"Construction growth has helped paint industry."
Indrajit Lahiri, the General Manager of Asian Paints Nepal, the subsidiary of India 's Asian Paints, for the last three years, assesses the situation of the paints industry and foreign investment businesses in Nepal . Excerpts from an interview:
How is the growth in the Asian Paints Nepal 's business? Would you mind sharing some key numbers?
We are quite satisfied with our performance of the last two years. During this period we have witnessed high double digit growths. Given the overall GDP growth and the construction sector growth, we feel that we have done much better than the industry as a whole.
In terms of the bottom line profitability also we are fairly satisfied with the kind of performance we have had. This year (2006) again we are targeting a high double digit growth. But the achievement, of course, depends on how the situation evolves. However, in the first month, we have managed to achieve that.
What are the reasons behind such achievement?
Number one is that the construction industry has also grown. The FNCCI data of the past three years have shown that there is high single digit growth in this sector. More migration towards larger cities, remittance income going into construction, increasing value of property especially in Kathmandu luring people to build an asset etc. are what have propelled growth in this sector.
In this connection, the paints industry has also grown as it has a strong link to the construction industry. As another development, Asian Paints has been able to take a certain amount of additional share within this new industry.
In difficult times in economy, many consumers who know about a company which has a reputation for quality may not take risks with unknown brands that are trying to establish themselves. We have been in Nepal for close to 22 years. So, there is a good probability that people choose to purchase our brands.
The third important factor is that we have taken a lot of actions in the market. We have increased the visibility of our brands. Other companies and people are talking about it. Thus it has given us good mileage. Our innovative schemes such as dealer loyalty programmes and consumer schemes have also given us mileage. There are certain product categories such as emulsion paint and water based paints in which we have focused and the consumers have upgraded to these products. Distemper is a product category where we are very strong. The category below this in interior paint is the cement paint. Because of changing lifestyles and aspirations, many consumers are upgrading very quickly from cement paints to distemper. We are there in the cement category as well but we are not that strong in this category. It is more difficult to produce distemper of a consistent quality than to produce consistent quality cement paints. So, the relative competition in distemper is less. Therefore, most of the growth in distemper category, I believe, would come to Asian Paints. Over the last 2-3 years distemper sales of our company have grown more than 40-45 per cent in terms of volume.
Is Asian Paints planning on any expansion by way of acquisition or otherwise in the paints industry itself or in other fields?
We are actively looking at expanding our capacity now. We obviously need the government's approval for that. Right now our capacity is just sufficient enough to meet our needs today and it is falling short in certain cases.
As of now we are not really looking into expanding our capacity through acquisition. Our existing location is in Hetauda. If we get acquisition opportunity there it would be quite likely. But chances of that are not very bright at this stage. In paints industry having two manufacturing locations makes sense only when the volumes are much larger than what we have today. Therefore, as of now we are planning for internal expansion of capacity at our existing location. It is at the early stage. Maybe, in 2006 there might be development in that regard.
The expansion of capacity we are considering would be a significant increase above the existing capacity. We will also bring in a great deal of machinery. With this expansion in place we may not go for it again for the next 3-4 years.
Your company's recent innovation in distribution and retailing by way of changing the outlet ambience is being replicated by other paints companies as well. What further marketing innovations are being contemplated upon to maintain the Asian Paints lead?
One thing that I have noticed is that people are very closely observing what we are doing and they are replicating. This is a part of competition. It happens in a free market. We opt for continuous innovation to be one step ahead of others. One definite thing we are planning to do is to take retailing to an entirely different level. The idea is to provide retailing experience to consumers which they may not be able to have otherwise even within the immediate vicinity of the country. For that we can leverage our global reach that we have today. But the fruits of that will come after some time.
When Indian companies first started setting up their subsidiaries in Nepal , one major market targeted was north India . How is Asian Paints Nepal benefiting from this market?
From the very beginning our objective has been to serve the whole of the Nepali domestic market. We have actually continuously focused on this. Northern Indian market has actually never been tapped by us at all. One of the reasons, of course, is that taxation and customs duty structures are not conducive for us to compete with the prices which can be offered in Northern India or India as a whole. The other issue is the plant sizes in India are significantly larger. As our objective has been to serve the Nepali domestic market we didn't build our plant at a very large scale. As of now, with the kind of customs duty regime we have, we are not immediately looking at the export market to India as a big opportunity. In case substantial duty structure changes are to come in there could be opportunities there.
It is perceived that the paints industry has little value addition in Nepal as almost all the raw materials are imported. How is the actual situation?
Definitely, the fundamental raw materials for paints are available in Nepal only to a very limited extent. Paint has got some four fundamental categories. One of them is 'solvent' which is either mineral water or mineral turpentine oil or water. Then there is an element called binder. That's a specific chemical. There is the pigment that gives colour to the paint. The fourth is additives, which includes anti-bacterial, anti-algal agents, drying agents etc. Other than these four elements, there is also the issue of the packaging material. Packaging material is available in Nepal in plenty. But only certain amount of other materials is available. So the majority of our raw materials are coming in from outside.
