Asian Paints Corporate Strategy

Corporate Strategy of Asian Paints


1 IDENTIFICATION OF INDUSTRY DYNAMICS.............................................7

1.1 Industry description..............................................................................................71.1.1 Industry Structure- Decorative:.......................................................................81.1.2 Industry Structure-Industrial Paints:................................................................91.1.3 Industry Characteristics:................................................................................101.1.4 Margins and Industry Attractiveness.............................................................101.1.5 Decorative Paints industry: Working capital intensive.................................13

1.2 Segmentation........................................................................................................141.2.1 Price based segments in architectural paints.................................................15

1.3 Current Scenario.................................................................................................161.3.1 Market Size....................................................................................................161.3.2 Growth Rates.................................................................................................171.3.3 Manufacturing Bases & Capacities...............................................................181.3.4 Raw Materials................................................................................................191.3.5 Backward integration.....................................................................................211.3.6 Distribution methods.....................................................................................221.3.7 Forward integration.......................................................................................231.3.8 Technology....................................................................................................231.3.9 Branding........................................................................................................241.3.10 Duty Structure................................................................................................24

1.4 Porter’s Analysis..................................................................................................241.4.1 Substitutes......................................................................................................241.4.2 Threat of new entrants...................................................................................251.4.3 Buyer’s power................................................................................................251.4.4 Supplier’s power............................................................................................26

1.5 Global Trends.......................................................................................................26

1.6 Expected growth in each segment......................................................................30

1.7 Changes in segmentation.....................................................................................30

2 IDENTIFICATION OF COMPETITORS.......................................................32

2.1 Main Competitors................................................................................................32

2.2 Identification of focus areas of competitors......................................................34

2.3 Entry of Global Players, Recent Joint Venture agreements............................34

2.4 Important brands of competitors.......................................................................35

3 KEY DRIVERS OF SUCCESS.....................................................................36

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3.1 Key drivers in past, present and future for each of the three segments.........363.1.1 Industrial Segment.........................................................................................363.1.2 Urban Decorative...........................................................................................383.1.3 Rural Decorative Segment.............................................................................39

3.2 Other Factors.......................................................................................................393.2.1 Branding........................................................................................................403.2.2 Inventory Management:.................................................................................40

3.3 Drivers for growth of Industry...........................................................................40

4 HISTORY OF ASIAN PAINTS LTD.............................................................42

4.1 The initial years....................................................................................................42

4.2 Financing growth.................................................................................................42

4.3 Capacity expansion..............................................................................................42

4.4 Modernization......................................................................................................43

4.5 New Product Offerings........................................................................................43

4.6 International Exposure.......................................................................................44

4.7 Colourworlds – A revolution in the paints industry.........................................44

5 HISTORICAL STRATEGIES ADOPTED BY ASIAN PAINTS.....................45

5.1 Market Leadership through Distribution Excellence......................................49

6 ASIAN PAINTS PERFORMANCE ANALYSIS............................................51

6.1 Financial Performance........................................................................................52

6.2 Market Performance...........................................................................................53

6.3 Management of working capital by Asian Paints.............................................55

7 ASIAN PAINTS STRATEGY.......................................................................58

7.1 Corporate Strategy..............................................................................................587.1.1 Asian Paints Overall Corporate Strategy.......................................................62

7.2 Asian Paints Acquisition targets.........................................................................637.2.1 Possible acquisition of Snowcem..................................................................65

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7.3 Business Strategy.................................................................................................667.3.1 Urban strategy................................................................................................677.3.2 Rural strategy.................................................................................................697.3.3 Strategy for international markets.................................................................69

7.4 Differentiation and the role of branding...........................................................697.4.1 Branding........................................................................................................707.4.2 Classification of paint....................................................................................717.4.3 Shift in brand strategy....................................................................................77

8 POSSIBLE FUTURE CHANGES:...............................................................79

9 EXHIBITS.....................................................................................................82

10 Bibliography..............................................................................................86

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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 country’s 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 sector’s market

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

substitute to Proxies. The unorganized sector’s 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 the

proposition.

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 and

therefore 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 the

vendor 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 and

industrial 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 the

segment. 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 the

markets 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 company’s 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 divided

into 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 Purchase

Influencers

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, CRISIL’s 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 capital

investments.

