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Panchakanya Focused
Expansion
Expanding business is tricky in a small market economy like Nepal. In the process of expansion, many businesses may be found involved in wide range of products and services from noodles to roofing sheets and rice milling to information technology. But there still are examples of business houses focusing on single line and expanding strategically on the same line.
Panchakanya Group is such a case.
“In fact our strategic focus is two-pronged,” says Pradeep Kumar Shrestha, the Managing Director of the Group, summarizing his company’s strategy. “First, we are expanding only on those fields that are related to the production and supply of basic construction material, and second, we are focused on quality.”
Panchakanya as a business house started around 30 years ago when Pradeep’s father Prem Bahadur Shrestha, who is still active in business as the Chairman of the Group, ventured into a saw mill and rice mill at Jhapa in far eastern Terai. He soon had to search for new business opportunities when the government came out with policies discouraging the use of timber construction material so as to protect forest.
But Prem Bahadur had already decided that his business expansion would be in the construction material field itself as he had learned by then that such was a basic industry with a very long-term prospect for a developing country. That was how Panchakanya started iron rerolling mill. And he selected Bhairahawa of the western Terai as the base for the new business. Though there were difficulties in doing business with a base there as the East-West highway was not yet complete, there were opportunities as well because the western region did not have any such industry till then while there was one each already in the eastern and central regions.
Immediately with the start of iron rerolling mill, Panchakanya also started a polythene pipe unit and later a steel mill. Now it has five units located in the same premises (Panchakanya Industrial Complex) manufacturing different types of construction material – reinforced steel bars, HDPE pipes, PVC pipes, SWR PVC fittings, MS Wire rods and allied products including nails.
Eventually the Group acquired Nepal Bitumen and Barrel Industry Ltd. when it was offered to the private sector by the government under its privatization program. “It made sense for us to acquire that unit as bitumen is one of the construction material used mainly in road construction. And the country was going on a massive drive to expand road network making emulsion production a promising business,” says Shrestha. “Compared to most of the privatized units, our bitumen unit is doing much better,” he adds.
“We focused on the basic industry. Though there were several proposals presented to us by other parties to partner into consumer goods manufacturing, we rejected them because we believe that such industries would have a short life whereas basic industry would be long-lived.”
However, it is not that the Group did not go at all in other sectors. For example, it also had a rice mill at Jhapa but that had to be closed after Nepal turned a net importer of rice from earlier net exporter. Moreover, all the big rice mills had to close down because of the entry of small and smart rice mills imported from China.
So the rice mill property was converted into a carpet factory. That time the country was facing foreign exchange crisis and importers had to participate in bids to get the import license. As the Group had to import the raw material for all its construction material units, this situation made imports expensive and unpredictable. It induced the Group to go for an industry that would earn it foreign exchange. And when it started exploring the possible areas where it could enter for export-oriented units, it noticed that carpet was doing good and many workers in the carpet factories in Kathmandu valley were from Jhapa and Morang districts. And as the carpets had to be exported by sea, we thought Jhapa would be a better location than Kathmandu because Jhapa was nearer to the sea port. So, the Group set up a fully integrated carpet factory there employing some 600 people. “But we failed to notice that the buyer first came to Kathmandu as it has the only international airport of the country. For him it was at least two more days to go to Jhapa,” says Shrestha explaining the reason why the Group’s effort in carpets failed.
Therefore, any expansion plan of Panchakanya now will be in construction related industry only, according to Shrestha. “We are thinking of going for a cement unit but which will be based on local raw material unlike some recently opened cement units which are importing clinker and packing them after grinding,” he says indicating about the field that his Group may enter in the near future.
However, the prospect for expansion in steel industry is limited. “Backward integration is not possible in iron as iron mining is not yet economically feasible in Nepal. However, there is some possibility for forward integration. For example, there should be good prospect for prefabricated steel structures or reinforced slabs. May be we will go into that field some time in the future,” he adds.
