have to be the flag bearers of developing a diverse workplace. Achieving diversity and inclusion in the chemical industry needs to be on everybody’s agenda these days, and companies are willing to change their policies to promote diversity.

There is every reason to expect continued strong growth in the Indian chemical industry. Opportunities exist for entrepreneurs, overseas companies, and domestic manufacturers. While the regulatory environment has historically been difficult, this is changing and will most probably continue to improve. This is a great opportunity for the industry to expand in the global supply chain. Indian has a large and youthful population of well-educated technical specialists able to support investment in and growth of the industry. There is no reason to expect a change in direction, but those who move on new opportunities faster tend to reap greater rewards.

About Authors:

Tojo Eapen is a Partner in the India office of Stanton Chase. He brings a variety of around 20 years of experiences, including 10+ years of global HR experiences in Europe and the U.S.

Chandan Kumar is an Associate Partner in the India office of Stanton Chase. He has over 18+ years of experience, with 10+ years in Executive Search consulting.

Veena Pandey heads the editorial and content function for the Stanton Chase India offices. She has an extensive background in both qualitative and quantitative research.