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 two

segments is 50:50

1.3.2 Growth Rates

The demand for paints depends on the country’s 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, the

market 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 the

manufacture 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 Materials The 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 Dioxide

Titanium 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

world’s 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 is

much 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, a

partnership 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 Nerolac’s 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 depots

which 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&N’s 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

20


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 foreign

player 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 has Royale for the high end of the decorative

21


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 Porter’s Analysis

A Porter’s 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 décor. 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

22


barriers are huge. That may have been one of the reasons that ICI isn’t 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 it’s distibution channel, is

not all that threatened by new entrants. Even if an international player wishes to enter into

this 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 doesn’t 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 Buyer’s 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

don’t 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 a

player 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.

23


1.4.4 Supplier’s 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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The global market is in a very high stage of consolidation and the top players control

almost 60%Error: Reference source not found of the total demand. A lot of mergers and

takeovers have happened in the recent past. Despite the presence of thousands of paint

suppliers, the impact of mergers and acquisitions has been dramatic. In 1980, the top 10

paint manufacturers accounted for 15% of world sales. During 1980-2000, ICI grew more

than four-fold to become the world’s largest paint manufacturer with a market share of

10%Error: Reference source not found worldwide. Akzo Nobel grew five times and

Sherwin Williams grew three times. The level of consolidation can be seen from the

example of the DuPont takeover of Herberts. DuPont was the leader of automotive

coatings in North and South America and Herberts was the leader in the area in Europe.

DuPont planned it expansion to Europe and the executed this plan through the takeover

he Herberts to itself become the largest automotive paints manufacturer in the world.

The market is quite differentiated and a lot of sectors and niches have been identified.

The bigger the sector or the niche, more likely industry leaders will dominate it. The

reason for this is that most of the players have now started concentrating on the only

specialized niches and they try to dominate that particular niche. Due to a high level of

consolidation, only the large players have remained in each of the markets and therefore

survival of marginal or low market share players has become tough. Therefore, even the

large global players who have a small presence in non core segments have begun hiving

off those divisions and are concentrating on the core segments and the competition in

even the core segments is only from very large competitors.

Also, in the industrial arena technology advancements started making the technologies

for manufacture more and more exclusive to the proprietary technology holders. This has

made it infeasible for other players to advance in the markets and they have either sold

out or closed shop. It is very tough for one player to dominate more than three to four

niches in the industrial segment because that would require a lot of R&D capability and

expenditure. Also, it would have to compete with highly focused companies who are just

concentrating on one or two areas and are therefore specialized in these areas. Such a

25


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 world’s 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 world’s top five. In powder coatings it is

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

ICI, now the world’s 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. Inmont’s expertise was in vehicle repair paints. Both acquisitions gave

their purchasers years of corporate indigestion.

26


Meanwhile, Courtaulds sold its local UK automotive business to PPG and built on global

niche management skills acquired through its world-leading marine and protective

coatings.

Akzo, the Dutch chemical giant, has made a rapid series of acquisitions in the nineties

that have made Akzo Nobel, the largest paint manufacturer in Europe and second to ICI

in volume terms in the world. Many of these companies exchange parts of their portfolios

from time to time, to strengthen their positions in particular niches.

The emerging markets to which the paint majors are targeting are Latin America, Asia

and the Pacific regions. These markets are expected to be the thrust areas of the future

competition.

All the big names i.e. PPG, DuPont of US; ICI and Courtaulds of UK; BASF and

Herberts of Germany; Akzo Nobel of the Netherlands; Nippon and Kansai of Japan are in

India. Kansai is the parent company of Goodlass Nerolac and it owns a 65%6 equity share

in the company.

The Indian market has also started seeing a lot of mergers and acquisitions

happening in the recent past. Asian Paints also survived a major threat of acquisition

from ICI. Even the Indian market has consolidated quite a lot and most of the minor

players in the Indian market have been taken over. The next major events could be related

to mergers or takeovers of Indian companies by major global players or takeovers of

smaller Indian companies by market leaders like Asian Paints.

