Corp Study - Asian Paints

8/8/2019 Corp Study - Asian Paints

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N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

Corporate Strategy of Asian Paints


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1 IDENTIFICATION OF INDUSTRY DYNAMICS .................................................. 5

1.1 Industry description ....................................................................................................5

1.1.1 Industry Structure- Decorative: ...............................................................................61.1.2 Industry Structure-Industrial Paints: ...................................................................... 7

1.1.3 Industry Characteristics: ........................................................................................ 81.1.4 Margins and Industry Attractiveness ...................................................................... 81.1.5 Decorative Paints industry: Working capital intensive ........................................11

1.2 Segmentation ............................................................................................................. 12

1.2.1 Price based segments in architectural paints .........................................................13

1.3 Current Scenario .......................................................................................................14

1.3.1 Market Size ........................................................................................................... 141.3.2 Growth Rates ........................................................................................................ 141.3.3 Manufacturing Bases & Capacities .......................................................................15

1.3.4 Raw Materials ...................................................................................................... 171.3.5 Backward integration ............................................................................................191.3.6 Distribution methods .............................................................................................191.3.7 Forward integration ...............................................................................................211.3.8 Technology ........................................................................................................... 211.3.9 Branding ................................................................................................................211.3.10 Duty Structure ..................................................................................................... 22

1.4 Porters Analysis ....................................................................................................... 22

1.4.1 Substitutes .............................................................................................................221.4.2 Threat of new entrants .......................................................................................... 221.4.3 Buyers power ....................................................................................................... 231.4.4 Suppliers power ...................................................................................................24

1.5 Global Trends ............................................................................................................24

1.6 Expected growth in each segment ........................................................................... 27

1.7 Changes in segmentation .......................................................................................... 28

2 IDENTIFICATION OF COMPETITORS ........................................................... 29

2.1 Main Competitors .....................................................................................................29

2.2 Identification of focus areas of competitors ............................................................30

2.3 Entry of Global Players, Recent Joint Venture agreements ................................. 31

2.4 Important brands of competitors ............................................................................ 32

3 KEY DRIVERS OF SUCCESS .......................................................................... 33

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3.1 Key drivers in past, present and future for each of the three segments ..............33

3.1.1 Industrial Segment ................................................................................................ 333.1.2 Urban Decorative ..................................................................................................343.1.3 Rural Decorative Segment .................................................................................... 36

3.2 Other Factors ............................................................................................................ 363.2.1 Branding ................................................................................................................363.2.2 Inventory Management: .......................................................................................37

3.3 Drivers for growth of Industry ................................................................................ 37

4 HISTORY OF ASIAN PAINTS LTD.................................................................. 38

4.1 The initial years .........................................................................................................38

4.2 Financing growth ...................................................................................................... 38

4.3 Capacity expansion ..................................................................................................38

4.4 Modernization ........................................................................................................... 39

4.5 New Product Offerings .............................................................................................39

4.6 International Exposure .............................................................................................40

4.7 Colourworlds A revolution in the paints industry .............................................. 40

5 HISTORICAL STRATEGIES ADOPTED BY ASIAN PAINTS ......................... 41

5.1 Market Leadership through Distribution Excellence............................................45

6 ASIAN PAINTS PERFORMANCE ANALYSIS .................................................47

6.1 Financial Performance .............................................................................................48

6.2 Market Performance ................................................................................................ 49

6.3 Management of working capital by Asian Paints .................................................. 51

7 ASIAN PAINTS STRATEGY .............................................................................54

7.1 Corporate Strategy ...................................................................................................54

7.1.1 Asian Paints Overall Corporate Strategy .............................................................. 58

7.2 Asian Paints Acquisition targets ..............................................................................59

7.2.1 Possible acquisition of Snowcem ..........................................................................61

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7.3 Business Strategy ......................................................................................................62

7.3.1 Urban strategy ....................................................................................................... 627.3.2 Rural strategy ........................................................................................................657.3.3 Strategy for international markets .........................................................................65

7.4 Differentiation and the role of branding .................................................................657.4.1 Branding ................................................................................................................667.4.2 Classification of paint ..........................................................................................677.4.3 Shift in brand strategy ........................................................................................... 73

8 POSSIBLE FUTURE CHANGES: ....................................................................75

9 EXHIBITS ...........................................................................................................78

10 BIBLIOGRAPHY ............................................................................................. 82

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1 Identification of Industry Dynamics

1.1 Industry description

The Indian paints industry has been valued at Rs. 43 bn. with annual consumption

of 0.6 million tons. The industry has been growing at a CAGR of 8% to 10%. The

industry can mainly be segmented into decorative and industrial paints with a rough

distribution of 70% to 30% in favor of the former. This distribution is expected to move

towards a 50:50 distribution.

The demand for decorative can be split into first time demand and demand for

repainting. The first time demand is a derived demand and the growth in the demand for

decorative paints is linked to the state of the housing sector and the government

infrastructure sector. In turn the housing and infrastructure activity is dependant upon the

state of the countrys economy. Cement and Steel are the first sectors that reflect the state

of the economy, followed by the housing and infrastructure sectors, which affects the

paints industry. Therefore, the demand for new paints follows the economic cycle with a

lag of about 12 to 18 months. Empirical evidence shows that the paint industry grows at

about 1.5 to 2 times the GDP growth rate.1

The demand for repainting is a slow growing area, since India, as of now has not

developed the culture of using paint as a fashion tool, therefore repainting is not done

very often. But, this sector does show consistent growth, though it is slow.

The demand for decorative paint is also highly seasonal, especially for the

repainting segment, the bulk of the demand being during the festivals seasons. The

peaking of demand during specific seasons has been a unique feature of the Indian paint

industry and has led to the introduction of such paints like Utsav by Asian Paints. The

marketing activity is also stepped up during the festival season.

The industrial paint segment is highly cyclical and again, it is also a derived

demand depending upon the sector that is being served. E.g. the automotive paint

segment is linked to the fate of the automobile industry that is directly linked to the state

1 From www.capitaline.com

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of the economy and reflects changes in the economy quite fast. Therefore the demand for

paint in this segment also reflects changes in the economy quite quickly.

1.1.1 Industry Structure- Decorative:The decorative segment of the industry is hourglass shaped. There are a small number of

large players having a high market share and a large number of players in the

unorganized sector. Even though regional medium sized players exist, they do not

command a high market share.

The large players have Economies of Scale in manufacturing, large distribution

networks, centralized Marketing and Advertising departments and very high brand equity

among the consumers, which gives them a significant advantage over the mid-sized

players. Since, regional variation in demand of the product is minimal, the regional

players do not have any advantage over the big players. The unorganized sectors market

comprises of the rural and small town segments, where they offer a viable, affordable

substitute to Proxies. The unorganized sectors competitive advantage lies in operating in

the right willingness to pay segment of the market. The unorganized sector has a 20-30

percentage cost advantage over the established players and therefore they have a high

share in the price-sensitive rural segments. They offer low-quality paint as an ideal

substitute for the proxies and attract the value-sensitive rural customer with theproposition.

