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Dow Chemical to exit petrochem biz in India

Dow Chemical to exit petrochem biz in India
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First Published: Wed, Dec 24 2008. 12 07 AM IST

New script: Ramachandran to focus on speciality chemicals. Abhijit Bhatlekar / Mint
New script: Ramachandran to focus on speciality chemicals. Abhijit Bhatlekar / Mint
Updated: Wed, Dec 24 2008. 12 07 AM IST
Mumbai: Dow Chemical Co., the world’s second largest chemical manufacturer, is going through a restructuring, closing 20 plants, suspending work at another 180 factories, and laying off 5,000 of its 46,500 employees across 175 countries.
In India, too, Dow Chemical International Pvt. Ltd is writing a new script. Ramesh Ramachandran, who took over as president and chief executive of the company’s India operations last year, wants to exit the petrochemical business in the country to focus on speciality chemicals. The company currently buys petrochemical products from its parent for trading in India.
New script: Ramachandran to focus on speciality chemicals. Abhijit Bhatlekar / Mint
Margins from the petrochemical business are terrible, he said in an interview, since the company does not have control over raw materials, unlike Reliance Industries Ltd, the largest petrochemical manufacturer in the country.
The petrochemical business contributes about 30% of Dow Chemical India’s projected sales of about Rs2,500 crore for the year through end-March.
But unlike its global parent, the company is not planning layoffs in India. Ramachandran, in fact, wants to more than double the company’s headcount to about 2,000 next year from 960 now, to focus on innovation, and design and develop technology for the speciality chemical business in India at its three centres.
“The talent required to innovate and come up with these technologies and implement them is simply not available outside. That is why (we are moving) technologies and centres of excellence here. The cost is not so low. But the quality of talent is very high here,” said Ramachandran. “Once we have the right people, we believe that most of the problems have a way of going away. And we have (the) market going for us.” Edited excerpts:
How has Dow Chemical been growing in India?
Over the last three years, our growth rate has been around 30%. This year, we will be close to finishing with annual revenues of around Rs2,500 crore.
I do believe there is enormous optimism where the company can go as far as technology growth (for making speciality chemicals) is concerned, as opposed to commodity growth.
You also have a large share in the commodity business.
No. That is one of the biggest, I would say, misimpression out there about the company. If you really look at it, our commodity portfolio will be around 30%, and 70% is in speciality chemicals. Growth in India on the commodity business is very hard to come by because competition is extremely good. Second, it is not very profitable...the margins are not very high over here for commodity products. The segment which is profitable is one that is able to respect technology. (In the) long term, it is difficult to have viable commodity business here.
Are you bearish on the margins in commodity?
If you look at commodity plastics today, there is no differentiation. In our industry, the only person who makes money is someone who has a feedstock advantage. When we say feedstock advantage, (we are referring to) someone who is back integrated to the refinery, who can make propane or naphtha. We are not back-integrated to any petrochemical feedstock except in Kuwait, where we have a joint venture, and some of the ventures in Malaysia.
We are able to move products that have a technical barrier as opposed to a feedstock barrier. The volatility of commodity that is cost-based is that you can move investments here as there is growth in India. No doubts about it. But the margins are terrible.
Will you then relook the 30% share of the petrochemical commodity business in your portfolio?
Absolutely. Almost the entire portfolio of commodity plastics is going into the joint venture with KPC (Kuwait Petroleum Corp.). Dow has formed a 50:50 venture with Kuwait Petroleum Corp. that is slated to launch on 2 January, with headquarters in Michigan. The investment is nearly $19 billion for that joint venture. In India, 90% will be speciality chemicals as soon as the venture takes off and 10% commodity business. Even that 10% will be for internal trade purpose.
Who are your prospective customers for speciality chemicals?
Paint manufacturers, pharma companies. We don’t make the ingredients that go into medicines but only the excipients, which are the polymers that help the drug to be released on a steady basis. Food, cellulose, bio-medicals, cosmetics, automotive cushions and water treatment. The underlying theme is (that) chemistry and technology play an important role, and that is why speciality chemicals are a huge market for India.
Your parent (Dow Chemical Co.) is restructuring its business and cutting jobs. What do the plans in India mean for the parent?
India will play two roles. One, the country is growing at 6%. People will kill for that number. We can debate whether it is 6% or 8% but when you hear North America and Europe are on negative growth, 6% is very attractive. Second, to cater to a large market across the board, there has to be technology to solve problems. I agree pure commodity band will not be attractive, but if technology solves problems at the low end, the opportunity is high.
The other area is the people, however mundane it sounds. The talent required to innovate and come up with these technologies and implement them is simply not available outside. That is why (we are moving) technologies and centres of excellence here (India). The cost is not so low. But the quality of talent is very high here. Once we have the right people, we believe that most of the problems have a way of going away. And we have the market going for us.
Research and technology is in Pune with 200 people…the idea is to grow (that) to 500 as soon as some of the issues are sorted out. Chennai is the engineering centre of excellence (where) we have around 200 engineers…the idea is to grow to around 1,000 by 2009. The remaining 900 employees will join in the transaction and corporate offices.
What are your investment plans for India at a time when business confidence is low?
The investment for the centre for excellence in Chennai is mostly in people and infrastructure. But to put steel on the ground, where you actually manufacture here, there is not enough to do. You need a policy change. And that in India is a bit of (a) challenge because what we need is a certain degree of comfort when you come and invest in a piece of land. You can’t take it for granted that you can go ahead and start manufacturing there.
Similarly, power, waste-water treatment and water. To establish a strong manufacturing base, you need the comfort that infrastructure will be available. We did not want to start a manufacturing base. We wanted to start a world-scale research centre.
I couldn’t be more disappointed (with) where we are today. Contrast this with other countries like Vietnam and Middle East, (which are) offering incentives not because of the jobs offered but the technology that will change their lives.
But you haven’t elaborated on your investments in India?
Token investment (in India) is Rs420 crore (for 2009). We have formed a joint venture with Gujarat Alkalies and Chemicals to make chloromethane that will be used by the pharmaceutical industry. Again, here, we are using a technology that will comply with the Montreal Protocol. But to establish a performance chemical park—we will be looking to make speciality chemicals—this has to start with billion dollars.
We are not in a position to announce any large investment as we are trying to find out what is the optimized portfolio to satisfy this market. These investments will ideally be to build speciality chemical parks in earmarked speciality zones with anchor tenants like Oil and Natural Gas Corp. or anyone that will build a refinery and petrochemical complex. We may look at Gujarat, Andhra Pradesh or Tamil Nadu.
Dow Chemicals has faced protests against some of its other projects in India. Is the legacy of Union Carbide still haunting you?
The Union Carbide mishap (in Bhopal) happened in 1984. In 1996, a settlement came from court and the company ceased to exit from 1991. From Dow’s standpoint, we have to etch it in stone that we had “zero” relations with Union Carbide. Our growth in technology is absolutely accelerating.
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First Published: Wed, Dec 24 2008. 12 07 AM IST