1.6 Expected growth in each segment

The growth rate of the industry is expected to be about 10% CAGR in the future. The

growth rate of industrial segment now is about 10%, this is expected to accelerate and hit


27


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 the

exterior 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 in

greater 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 Competitors Indian 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%


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 Paints41%

Goodlass Nerolac21%

ICI15%

Berger Paints13%

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J&N6%

Shalimar4%

2.2 Identification of focus areas of competitors

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 product

range. 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

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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

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 Royale

Berger Paints Luxol Silk

Medium segments ( enamels)

ICI Dulux

APL Apcolite

Shalimar Superlac

Berger Rangoli, Vinyl and Luxol.

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Popular segment ( distempers)

ICI Farco, Supercote and Maxilite.

APL Utsav, Tractor.

Berger Butterfly

GNP Goody

Shalimar Diamond

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.

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Key Drivers for Success

Segments Past Current Future

Industrial

Quality-

Assurance Technology

Relationship,

R&D, Niche

Development

Urban-

Decorative Variety Total Package

Service, Design

etc

Rural-

Decorative

Concept

itself Distribution/Pricing Choice


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 to

develop 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

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 of

foreign 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

34


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

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 started

realizing 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.

35

Surround Product

Core Product

Tangible elementsQualityProduct featuresTechnologyDurability

Intangible elementsReliabilityResponsivenessAssuranceEmpathy

Empathy


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

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 strong

influencers 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 system

becomes more entrenched in the rural psyche, factors like the variety offered and choice

available could become the drivers for market penetration.

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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

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 resort

to 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.

37


3.3 Drivers for growth of IndustryPaints 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 company’s 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 expansion In 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.

39


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 company’s 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 and

selective 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 ACE

exterior 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 time8. 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 didn’t 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

42

Competencies Opportunities

Aspirations


AP short-circuited the established network, bypassed the bulk order segment, and

went directly to the individual consumer. This was highly counter-intuitive, as bulk order

was the major segment and any company needed a portion of it for sheer survival. Also

AP sensed this was not the future growth segment. This was the momentous decision

made by AP, which affected all other decisions made by AP. Since they were servicing

the customers directly, they had to necessarily keep a wide product range. This resulted

because of the divergence of the multitude of consumers whereas in bulk business it was

possible to service the market with limited products. This move helped AP in the long

run, which will be explained in subsequent pages.

As stated earlier, all the big players were vying for a share of pie of urban market.

AP decided to distance itself from the prevailing urban orientated marketing. This

decision was taken due to two reasons. One, AP sensed a huge potential in hitherto

untapped rural markets and two, major companies and their distributors weren’t

providing them any openings in the urban segment. AP targeted semi-urban and rural

markets, which implied that they had to expand their distribution channel further. Further

they decided to limit themselves to the decorative segment, as neither was there a market

for industrial segment, nor did they have any competency in that area, which is

technology.

Now due to the above reasons, and some strategic decisions (which stemmed

from the fact that AP decided to go to the end consumers directly), it will be shown how

AP’s legendary distribution network came to existence.

This was the genesis of the strategy of AP, which even continues today. The

decorative paints industry was an industry that was not technology driven, and therefore

product based differentiation was not possible in this industry. Since the competitive

advantage was not product-based, it was likely to be shortlived. Historically AP has been

adopting a strategy that involved adopting measures that gave them a series of short-term

competitive advantages. On every occasion in which Asian Paints advantage ran out, they

further raised the standards of the industry by adopting measures that increased the cost

of doing business for the other competitors. Being the market leader, they could afford to

make these changes to the market that forced other competitors into increasing the

hygiene factors of doing business. All the changes that Asian Paints introduced in the

43


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 AP’s 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, AP’s marketing

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

reasonably low to suit the Indian consumer’s ability to pay. Te Company could

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

44


volume of business meant growing investment in distribution infrastructure. AP

had to find the resources for this and therefore couldn’t afford to have high

distribution expenses.

Affective Inventory Management: Effective Inventory management in fact is the

single most important component of AP’s distribution/cost control strategy. This

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

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 AP’s 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 the

stipulated time norms. This is refereed to as the discount for perfection 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. AP’s 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

45


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 of

the 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 AP’s 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.