1.1.1.1 The Advantage of the unorganized sector:

The cost advantage for the unorganized players was derived mainly from government

policies. The tax structure for the paint industry was one of the major constraints and

government policies regarding taxes led to the negative growth of the industry in the

early 90s. The government had classified the paint industry as a luxury industry andtherefore the industry attracted very high excise and import duties. These adversely

affected the organized sectors. The unorganized sectors were small industries and

therefore had to face much lower tax rates. Also, the import duties on the intermediaries

and the raw materials required for the paint industry were very high. This again hit the

organized sectors because they were the companies that were mainly importing these raw

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materials, and the unorganized sectors were using lower quality local raw materials. All

this led to the proliferation of these unorganized sector industries, and enabled them to

offer significant lower prices than the organized companies. This price differential was

crucial because the rural customer was very price sensitive and therefore bought from thevendor offering the cheapest options.

However, in recent times, the unorganized sector has struggled to match the

offerings of the organized sector. The rationalization of the tax rates has nullified this

advantage for the unorganized sector. The excise duties have been brought down to 18%

from 40% in 1992-93 and the import duties of raw materials have been brought down to a

mean of 40.8% from 67.5% in 1993-942. This has primarily been due to the change in the

classification of the industry from a luxury industry to a protective industry. This has

minimized the cost advantage that the unorganized sectors has had on the organized

sector, though the unorganized sector shall continue to have some cost advantages from

the use of inferior quality raw materials. The other reason for the recent failure of the

unorganized sector has been changing customer preferences. The rural market has

matured and the primary factor of demand is now not only price but also quality and the

value added services provided. The organized sector has a significant advantage in this

area, and therefore the price disadvantage that they have is overcome and in fact, some

sort of advantage is built.

1.1.2 Industry Structure-Industrial Paints:The Indian industrial market, like the global markets is dominated by a few players. This

is because there is a high technological competence required for competing in the

industrial segment and the unorganized sector do not have this competence.

The industrial segment is further sub-divided into a number of segments and since

it is a technology based industry, the competencies required to be successful in different

segments are distinctive and unique. Due to this, the market operates like a set of niches

with different players operating in different segments. Each segment is like a

monopolistic industry with one player dominating the niche. There is no head on

competition and every player has a set of independent niches to operate in. The customers

2 CRISINFAC

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also have long-term contracts and customized service requirements with the industrial

paints companies.

1.1.3 Industry Characteristics:The industry is characterized by low fixed capital requirements but high working capital

requirements. A plant for manufacturing decorative paint can be set up with low capital

requirements, though for industrial paints there would be specific technologies and higher

capital requirements. High inventory management costs is a very important reason for

working capital requirements. The wide choice offered to the consumer and the large

number of SKUs that are present increases the inventory requirements vastly.

The problem of high inventories due to high variety has been partially solved by

the introduction of tinting machines. These tinting machines postpone the process

required for generating by a large extent and shift the timing of customization to the point

of delivery, thereby reducing the inventory requirements drastically.

1.1.4 Margins and Industry Attractiveness

The margins that are being offered in the decorative and the industrial segments are

different but the differences are not very significant. The gross margins for the various

players are as follows3:

Company Gross Margins

Asian Paints 12.37%

Jenson and Nicholson 9.54%

Goodlass Nerolac 7.78%

Berger Paints 7.36%

It can be observed from the above that the margins for players that are very highly

exposed to the decorative segments are higher and as the dependence on industrial paints

increases the gross margins go down.

3 Source: www.capitaline.com

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The above differences in margins may be slightly distorted by the much higher margins

of Asian Paints. The higher margins of Asian Paints are mainly because of much lower

raw material costs. The proportion of raw material costs of Asian Paints is 34% compared

to about 48% for the rest of the players.

This advantage to Asian Paints could have accrued due to two reasons:

Better logistical management: Asian Paints has a very good supply chain structure

and the entire supply chain has been integrated through the use of IT. This could lead

to better availability and utilization of resources, less wastages and lower transaction

and coordination costs. All this would lead to lower costs for the supplier and Asian

Paints and therefore lower prices.

Backward Integration: Asian Paints has established capacities to manufacture PAN

and PET, two raw materials that comprise about 35% of the cost of the product. This

backward integration helps reduction in the raw material cost in two ways. This

immunizes Asian Paints to the fluctuation in the prices of raw materials in the

external market. Also, the raw materials produced at the plants are transferred to

Asian Paints at cost or a low margin over cost; therefore the cost of raw materials is

much lower for Asian Paints than the costs for the other players. The prices of the raw

materials depend upon the prices of petrochemicals in the international market. The

intermediate raw material companies help insulate Asian Paints from major price

rises and pass on the price drops.

This implies that though there is a slight differential in the margins of the decorative andindustrial segment, the differential is quite small and therefore both the industries would

have similar attractiveness. It must also be kept in mind that these figures are for 2001-

2002 when the industry conditions were quite depressed. Industrial segment depends

upon the growth of the economy and the depressed conditions might have driven down

industrial margins slightly and they could be expected to bounce back.

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Therefore, financially, the attractiveness of the industrial and the decorative segments is

quite similar. Therefore the differentiation between the decorative and the industrial

segments can be dependant upon the capital intensiveness and the technology of thesegment. The manufacturing processes of the decorative segment are quite similar

throughout the industry but the processes in the industrial segment vary from market to

market, with each having its own method of manufacture. Therefore, the capital

intensiveness and the technology dependence of the industrial segment cannot be

evaluated as a whole, but each market can be evaluated separately as a wholly different

segment and its attractiveness with regard to these parameters gauged separately.

Technological Requirements: The technology required to manufacture decorative

paints is quite standard and quite simple and cheap to imitate. There are no

technological advantages for anyone in the manufacturing side of the decorative

paints segment. Comparatively, the technological requirements for each market in the

industrial segment are unique and therefore are marked by low imitability. The

uniqueness of the technological capability that a company possesses increases the

attractiveness of the industry for that particular player. Most of the Indian players do

not have any proprietary technology in the industrial segment and therefore themarkets they enter depend upon the tie-ups that they have in the international

markets.

Capital Intensiveness: The decorative paints industry is very working capital

intensive. This point has been justified later along with the practices being followed

in the industry. The capital investment required for decorative paints is quite low with

the cost of a 1 million tpa plant being only about Rs. 12 crore. Comparatively, the

initial capital investment required depends upon the technology being used. There is

no standard template for the capacities being setup in the industrial paints segment. If

the industry is a highly capital intensive one, the expectation for revenues and

margins is bound to be high and is that is not satisfied, that industry becomes less

attractive.

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1.1.5 Decorative Paints industry: Working capital intensive

As mentioned earlier, the decorative paints industry is not fixed capital or initial

investment intensive but working capital intensive. The following points can justify this:

The initial investments required setting up a plant for the decorative paints area is

quite low; a 1 million tpa plant can be setup for Rs. 12 crores.

Since the variety of the paints being sold is very large, the inventories of each type of

paints being manufactured is to be kept, this leads to inventory accumulation and

therefore need for larger warehouse space. This inventory would always be a problem

and management of this inventory would create even bigger problems. What type of

inventory to keep? What product to keep in inventory? What is the optimal inventory

level? Some of these questions would always trouble the managers.

Inventory management is even more crucial keeping in view their customer focused

marketing strategy. If a particular shade is not available, the customer would go to a

different provider since the switching costs are not very high. So, again inventory as

part of working capital gains importance.

Highly raw material intensive: The industry is also highly raw material intensive and

50% of the raw materials are imported. The international raw material prices are

highly volatile and depend upon the prices of oil. So, to hedge this price volatility

better cash management is required and higher cash balances have to be maintained.

Also, higher raw materials inventory needs to be maintained.