This is really a function of the kind of mineral resources that are available. In paints, much of the value addition or the intellectual capital is created by so-called technological expertise. These formulations are actually secrets of intellectual property.
Formulation is where the real art of the paint comes from. It is like the formula of how you blend liquor or how you formulate the food products. There are about 17-18 paint manufacturers in Nepal . As long as you have the technology and formulation coming in, and as long as the sales are made within Nepal , I don't think there is any risk of losing out. Even if you have all the raw materials, there are some specific requirements, such as special machinery, special processing, timing factors etc.
Paint technology is not very complicated. In fact, there are very few chemical reactions in paint manufacturing. More of the processes are physical reactions. From that perspective, I would think there is a lot of industrial activity which is associated with the paint manufacture. Today paint companies are going in for quality certification like the ISO 9000 certificate. They are going in for environmental friendly or cleaner productions, better operations in management practices. All these add to the growth of manufacturing capability.
Directly and indirectly I think that having a good thriving paint industry here with 17-18 manufacturers and a reasonably large domestic market has been beneficial to Nepal as a whole. It's not merely a screwdriver-like technology or merely a trading business. We are building knowledge and capability. Obviously, there is the issue of employment also. It has definitely contributed to the industrial development of Nepal .
A cursory view across the businesses with foreign investment indicates that those businesses are successful in which there is a strategic local partner while those without such partner face frequent difficulties. What has been your company's experience?
Asian Paints ( India ) has a majority stake and the rest of the equity is dispersed among a group of local shareholders, all retail investors. Some of them are dealers. Some of them are from other walks of life. About 40 per cent of our total equity is held by them. The local shareholders have provided us with suitable help. We have always dealt with them in a fair and transparent manner. We have always kept them informed of the company's actions and have detailed interaction. We are satisfied with the quality of investor relationships we have in Nepal presently.
How is the overall situation of joint venture companies in general at present?
Regarding this issue the key factor will obviously be how the economy performs in the next 4-6 months. Inflation rate is going to be of paramount importance. How the sentiment is in the immediate period is also very important. In our industry [paints] we feel that there is certain amount of hope that the industry will do well even this year.
From the perspective of joint venture, overall health and robustness of the economy, especially the inflation, and what sort of regulatory actions are coming, would be important. In the longer term, the impact of SAFTA and WTO are what we will be watching quite closely. Our industry is very much working capital intensive. It is also quite dependent on liquidity for recovery of dues from the marketplace. If there is strong regulatory framework in place for easy settlement of disputes and easy recovery of bad and difficult debts, then the industries as a whole would benefit. Right now there is a bit of burden on industries because of bad debts. There is no strong regulatory mechanism, for example a debt recovery tribunal, for industries, in place. If there is such a body it will be of big help for the kind of industry that are work capital intensive.
In dealing with the government bureaucracy, we know that there is problem of duty drawback also. What other problems are there in such areas?
One thing is definite that with the provisions of the WTO and SAFTA implementation manufacturing in Nepal will face high levels of competition. So it has to be more linked and far more efficient and effective. Inevitably the country is going to face the large impact of globalisation. So, from this perspective some factors are crucial for businesses, whether joint venture or otherwise. First, you must have very high quality talents. Today Nepal needs managerial, technical and financial talents. There are a lot of capabilities here. If we are able to retain that and use appropriately, large part of this issue of whether manufacturing industrial development can take place, will also be addressed.
I think the days where we could look for such sops as customs duty related benefits or financial incentives are over. Competition in the future will be based on the fundamental strength of the industry. The nation may not be able to provide such non-sustainable sops. Moreover, you may not be able to use these sops as the competitive tool. Rather, more transparent laws and decision making process in the government would help the industries.
However, Nepal is progressing. Reforms are taking place. My feeling is that if the 'talent' issue is resolved, the industrial activities will definitely head up. That is something which should be a very high priority for the government. The government should consider ensuring the talent required for Nepal 's future industrial development is either available within Nepal or trained outside Nepal and brought back. Migration of skilled manpower and capability is a source of worry, even for us joint ventures.
Decision making process in the bureaucracy could be improved, but one of the things which is a big blessing for all the businesses is that the accessibility to the bureaucracy is lot easier in Nepal . What is needed is improving decision making and processing of information and transactions at the lower level of the bureaucracy.
Professional Managers' Forum started with your active initiation is still an informal group. How has been the experience with this initiative so far? Are there plans to make it a formal institution?
The forum was originally started as a platform to share management knowledge. It has done very well. So far we have found out that with its loose and informal structure, it has really facilitated the exchange of learning and experiences of various members.
There are already certain other bodies which have practicing managers as members. The forum can interact with management institutes across Nepal . This could also promote fresh ideas. That's one of the ways this forum can contribute. If we formalise it, there could be a chance that it might become more of a ritual rather than actually enriching the professional knowledge and capability of each of the members. The members can learn from each other more freely if it is informal.