46


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 AP the necessary qualification to compete

against the big players in the urban areas.

Strategy Adopted: AP’s strategy focused on the aspect of obtaining short-term

competitive advantages by increasing the Cost of doing business for the competitors. The

strategy was based on collecting of consumer insights that gave AP the knowledge of the

changing value-drivers in the industry. Based on these insights, AP decided its Marketing

moves and acquired the competencies to help it leverage this understanding. Thus, the

strategy adopted by AP was driven by

1. Strong Customer Focus

2. High Operational Efficiency to enable it to offer the features demanded by the

customers.

With its strong customer orientation, AP has been able to spot the change in the

value-drivers among the customers and has been able to consistently vary its internal

processes to deliver on the most-important criteria sought by the consumer.

Urban Strategy:

In the urban segment, the key benefit sought by the customer kept changing over a

period of time. In the initial phases, when the economy was still supply driven, The

availability and reach of the paints were the most important criteria for purchase among

47


the consumers. It was during this period that AP developed the retailer network and

changed the industry pattern from making Bulk sales to making retail sales.

After a period of time, the distribution-retailer network of all the big players were

well established and product availability ceased to be an issue. During this period, the

consumer’s purchase decision was driven by variety. To meet this demand from the

consumer, AP further increased its number of SKUs and offered a wider range of

products to the consumers. Its fully integrated and computerized supply chain enabled it

to do this at little additional cost. AP ran ad campaigns focusing on the ability to provide

variety and choice offered became the platform of competition in the industry. However,

with the explosion of the number of shades offered (and more recently, the introduction

of tinting machines), variety has stopped functioning as a differentiating factor.

To be added later on

6 Asian Paints Performance Analysis

The performance of a company can be analyzed in mainly two ways, the financial

performance of the company, and the market performance of the company

The financial performance is the performance that is related to the financial soundness,

the cash flows and the creation of wealth for shareholders.

The market performance is the performance of the company related to the market

position, the market shares, the expected future growth etc.

Asian Paints is India's largest manufacturer of paints selling around

200,000 MT/KL of paint in the FY ended March 2002. It is the leader in this

industry for over three decades, controlling 44 per cent of the Indian

paint market. It ranks among the top 15 decorative coatings companies in

the world. Asian Paints has been recognized as the `Fourth Most Admired

48


Company' across industries in India through a survey carried out by `The

Economic Times` in association with ORG-Marg.

6.1 Financial Performance

1. APIL’s’s net sales increased at a CAGR of approximately 16.2% during the

period between 1997-98 and 1999-2000 derived primarily on account of 17.7%

increase in the volume off take in paints. The average realizations however

declined by 1.7%. The increase in turnover coupled with higher income from

other related activities led to a CAGR of 16.4% in the operating income. During

2000-01, paint volumes grew by 11.8%, while unit realizations registered a

marginal increase of 0.6%. Paints volumes grew strongly during the year

primarily on account of higher sales of exterior paints, where APIL has emerged

as the market leader.9

2. APIL’s’s net sales are expected to increase from Rs. 12.5 bn. in 2000-01 to Rs.

14.9 bn. In 2002-03, primarily driven by strong growth in exterior paint sales

coupled with initiative to expand the overall paint market through color tinting

machines, new products launches & direct customer services.

3. The earnings of APIL are at a higher percentage than the industry average. This is

because of their higher exposure to the decorative paints segment. Also, since

there is some degree of backward integration, the company has some

immunization from cost fluctuations. Also, though the margins from the

traditional decorative segments are falling, the company shall be able to maintain

its higher operating profit ratio due to higher exposure to exterior paints. Exterior

paints is still a nascent industry in India and therefore is a high growth, high

earnings industry. But, now since they are still penetrating the high volume but

highly cost sensitive rural market, their margins still have some downward

pressure. With the prices of key raw materials expected to remain stable over the

9 Data taken from CRISINFAC, service from CRISIL

49


next two years coupled with improved cost control following the implementation

of the SCM & ERP systems, operating margins are expected to increase over the

next two years to touch 16.6% in 2002-03.Error: Reference source not found

4. PBDIT at Rs2.38bn was 13.4% higher than the previous year. PBIDT margin

registered a 70basis point improvement from 17.4% to 18.1%.10 The margin

improvement was despite three price decreases undertaken during the year to pass

on the benefit of soft raw material prices to the consumer Though the overall

growth rates for the industry have reduced the profit margins of APIL have not

come down. This is also because of it superior management of its costs. Due to

the introduction of the point of sales mixing machines, the inventory costs have

reduced and greater production efficiencies have resulted. Also, APIL has

integrated its supply chain with the use of IT. This has led to better

responsiveness to demand changes and also better inventory and production

management.