Long debt periods and Seasonal nature of demand: The industry is characterized by

long credit periods for the retailers and dealers. In normal circumstances also this

would require better receivable management. Also, more cash would be stuck in the

credit provided and as the cash to cash cycle increases, requiring better cash

management. If we throw in seasonality of demand where most of the sales occur

around the festival season, this long debt period creates a bigger problem. Since the

sales during festival time are a high percentage of the companys sales, due to the

long debt period, a huge amount of cash is trapped in the cycle leading to higher

working capital requirements during this period of time.

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Not just in the last point, but also in the points above that, basically more and more

cash reserves are required because the cash to cash cycle in every case is going up.

1.2 SegmentationThe paint industry can be segmented mainly on the following bases:

1. End Use classification: Under this heading, paints can be classified as decorative/

architectural paints and industrial paints. As the names suggest, decorative paints

are mainly used for household and construction purposes while industrial paints

are used as coatings for industrial products. Main types of decorative paints are

enamels, acrylic emulsions, distempers and exteriors and primary types of

industrial paints are marine paints, anti corrosive metal coatings, etc.

2. Solvent based classification: this includes paints, which use petro products or

water as the main solvent. Water based paints are gaining popularity due to their

environment friendliness.

3. Solid content: can be classified as liquid or solid (powder) paints. Powder

coatings find application mainly in the white goods industry.

On the basis of end user classification the industry is mainly divided into two segments:

1. Decorative/Architectural: This segment can again be geographically dividedinto two categories, rural and urban. In India, both these segments show different

buying and decision-making characteristics and the value drivers for both the

types of customers are different. The decorative segment can be further classified

into the following:

Emulsions: These can be used on concrete for interior or exterior application.

Product variety is greatest in this segment, but this is a higher priced segment.

White washes and distempers: White washes are basically whiteners in glue

solutions, while distempers can be applied to interior concrete walls.

Cement paints: Are of more use than others for exterior use.

Enamels: These can be used on a variety of substrates like steel, wood,

concrete etc. and are preferred because they provide gloss to the substrate.

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2. Industrial

The industrial segment can be classified into the following:

Automotive segment: This segment serves the large automobile segment.

Powder coatings: These are used for metals that require protective coatings

Performance coatings: These are used by engineering companies and are used

for maintenance coating.

Coil coatings: They are applied on coils and metal rolls and have a very

specific industrial application.

Marine coatings

1.2.1 Price based segments in architectural paints4

Particulars Premium 1st Quality Popular Product

Description

Super-acrylic

Emulsions,

Premium Enamels

Plastic Emulsions,

Acrylic distempers

Oil-bound

distempers,

Synthetic

enamels

Target

Segment

Up-market buyers High income group,

Upper middle class

Middle class and

Rural markets

Key PurchaseInfluencers

Quality, Shades &Dealer push

Quality, Surfaces,Shades, Cost &

Dealer push

Cost &Availability

The end user classification is the one that is the primary differentiator. The end user

classification decides not only the marketing and the customer contact part but also

the manufacturing technologies and the capital investments required. The following

points differentiate these two segments:

The decorative segment is characterized by low fixed investments and high

working capital investments. The industrial segment on the other hand

requires huge fixed capital investments.

4 Classification derived from CRISINFAC, CRISILs Business Intelligence Service

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The technology required for manufacturing of decorative paints is easily

replicable and of a relatively low cost while the technology required for

manufacturing of industrial paints is highly specialized. The technology for

industrial paints is not easily replicable and also requires high capitalinvestments.

In the Indian context, success in the decorative arena depends upon non-

manufacturing and service related factors. Therefore distribution, availability,

value added services etc are more important. For the industrial arena,

technical expertise is more important. This has led to a lot of companies

participating in joint ventures for serving the industrial markets.

The methods for customer development also differ in both these markets. The

decorative segment demands heavy advertising, brand development, value added services

etc. The industrial segment requires very good quality, relationship management, direct

marketing etc.

1.3 Current Scenario

1.3.1 Market Size

The estimated size of the paint industry in India is about Rs. 5500 crores. The

organized sector occupies 70% of the market and the rest 30% is catered to by the

unorganized sector. Over the last few years, there has been a significant shift in customer

preference in favour of the players in the organized sector.

The Indian paint sector is dominated by decorative paints, which occupy about

70% of the market. The industrial paints have a meager share of 30%. This situation is

very different from that of most developed countries where the share of these twosegments is 50:50

1.3.2 Growth Rates

The demand for paints depends on the countrys economic development. In India,

the demand for decorative paints comes from two segments i.e. new building construction

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and retail demand for refurbishment. The demand for industrial paints is mainly from the

consumer durables, automobiles, shipping and engineering industries.

The growth had been sluggish (2-4% p.a.) in the late 80s and early 90s (87-92)

due to low industrial growth and steep excise duty imposed. In the period 1992-96, themarket grew at a faster face of about 12% on account of lowering of the duty structure

and the improvement in the economic condition of India. This era of high growth

extended beyond 1996 as even after a lower growth in the last couple of years due to

economic slowdown.

The growth is on two counts: Increase in price realization and the increase in the

volume consumed. As the price increase has been lower than 5% p.a., most of the growth

I due to higher consumption, which is a healthy sign.

The Indian paint sector is dominated by decorative paints, which occupy about

70% of the market. The industrial paints have a meager share of 30%. This situation is

very different from that of most developed countries where the share of these two

segments is 50:50.

The demand for decorative paints is expected to grow by 8% p.a. for each of the

next 5 years, courtesy the construction of new houses. The shortage of housing and the

tax concessions provided in the recent budgets will lead to the growth of the housing

construction and thus the paint industry. Rural areas are expected to be centres of growth

in this regard.

Due to a rapid growth in industries like consumer durables, automobiles and the

lower current base, the industrial paints segment is expected to record a higher growth.

1.3.3 Manufacturing Bases & Capacities

The plants are usually located in multiple locations so as to be near the customer. For e.g.

Asian Paints has 4 manufacturing facilities at Mumbai (Maharashtra), Ankleshwar

(Gujarat), Patancheru (Andhra Pradesh) and Kasna (Uttar Pradesh). The capacities of the

above plants are 20000 MT, 50000 MT, 50000MT and 42700 MT per annum

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respectively in March 2000. The locations of various plants for major paint companies

have been given in the exhibit 3.

The capacities for manufacture of Paints, varnishes, enamels & oils (in MT) for the top

players in the industry are as follows:

Company Mar 98 Mar 99 Mar 00 Mar 01 Mar 02

Asian Pints 118900 162700 162700 168900

Berger Paints 34920 56420 56420

Goodlass Nerolac 25847 35318 39123 39588

In the last 2-3 years, the top players have not added significant capacities.

Utilization

Paint is manufactured in a batch process and the downtime between batches is

significant. In decorative paints, lighter shades are produced in the beginning of the

month, and darker shades as the month progresses. This maintains the purity of the

shades. The equipment is rinsed quickly between the production cycles of two shades and

washed thoroughly at the end of the month. Batch sizes are however significantly lower

for industrial paints because the product variety is much wider. Also, the equipment used

in this case have to be washed thoroughly between different batches, leading to a

significant loss of downtime.

Paint is not a capital-intensive industry. Hence, it is affordable to create extra

capacity to meet seasonal demand only. This is more cost affective than building up

inventory during the lean season. The average capacity utilization of the paint industry is

65%. Low levels of plant automation in India product mix variety, batch size, batch

processing time and downtime between batches adversely affects the plant utilization

levels.