Quality Focus
Despite its wide range of products, Panchakanya Group is known more for reinforced steel bars and the market for this product is highly competitive with a large number of other units producing the same product. Once there were 25 steel mills in Nepal. On top of that, Panchakanya is priced higher compared to all the other brands of steel rods. What is the secret behind the success despite these odds?
Shrestha names ‘quality’ as the main success factor. And his point is proved from the fact that his Group has been the ‘first’ in several respects in the quality field. For example, it is the first to get the NS mark, the national quality certification of the country. It is also the first to get the NS Quality Award that the national quality certification agency has been presenting to the best among the products that have received NS mark. Similarly, Panchakanya was the first steel factory to get ISO certification. Equally importantly, it is the first to introduce TMT steel technology in the country.
Right now Panchakanya is facing the problem of competing with low grade products imported or manufactured in Nepal itself. “People set up rerolling mills when they saw that there was shortage of the product in some years. But they were myopic. They could not see that those shortages were only temporary,” he says. So many of those 25 units have now closed down. But some units have been producing rods using scrap as the raw material. “To compete with substandard quality product by entering into price war is very difficult. So, we don’t want to enter into price war. But as customers are cheated by lower quality, we suggest the government to introduce a system to distinguish substandard bars from higher quality bars,” he says.
Failure of Carteling
About 15-18 years ago, there used to be a price war among the iron rerolling mills in Nepal. In the process, the quality used to be compromised. To avoid that, they entered into an informal cartel dividing the market among the players. “Though it seemed all right as the market then was small and our own operation was small and such an arrangement helped to save in transport cost, it invited many other problems. Looking at the geographical monopoly that each player was enjoying under this arrangement, a number of new players entered this industry. More importantly, as we were making quality product even then, we felt that we were not benefiting from the cartel. So we decided to break from it and go on our own way. And that was very important turning point in the history of our Group,” he says.
Days ahead
In view of Nepal’s recent membership in WTO and SAFTA, the steel bar industry is likely to face more competition from imports. “In steel bars Nepal is self-sufficient already. So, it should be included in the sensitive list for SAFTA. Otherwise, the imports will displace the domestic industry because Nepali producers will have lower economy of scale,” he fears.
However, it is not that Nepali steel bars cannot be exported at all. Once, Panchakanya had started exporting to Tibet. But soon, also the bars made of scrap started being exported there by other manufacturers. As they sold cheaper the Tibetans were quickly attracted to them without knowing that they were made from scrap. Soon they found about the lower quality of such bars. But they concluded that all the bars from Nepal were of lower quality. Thus the entire Tibet market was lost. However, Panchakanya is still exporting plastic products to Tibet and doing satisfactory business there.
Newer products introduced recently by Panchakanya are, however, being exported even to India and Bangladesh. “Now we are targeting Bhutan market as well,” Shrestha adds.
To remain ahead in the market and sustain even under the WTO and SAFTA regime, Panchakanya is now going ahead with a number of strategies. According to Shrestha, one strategy is creating a corporate image and the other is brand building. Similarly, trainings are being provided to the masons and seminars held for the engineers, the groups that influence the buyer’s decision. “So far, we have already held seven or eight such seminars enlightening the technical people about the TMT bars,” he informs.
Earlier, the company was using “PK” as its trade mark, but as these letters were not felt to be conveying the clear image about the product, the company nowadays is using “Panchakanya”.
To convince the people about the quality and to help the management trace the origin of the product, it has a system of using codes in each bundle of bars. “In case of any complaint about the product, this system helps to know the batch of the raw material from which it was made and also the people involved in making them. This has proved very useful in quality control,” says Shrestha.
Apart from existing lines of business, the Group is also thinking of setting up a training institute for the construction workers. “Many people are going abroad these days as construction workers but they have no proper training and therefore they are not getting high paying jobs. We think we can help them by providing the trainings. But this we intend to do more as a charity than as a business,” he adds.
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