Economics of scope in industrial and decorative paints

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Theoretically a paint producer has the flexibility to shift from the production of

decorative paints to industrial paints and vice versa. The manufacturing process is very

similar and the equipment can be modified, too. However, varying batch sizes of the two

segments, different vessel sizes and additional safety precautions to be adopted in themanufacture of industrial paints deter the paint producer from switching equipment

between the two segments of paints. However, the big players are generally present on

both sectors because the Economic cycles are different and this provides the companies

with an opportunity to de risk their operations.

1.3.4 Raw MaterialsThe paint industry is raw material intensive, with the raw materials accounting for about

70% of the total production costs. Approximately, 300 different types of raw materials

are used in the manufacturing process. The most critical ones are Titanium Dioxide (TiO2),

Phthalic Anhydride (PAN) and Pentaerythritol (PENTA) which constitute 30%, 20% and

15% of the total raw material cost. Besides these, organic pigments, solvents, oils and a

range of chemical additives are used in paint production. The industry imports around 30%

of its total raw material requirements, primarily titanium dioxide.

Titanium DioxideTitanium Dioxide is a white pigment that gives colour, consistency and durability to

paints. It exists in two forms namely rutile and anatase. Rutile is 12-15% more expensive

and is used in high value decorative paints and in industrial paints. Anatase is more

commonly used for exterior paints. Due to the high price of TiO2 (about Rs. 90000/MT

for imported rutile), transportation cost is not much of an issue. India has 7-8% of the

worlds ore deposits, mostly in Kerala, but is unable to exploit it due to power supply

problems, the lack of appropriate technology and the minimum economic size of plant

(about 50000MT/annum, costing about Rs. 1000 crores). In India, the demand for rutile

and anatase are about 40000MT/annum and 30000MT/annum respectively. The 4

existing manufacturers are currently operating at near 50% of their utilization and

meeting less than half the existing market demand primarily due to lower quality of their

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products (unable to produce finer grades). Their prices are however, not lower than the

imported products. Hence, the high imports.

Setting up a TiO2 manufacturing facility in India is currently unviable.

60% of titanium dioxide produced worldwide is used by the paints industry, which ismuch more fragmented than the rutile/anatase producing industries (the top 4 players

hold about 60% of the market). Hence, there is significant supplier power.

Pthalic Anhydride

It is used for the manufacture of synthetic resins, which act as binders in paint products.

About 50% of the PAN produced is consumed by the paints industry. The top 2 players

viz. I.G. Petrochemicals and Thirumalai Chemicals account for almost 75% of the

domestic production. Asian Paints with a capacity of about 20000MT has a 7% market

share. Although India has a surplus of PAN, with 40% of production being exported, I.G.

Petrochemicals is an export-oriented unit and does not flood the Indian market. As such,

the prices are at a moderate-high level, fluctuating widely (Rs. 29000 Rs 39000 in last 1

year) in toto with the international prices. During such time of high international prices,

Asian Paints has a significant advantage in cost of production of paints. Technology is

stable and easily available but scale advantages are large. Hence, the small paint

manufacturers are unable to go in for backward integration for captive consumption only.

Pentaerythritol

A large number of industries use this product, paints being one of them. The top 3 players

control about two-thirds of the industry. Asian Paints has a market share of 20% and uses

two-thirds of its production for its own use. The quality of Asian Paints produce is

higher than the other majors, resulting in a 15% higher price, of about Rs. 100,000/MT.

The fragmented consumers of Penta results in high profits for Asian paints.

Organic Pigments

They are pigments, usually in powder from, consisting of white or coloured particles and

provide the characteristic colour and opacity to the paint. It is a fragmented industry, with

more than a 100 small and medium players manufacturing a wide variety of colouring

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pigments. Thus, supplier power is low. Also, as far as the major paint manufacturers are

concerned, it makes little sense to set up facilities to manufacture organic pigments. As

far as consumption in paints go, they are a low value, high price item (about 20000MT

annually at Rs. 400,000/MT). The technology is not well developed in India. As such, apartnership in some form with foreign firms is necessary.

1.3.5 Backward integration

Asian Paints has established capacities to manufacture PAN and PET, two raw

materials that comprise about 35% of the cost of the product. This backward integration

helps reduction in the raw material cost in two ways. This immunizes Asian Paints to the

fluctuation in the prices of raw materials in the external market. Also, the raw materials

produced at the plants are transferred to Asian Paints at cost or a low margin over cost;

therefore the cost of raw materials is much lower for Asian Paints than the costs for the

other players. The prices of the raw materials depend upon the prices of petrochemicals

in the international market. The intermediate raw material companies help insulate Asian

Paints from major price rises and pass on the price drops. The process of backward

integration also equips the company with the ability to meet sudden surges in demand

that could be created if the industry dynamics undergo a drastic change.AP is one of the few companies to have been involved in Backward Integration.

This is fundamentally because of the need for having high capacity utilization in the

captive manufacturing plants. Even Asian Paints, for its size of operations, is able to

consume only two-thirds of its captive production. The rest 1/3rd it sold to other

manufacturers of paints. This might prove to be strategically important to AP if the

demand surges.

1.3.6 Distribution methods

The availability of a wide variety of shades and an extensive distribution network

is critical for the success of the decorative paint business. The company salespeople keep

visiting these dealers and maintain a cordial relationship. This is what prevents

international players from entering the Indian market on their own, without any tie-up

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with a local player. Although Asian Paints 14,500 dealers are not much more, compared

to Goodlass Nerolacs 11,000 dealers, the quality of dealers that Asian Paints has (in

terms of financial power, customer interaction, etc) are much better than that of its

competitors. The dealers receive their supplies from the nearest of 55 company depotswhich in turn are supplied by 6 regional distribution centres in India. These depots in turn

receive the goods directly from the 4 Asian Paints factories.

Having plants spread across the region being serviced is very important for

cheaper products like distempers but not so for emulsion paints. The high transportation

costs as a fraction of the COGS would wipe out a substantial portion of the profit margin,

otherwise (The distempers sell for about Rs. 50/litre and the exterior paints and

emulsions for Rs.150 to 200 per litre. The transportation cost from Mumbai to Kolkata is

about Rs. 1,500/kilolitre.)

The number of product-pack-shade combinations offered by a paints company is

vital for its profitability in the decorative paints market. Although temporary in nature,

Asian Paints had the first mover advantage in introducing a wide variety of colours first

through an extended shade card of 151 colours. In response to J&Ns introduction of

2500 readily available shades through tinting machines in late 1996, Asian Paints and the

other majors followed suit by offering 1000-1500 shades to their customers. However,

Asian paints gained the most as it was able to penetrate the market most with its tinting

machine so much so that most people think that Asian Paints was the pioneer. Although

the inventory carrying cost drastically comes down as only 10-15 varieties of stains need

to be stocked for mixing, an investment of about Rs. 5 lacs is required by the dealer for

such a machine. Hence, the penetration of such machines is still low, with non-existence

in rural areas.

Inventory management is critical in the paints industry. The majors normally

carry 70-90 days of sales equivalent of inventory. Among them, Goodlass Nerolac is

more efficient due to more of its sales coming from the industrial sector where lower

inventory is required (fewer varieties and more specialization).

Asian Paints was the first paints major to take a rural initiative as long back as

1989. Since then, it has built up a good dealer network in such areas, where availability

of paint is the primary concern and not the shades or the services offered. Also, small

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pack sizes (1kg and 0.5kg) are critical as the customers often paint only one or two walls

and even if the entire room is painted, 4 litres of paint is rarely required. (1 litre of

distemper and emulsion are sufficient for painting 2 coats 100 and 150sq ft area. Asian

Paints offers the distempers in 0.5kg packs and the emulsions in 1kg pack.

1.3.7 Forward integrationThe major players are considering providing services also, instead of just selling

products. They are thinking of taking care of their customers needs right from the

selection of the paint to the completion of painting their house. This will be discussed in

detail in subsequent chapters.

1.3.8 Technology

Technology is very important for industrial paints. The Indian companies have not

invested in research and development and hence are backward in this regard. They try to

copy the offerings in the international market. Industrial paints can be classified into

various categories including automotive coatings, marine coatings, powder coatings and

coil coatings, all of which are based on different technologies which require considerable

R&D effort for developing and improving. Hence, the Indian players are not geared up to

meet the needs for industrial paints on their own.

The companies are increasingly going in for joint ventures and technical tie-ups

with foreign firms, which have access to modern technology in order to make an impact

in the industrial paints segment. These joint ventures are also very useful in getting the

Indian accounts of the global players that are currently customers of the JV partner. By

virtue of partnering with PPG Industries of USA, Asian Paints got the account of DCM

Daewoo, Hyundai Motors and GM in India. Such joint ventures are beneficial for both

the partners, the Indian partner getting access to the critical technology and the foreignplayer to the distribution network and service personnel.

1.3.9 BrandingThe top players have launched various brands in the market. Different brands are targeted

at various segments. For e.g. Asian Paints hasRoyale for the high end of the decorative

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paint market and Utsav for the lower end. Brand building is an important deterrent for

new players wanting to enter the paint market in India.

1.3.10 Duty StructureThe excise duty on paints i.e. the finished products has remained at 16% since 1997-98.

Till the early 90s, the unorganized sector had various SOPs, which enabled them to

produce at 40% lower cost and hence play a major role in the decorative paints market.

However, in the mid 90s, the change in the duty structure brought down the cost

advantage from about 40% to 4-5%. This resulted in the increase in market share of the

players in the organized sector.

1.4 Porters Analysis

A Porters five-force analysis was done. It is given in a diagrammatic form in the

exhibit 1.

1.4.1 Substitutes

The threat of the substitues is much greater in the rural markets, where the

awareness about paints is still quite low, and it is considered as a luxury good. Either the

walls are left as such without any paint on, or substiutes like whitewash are used. This

threat is visible in the urban markets also, especially in the exterior paint segment. White

cement is one of the most preferred substitutre for the paints for exterior walls. Houses

are increasingly made with walls, constructed of bricks in such a way that the bricks act

as a natural dcor. Stones are also being used in many cases.

1.4.2 Threat of new entrants

We see that the drivers for success are different in both the segments, that is

decorative and industrial. In decorative segment, distribution channel becomes most

important for a player to be a success. Thus for a new player to succeed here, entry

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barriers are huge. That may have been one of the reasons that ICI isnt such a big player

in Indian decorative segment. Although, the growth rate of Indian market is very

attractive, in comparison to global markets, APIL, because of its distibution channel, is

not all that threatened by new entrants. Even if an international player wishes to enter intothis segment, it will take him inordinately long time to establish channels which could

threated APIL. The brands of the existing players could also make it difficult for a

potential new entrant, especially if the Pull factor further increases in the industry.

The industrial segment, which gives mcuh more importance to the technology

used, and doesnt require such huge networks, is more prone to new entrants. But the flio

side of this segment is the technology. It raises the entry barriers to forbid entry into this

segment. Also getting a foothold in the market is very difficult, as the swittching cost is

high for the customers.

1.4.3 Buyers power

The decorative segment is very fragmented market as most of the buyers are small

buyers. There are a huge number of buyers, all of them with small demand. Thus they

dont have much power. They have low switching cost though, thus it might be difficult

to establish a brand loyalty though. There might be corporate customers with whom aplayer may have tie-ups. In those cases the buyers do have certain power.

The consumers of paints especially in the decorative paints segment do not have

adequate knowledge about the quality, properties and perceived benefits of a particular

paint. Hence, there is a strong reliance on intermediaries like painters, contractors and

even paint dealers in making an informed decision about the type and even the brand of

paint to buy and use, thereby becoming strong influencers.

In industrial segment the buyers do have some buying power. There are fewer

buyers with huge demands. Loss of one customer would hit the company in quite

noticeable way. This can be overcome by raising switching costs. The costs can be

increased by giving the customers specialized services, like after sale services etc.

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1.4.4 Suppliers power

One of the main RM in the manufacture of paints is TiO2. 50% of it is imported

primarily because the quality of indigenously prepared compound is not very high. There

are very few suppliers of this material. Also the threat of backward integration into

making TiO2 is low, as the capital costs are in the tunes of 450 to 500 crores, suppliers

power further increases.

In industrial segment, technology is imperative. There are only very few

companies which pioneer in the technology, for example Du Pont, thus they command

their prices.

1.5 Global Trends

Till now we have examined the domestic market and the present scenario through which

we are getting a picture of what the future scenario can be in the Indian market. The

Indian market is expected to move towards the model of the western markets as it

matures. In the global market the share of industrial paints is 70% and that of decorative

is 30% while for the Indian market it is the other way round. The Indian industrial paints

market has just about started growing and the decorative paints market has started

maturing, so the long-term distribution of paints shall be comparable to the world

scenario now.

The global market is estimated at about $21 million tons per annum and valued at about

$60 billion5. The world market is growing at a rate of 3-4% a year, or slightly less than

the world economy and is serviced by 7,000 paint makers. This is because the market in

developed countries is quite mature and a very high level of market penetration has been

achieved and there are few areas where market expansion can take place.

5 Source: www.indiainfoline.com

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company would find it tough to keep up with the technological advancements in the area

and would therefore have to move towards more focus on a smaller number of niches.

The ultimate structure of the industry (the signs of which can be observed even now)would be where a small number of highly focused global competitors compete in each

niche with each having a substantial market share.

Companies such as ICI, Kalon and Akzo Nobel have become experts and so dominate the

decorative markets, with ICI in particular choosing to quit car paint segment four years

ago to concentrate on decorative segment. It has, however, stayed in two big worldwide

industrial sectors: vehicles refinish and can coating.

This trend to concentrate on core competencies was started by Herberts in Germany in

the mid-eighties, when Hoechst, its parent company, allowed it to exit from decorative

paints, revive the former Herberts brand name and concentrate on industrial market alone.

The move astonished an industry then obsessed with volume, for Herberts immediately

dropped out of the premier league of the worlds top 10 paint manufacturers. Today, it is

back in the top 10 after building up through acquisitions and accelerated growth in

sectors where it is confident it can make the worlds top five. In powder coatings it is

world number one. It was, of course, taken over by DuPont in 1999.

ICI, now the worlds largest paint manufacturer, has led the rush for volume and

continues to do so. It has pared down its high-tech, specialized global niches to two -

vehicle refinishes and can coatings - and has developed a profitable world business since

its big leap forward in 1986, when it bought Glidden, a US giant then in the top 10. A few

months prior to this purchase, BASF, Herberts German rival, had bought Inmont,

another US giant, from United Technologies. Glidden specialized in can coatings, having

developed an environmentally friendly water-based lacquer for spraying the inside of

beverage cans. Inmonts expertise was in vehicle repair paints. Both acquisitions gave

their purchasers years of corporate indigestion.

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12%-13% in the next few years. The reasons for this could be increased industrialization

and more importantly, the growing importance and awareness about the need for

industrial paints.

The decorative paints segment is expected to grow at a slower 7%-8% pa with theexterior paint segment being the star with 10%-11% growth rates. Growth in the

decorative paint segment is expected to slow down even more in the future.

1.7 Changes in segmentation

The Indian markets are expected to move towards the international model of competition

and segmentation. In the decorative paints arena, there shall still be stiff competition but

the focus of competition shall move from variety to service, that has been explained ingreater detail later. The rural segments shall themselves upgrade and move towards the

equivalents to the current urban markets.

In the industrial segment, the Indian market is, as of now, not matured. This market shall

evolve to form well-defined niches. Each of these niches shall have very specific

demands and specific technology requirements, which shall ensure that only one or two

players who have the competence in the area shall dominate each niche. These niches

exist in this segment because of the switching cost of the buyers, increases with the

period of association. This is because the supplier would have acquired a significant

knowledge about the customer and this is the reason why market shall develop as an

aggregation of monopolies.

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2 Identification of CompetitorsIndian paint industry is characterized by presence of five big players, who command

62% share in decorative segment and 87.1% in the industrial segment. Various

competitors and their strategies are as below:

2.1 Main Competitors

This is the market share of the companies in both the markets. It includes the organized

and the unorganized sector also. 7

7 all the information from CCS report on Asian Paints.

29

Company Industrial Market Decorative Market

APIL 14.50% 37.50%

GNPL 42.50% 10%Berger Paints 14.20% 11.20%

ICI 7.80% 7.80%

Jenson & Nicholson 8.10% 5.50%

Others 12.90% 38%


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Industrial and Decorative Market Share

14.50%

42.50%

14.20%

7.80%

8.10%

12.90%

37.50%

10%

11.20%

7.80%

5.50%

38%

APIL

GNPL

Berger Paints

ICI

Jenson & Nicholson

Others

Industrial Market Decorative Market

The market share of the leading paint companies (the competitors to AP), keeping only

organized sector in mind, are as given below. This includes both the industrial and the

decorative segments.

Market Share (FY 99)

Asian Paints 41%

Goodlass Nerolac 21%

ICI 15%

Berger Paints 13%

J&N 6%

Shalimar 4%

2.2 Identification of focus areas of competitors

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Focus strategies of the various competitors were studied. This would help APIL in

determining its future course of action.

APIL: Focus solely on architectural paints and complete the vacant slots in productrange. Gain market share in the auto OEM segment through the joint venture.

GNPL: Provide paint shop management services to sell solutions rather than products.

BPIL: Increase the focus on southern markets of India.

ICI: Increase capacities to strengthen presence in fast growing architectural segments.

JNIL: Leverage on joint ventures for growth in the industrial paint segment.

SPIL: Consolidate position in architectural paints.

SNIL: Consolidate position in the re-painting exterior paints market.

RPL: Increase presence to cover all segments of architectural paints.

Consolidate position in the re-painting exterior paints market

2.3 Entry of Global Players, Recent Joint Venture agreements

Company Collaborator Purpose

Asian

Paints

Nippon Paints

PPG Industries

Sigma Coatings

BASF

Pre treatment chemicals, Coil & Powder

coating

Automotive paints

High performance coating

Can coating

GNP Kansai Paints

Nihon Tokushu

Auto & Industrial coating

Auto coating

Berger Herberts

Valspar Corp. Teodur

Auto coating

Heavy duty coating

Powder coating

J&N Tikkurila

Herberts

Chugoku

Decoratives

Auto refinish

Marine

Rajdoot Becker Coil coating

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Shalimar Salphi

W.R.Grace

Marine coating

Can Coating & metal packaging

ICI India ICI Auto refinish

2.4 Important brands of competitors

Brands in the market in decorative segment

Premium category ( emulsions)

ICI Duette, Dulux, Weather Shield and Dulux Velvet Touch.APL RoyaleBerger PaintsLuxol Silk

Medium segments ( enamels)

ICI DuluxAPL ApcoliteShalimar SuperlacBerger Rangoli, Vinyl and Luxol.

Popular segment ( distempers)

ICI Farco, Supercote and Maxilite.

APLUtsav, Tractor.

Berger ButterflyGNP GoodyShalimar Diamond

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3 Key drivers of success

3.1 Key drivers in past, present and future for each of the three

segments

The key drivers for success in the three segments Industrial, Decorative urban and

Decorative Rural are fundamentally different. Even within the segments, the drivers have

changed over time. The Industrial segment has been driven by technological innovation

and performance while the decorative segment has been driven by variety and service.

The following table gives the most important drivers for success for each of the segments

at different points of time.

3.1.1 Industrial Segment

In the pre-liberalization era the Indian Industrial market was relatively underdeveloped

technologically. The Indian companies did not have the technological know-how todevelop specific products for specific industry requirements. The Indian companies,

operating in a protected environment, invested very minimal amounts on R&D and

offered very basic paints to the customers. During this period, the differentiation among

the products on the basis of their performance was minimum and the quality (reliability

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Key Drivers for Success

Segments Past Current Future

Industrial

Quality-

AssuranceTechnology

Relationship, R&D,

Niche

Development

Urban-

DecorativeVariety Total Package

Service, Design

etc

Rural-Decorative

Conceptitself Distribution/PricingChoice


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and long-lasting nature) of the paint and the assurance provided by the manufacturer were

the most important factors for choosing a particular supplier.

In the early nineties, with the opening up of the Indian markets, a large number offoreign players entered the Indian industry. These players did not have either the

branding or established dealer networks of the leading Indian Paint companies, as a result

of which they could not compete immediately in the decorative segment. However, these

companies, armed with the experience of having served mature industrial markets around

the world were equipped with the technology to deliver specialist products to the Indian

Industrial segment. These companies entered into a large number of Joint Venture

agreements with the existing Indian players and vastly raised the bar for service in the

Industrial segment. Technological superiority and product delivery on specific attributes

sought by the industry became the drivers for attracting customers in the industry.

The industrial segment in India is still in the growth stage and the penetration

levels are significantly lower compared to developed countries. Differentiation based on

technology can be expected to be the key driver for success till the market matures.

However, in the future, Paint companies can be expected to focus on micro segments and

Niches within the industrial segment and develop expertise in these. Joint R&D spending

by industry and the paint manufacturer and development of long term relationship

between the buyer and the paints companies could be some emerging trends in these

markets. Worldwide, the big paint companies have focused on minor niches for

themselves and emerged as dominant players in these niches. The mature industrial

segment can be compared to an industry with a large number of small monopolies (a

version of oligopolistic competition).

3.1.2 Urban DecorativeIn the past, the number of shades that could be offered to a consumer was the key driver

for success. The mera wala yellow and the chocolaty brownie yellowy campaigns

bear testimony to this fact. The paint manufacturers tried to distinguish themselves on the

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basis of the choice they could provide to the consumers. In a previously low-involvement

category, the paint manufacturers tried to introduce emotional appeal among consumers

to increase the Pull factor for their products. Choice became a very important factor

among consumers for choice of paints. This was also the period that companies startedrealizing that branding could play a very important role in affecting consumer decisions

and this increased the net ad spend in the industry. This was coupled with making with

the consumers more informed about the paints in general. This move was intended to

reduce the effect of the painters as opinion leaders, and make the consumer real decision

maker.

In the mid 90s the tinting machines were introduced, which increased the choice

available to consumers exponentially. The mixers, which were generally present in the

retailers outlets gave the consumers the choice to choose from up to 2000 shades. This

removed Choice and Variety as differentiating factors amongst competitors. The

consumers in the urban market became more service-sensitive than price-sensitive.

The Intangible elements played a more important role in decision-making than the

tangible elements.

In the future, when the urban decorative segment further saturates, the peripherals

can be expected to play a more and more important role in influencing decision-making

35

SurroundProduct

CoreProduct

Tangible elementsQualityProduct featuresTechnologyDurability

Intangible elementsReliabilityResponsivenessAssuranceEmpathy

Empathy


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especially as the number of differentiators based on product features is very low in this

segment. Already, some of the Paint companies have gone into providing Total solutions,

i.e., providing services for the consumer right from Product selection to annual

maintenance. In the urban segment, the interior designer and architect act as very stronginfluencers in deciding on the paint to be used. Bearing this mind, a large number of the

paint companies are setting up designing and interior decoration subsidiaries in an effort

to play an increasing part in the decision making process.

3.1.3 Rural Decorative SegmentThe rural segment has been consistently following the Urban segment with a time

lag. Till the early 90s, paints in the rural market were looked upon as a luxury item. It

was only after the establishment of a very wide rural distribution network by the major

Paint companies (Asian paints in particular) that the rural penetration began to increase.

As compared to the urban segment, the rural segment is extremely price-sensitive and

therefore price is a very important determinant for gaining market space in the rural

market. The rural markets also exhibit a high level of seasonal fluctuations in demands

and the availability of paints during the peak season is a crucial factor for success.

Therefore, the distribution network of the companies is the most important driver for the

companies for succeeding in the rural markets. In the future, as the distribution systembecomes more entrenched in the rural psyche, factors like the variety offered and choice

available could become the drivers for market penetration.

3.2 Other Factors

Apart from these sector specific drivers of success, there are some factors influencing

success that are common across sectors. They are

3.2.1 Branding

Branding plays a very important role in creating a sustainable competitive

advantage for companies, especially in the decorative segment. Even though it is a fairly

low-involvement category, the stress placed on assurance and reliability implies that

branding would have a very important role to play in this industry. This coupled with the

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fact that the companies started emphasizing on the emotional side of the purchase, made

brand all the more important. Slogans like, mera wala green became the catchwords. In

the future, when the distribution strength fails to provide a competitive advantage and

after the entire span of the country has been reached, the companies would have to resortto creating a pull for their products as the push strategy fails to give advantage. As

the market matures, more segmentation would take place and paint would become less of

a commodity, which would necessitate branding. Even in the industrial segment, as the

companies try to gain expertise and dominance over specific niches, branding could help

them create an identity in these niches.

3.2.2 Inventory Management:

As the market moves towards more customization and greater choice to customers, the

management of inventory along all layers of the supply chain becomes more and more

crucial. In a progressively expanding market, capacity utilization of various

manufacturing plants could also be very important. Even though inventory management

and operational efficiency cannot be instruments providing sustainable competitive

advantage, the introduction of foreign players could put pressure on the existing

companies to improve their operational efficiencies.

3.3 Drivers for growth of Industry

Paints are still considered as luxury goods in many parts of India, and therefore, the

total consumption of paints in India is a function of the net disposable income of the

country, which in turn is dependent on the performance of the Economy. In such a

scenario, the crucial demand drivers in the paint industry are macroeconomic factors

such as a good agricultural and industrial growth, good overall economic growth,

performance of the related industries like construction, automobiles, white goods,

capital goods and heavy industries, increase in consumer income and consumer buying

capacity and impetus given to the housing sector by improved availability of housing

finance

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4 History of Asian Paints Ltd.

4.1 The initial yearsAsian paints was started in 1945 under the registered name of Asian Oil and Paint

Company Pvt. Ltd. It went public in the year 1973. Since the early years of its

incorporation, the company has played an active role in expanding its product offerings,

bringing about technological innovation, and expanding its distribution network to

include small towns. Its financial strategy to plough back its earnings instead of

distributing large dividends helped it to grow at a rapid pace. The company was renamed

Asian Paints (India) Pvt. Ltd. in 1974 and got listed on the stock exchange in 1982.

4.2 Financing growthSince 1960, the company has been issuing bonus shares at regular intervals to signify its

growth in earnings and to gain shareholder confidence. In the 1980s, Asian Paints

resorted to raising both debt (in the form of debentures) and equity to fuel its growth

plans. The fresh equity shares were preferentially offered to the employees and business

associates of the firm in order that they strive harder for the companys well being. The

debt raised was long term (8-10 years) with the repayment starting after about 5 years

enabled the company to push for growth instead of worrying about repayment

immediately. Also, the debenture redemption was done in installments so as not to

suddenly strap the company for cash.

4.3 Capacity expansionIn 1985 Asian Paints started its third Indian plant for the manufacture of paints and

enamels in Patancheru, near Hyderabad, taking advantage of tax benefits for setting up a

unit in a backward area. In a similar fashion, a fourth plant with a higher capacity was

established in Uttar Pradesh

Pentasia Chemicals Ltd. (PCL) was jointly set up with Tamil Nadu Industrial

Development Corporation (TIDCO) for the manufacture of pentaerythritol and sodium

formate in 1987. In the 1990s, PCL first became a subsidiary of Asian paints and was

later merged into it.

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In 1994 the Company envisaged a grand plan to expand the existing capacities for

manufacturing paints and enamels to 50,000 tonnes/annum at its plants in Ankleshwar,

Kasna and Patancheru.

A fifth manufacturing facility was set up in Ratnagiri, Maharashtra in1996.

4.4 ModernizationTimely modernization has been a key to the companys superior performance. Its

Bhandup plant being the largest and among the most sophisticated factory in the paints

industry, besides being vertically integrated and producing a wide products variety of

products is a clear indication. To achieve maximum capacity utilization, adequate

attention has been paid to streamlining the process, planning the layout of machinery andselective addition of new capacity to minimize the bottleneck at any particular stage and

replacement of old and rusty equipment.

The Company imported the Van Heyden low energy process from a German company,

along with other technical knowledge for the production of pthalic anhydride, an

important ingredient in the paint industry in the late 1980s.

In 1992, Asian Paints entered into a technical collaboration with Nippon Paints of Japan,

wherein the latter provided technical know-how for producing powder coatings and coil

coatings. Subsequently, adequate manufacturing facilities were set up at its Kasna plant.

4.5 New Product OfferingsAs part of its effort to provide solutions in areas going hand in hand with decorative

paints, Asian Paints launched the NC range of wood finishes, Asian wall putty and ACEexterior emulsion in 1998 and the Opal brand of polyurethane wood finish in 2000.

To wrest away market share from local competitors who were selling lime-based paints,

Asian paints launched Utsav enamel (in essence a distemper) in 2001 at the lower entry

level

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4.6 International ExposureThe company decided to make its presence felt outside India in 1990. It set up a

subsidiary each in Fiji and Tonga, in partnership (almost 50:50) with local players. Asian

paints provided the technical know-how. Similar joint ventures were also set-up in Nepal

and the Pacific Island of Vanuatu. By 1995, joint ventures had been established in

Queensland (Australia and Mauritius, too. In 1999, the joint ventures had a strong hold in

the markets they were operating in and were turning in a good performance.

Asian Paints further expanded into Sri Lanka in 1999 and Australia in 2000 through the

acquisition route. It expanded to Oman in 2000.

Australia, an anomaly?

The technological innovation in Australia is not up to developed country standards and

the main entry deterrent is distribution network and understanding of the consumer.

Asian Paints gained these competencies through the acquisition process and has

competencies in taking them further. It would be very beneficial for its foray into the

Asia-Pacific market, which along with South America is the fastest growing with a lot of

potential. Besides, many international majors have already taken steps to make their

presence felt in South America.

4.7 Colourworlds A revolution in the paints industryAsian Paints took this marketing initiative in 1998. Till then the concept of a one-stop

colour shop for paints was unknown in India. Aided by advanced computer software,

paints could be mixed in varying proportions to satisfy even the fussiest of customers by

providing them the exact colour and shade of the decorative paint they required. The 350

colourworlds that it set up turned in an encouraging response.

To further its image of being customer centric, Asian Paints even opened an exclusive

showroom in Mumbai.

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5 Historical strategies adopted by Asian Paints

The success of a firm is a function of the Opportunities available in the market,

the competencies the firm has and/or can develop and the ability of the firm to create a

competitive advantage from its resources and competencies. The strategy adopted by a

firm is the conceptual framework that the firm has designed to achieve this objective by

creating a link between the three factors determining success.

When Asian Paints entered the market, it was dominated by foreign companies

and their big wholesale distributors. These foreign companies appointed a few trusted

traders as their wholesale distributors and made the business their monopoly. The

management of this distribution was shoddy to say the least. These traders enjoyed

virtually unlimited credit and made payments once in the year, at Diwali time 8. Further

the focus was only on urban market, with no inclination or compulsion to enter into semi-

urban and rural area or to improve their distribution infrastructure. They shut down the

doors on any possible new entrant. Thus it was virtually impossible for a new player to

enter into the market as the distribution network was totally lacking.

When AP tried to make the foray into this business, they had to tackle two issues,

to find a distribution channel and to find a market. They didnt have any competence to

take head-on with the players on their distribution network and in their playing space.

8 Marketing management, by VS Ramasawmy. 2nd edition

41

CompetenciesOpportunities

Aspirations


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market were driven by their consumer focus and market orientation. But the

operationalising of all these strategies was strongly rooted on the logistical efficiency of

the company.

For example, in the 70s Asian Paints discovered that customers needed smaller

pack sizes for their smaller requirements. Introducing smaller pack sizes for all their

product offerings would increase the number of SKUs exponentially, thereby creating

enormous problems in inventory management. But the Asian Paints Supply-Chain

management system was robust enough to make this change and AP began to offer a

wider range of SKUs to its customers at little additional costs. This forced the

competitors also to come out with different pack sizes and this raised their cost of doing

business. The short-term edge that AP achieved through this move was the competitive

advantage during this period.

Logistical Efficiency as a backbone for providing competitive advantage: Asian

Paints established a series of depots all across the country to set up their own distribution

network. They were the ones who introduced the retailer as a channel for selling Paints.

They brought in customer-focus into the industry and were the first ones to modify their

offering to suit customer needs. This increased the number of SKUs that they had to offer

per brand. This increased the inventory costs and caused a conflict to be created between

costs and service levels. In spite of its large number of SKUs, Asian Paints managed a

very high service level (85%) compared to the industry average (50-60%). Detailed

Analysis of APs log man strategy gives us the following as the reasons for their success

in inventory vs. service management.

A strong commitment to distribution cost control without compromising the

service level: While following a totally customer-oriented strategy, AP did not

forget the Cost angle. Firstly, Asian Paints was very careful not to invest large

amounts of money for the sake of increasing sales. This is because, AP had to

stick to its targets in Sales volumes and Profits. Secondly, APs marketing

philosophy demanded that the final prices of its paints were always kept

reasonably low to suit the Indian consumers ability to pay. Te Company could

not attempt to transfer the distribution costs to its consumers. Thirdly, growing

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volume of business meant growing investment in distribution infrastructure. AP

had to find the resources for this and therefore couldnt afford to have high

distribution expenses.

Affective Inventory Management: Effective Inventory management in fact is the

single most important component of APs distribution/cost control strategy. This

was all the more crucial to AP due to its wider range of product offering. APs

average inventory level equals only 28 days sales while the industry average was

51 days. This provided a 45% cost savings advantage in inventory costs to AP

compared to its competitors. In spite of having tight inventory management

schedules, AP was able to maintain high service levels due to its strong

distribution and transport networks.

Effective control of credit outstanding: The fallout of having a large distribution

network is the problem of large credit outstandings. So, an effective credit

management strategy was crucial to APs working capital management. AP

stipulated that every one of its dealers should pay for the supplies within a

specified time norm. The company offered them attractive incentive schemes to

induce them to comply with its stipulations.

o A special discount of 3.5% to be passed on at the end of the year, provided

each and every payment throughout the year was made within thestipulated time norms. This is refereed to as the discount forperfection in

payments

o A cash discount of 5% for all outright cash purchases. The cash discount

was given whenever payments were received within 24 hours of the

supply/invoice.

The scheme became a grand success. APs credit outstandings always stood

below 25 day while the outstandings of competitors were mostly in the range of

40 days.

Total computerization of the physical distribution and the credit control system:

Effective computerization of the distribution system, inventory control and

control of credit outstanding is the other factor that helped AP to control

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distribution costs without lowering service level. A totally computerized and a

totally integrated distribution system was evolved by the company beginning from

1976. Computerization of sales and inventory data and the use of rational

distribution models helped the company increase its service levels by 10% with

no increase in the overall level of inventory carried. Computerization also

enabled AP to process recent sales data for the 100 fastest moving SKUs. This

analysis was used to project sales of specific products, which helped plan

production, raw material purchases and advance stocking.

5.1 Market Leadership through Distribution Excellence.AP achieved an enviable leadership position in marketing through the distribution

route. Though, AP concentrated on all the marketing functions, it was the mastering ofthe distribution network that gave AP its distinct competitive advantage.

AP took the route of bypassing the bulk-order segment and introduced retailing

into the Paints industry to change the entire Industry dynamics and occupy leadership

position. AP had also decided to target the rural and semiurban areas initially as they

could not compete in the urban segment. To sustain its advantage and to serve this

particular target segment, AP had to build an extensive distribution network. Developing

such a distribution network had two far-reaching consequences.

1. They could not serve this market with single centralized distribution network.

Thus they opted for a decentralized distribution network serviced through

depots, located all over India. This set the base for AP to make whole India as

their market.

2. They decided to go retail and have an open door policy. This was the time

when APs distribution network started taking a shape, and they went for

channel management in a big way. This network was far bigger than

distributor-dependent network. While other companies were playing with just

a handful of distributors, AP was managing a channel of more than 6500

dealers in 80s itself.

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As stated earlier, with the strengthening of the supply chain, AP decided to serve

whole India as their market. This step placed heaviest demand on their distribution side.

Thus they developed a nationwide network of depots/stock points. As a logical corollary

to it, they had to develop a national marketing organizational structure (exhibit 4). This

gave them two specific advantages.

They had a distinct competitive advantage over the smaller regional players in the

industry who tried to spot niches and occupy them. AP was very efficient in

spotting the gaps in the market and defended its market leadership position very

well.

Having a strong dealer network gave

Corp Study - Asian Paints

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