5. The debt/equity of the company is only about 0.55, which indicates low exposure

to debt. This is again because of their strategy of having higher exposure to the

decorative paints segment. The capital requirements of the decorative segment are

not very large, and therefore not much debt is required. The exposure to debt

could be increased in the future due to their increasing presence in industrial

segments which shall demand higher and more specialized capital investments.

Also, they shall have to invest in the newer technology tinting machines in their

‘ColorWorld’ stores. This could increase debt, but not significantly since the

expense on tinting machines is not very high.

6.2 Market Performance

1. Asian Paints has consistently maintained a majority market share in the decorative

paints segment. The market share of APIL has consistently remained around the 10 Data from www.indiainfoline.com

50


range of 37% to 43% in decorative segments. Even after the entry of

multinationals, APIL has been able to defend its turf well and maintain a majority

market share.

Market Share (FY 2000)11 Decorative Industrial

Asian Paints38% 15%

Goodlass Nerolac14% 40%

ICI8% 9%

Berger Paints9% 10%

J&N5% 8%

Shalimar6% 8%

Others20% N/A

2. In the industrial segment, APIL lags quite a long way behind Goodlass Nerolac.

APIL has entered the automotive paint segment through a 50:50 joint venture with

PPG Ltd. The joint venture ranks No 2 in this market. Goodlass Nerolac is the

leader here, primarily because of its tie-up with carmaker Maruti. Recently, they

acquired Hawcoplast Chemicals, a powder coatings manufacturer. This will help

them make inroads into the industrial paints market, where powder coatings are

11 Data from domain-B industrial reports, www.domain-b.com

51


gaining favor thanks to their relative eco- friendliness (compared to solvent-based

paints). Hawcoplast also has a technology tie-up with a Europe based company,

which shall help APIL gain the required technology. The acquisition has

catapulted Asian Paints to amongst the top 3 powder coating manufacturers in

India. Basically, APIL is trying to broad base its market in India, so that in the

future if it is threatened by a large MNC it would have sufficient dominant

markets to resort to. Also, it is trying to pre-empt the entry of such MNCs. APIL

also realizes that the growth rates of decorative segments are reducing and the

overall proportion of the decorative segment in the total market is also going

down, so if it has to maintain its dominant position it has to enter the industrial

paints market.

3. Interestingly, Asian Paints could lay claim to being one of the few Indian

multinationals, a rarity given that they are not in a knowledge sector like

software or pharma. They already have nine units outside India and sell to

more than 20 countries. Though these are largely developing nations with small

markets, paint demand growth is likely to be higher than GDP (as in India).

Moreover, Asian Paints is well placed to leverage its experience in the cost-

sensitive Indian markets to get ahead of other MNCs. This is in keeping with their

strategy of growth with geographical expansion. Since the opportunities of

geographical expansion are limited in India, APIL is trying to expand in foreign

markets.

6.3 Management of working capital by Asian Paints

Asian Paints is one of the best managers of working capital in the industry, and they have

been using a lot of innovative methods to either reduce their dependence on working

capital by attacking the very parameters that make it important or better managing

working capital by being more efficient in handling the components of working capital.

Since management of working capital is so crucial, the following have been the initiatives

of Asian Paints to reduce their dependence on working capital or improve management:

52


Factors to reduce dependence:

o Introduction of tinting machines: The tinting machines that have been introduced

through ‘Colorworld’ have helped reduce working capital by reducing

inventories. Now, inventories of only a few shades have to be maintained since

the wastage and understocking problems are vastly reduced. Each shade will be

produced as required and therefore each shade will be produced only as much as

is required, leading to much lower requirement of safety stock. The problems in

inventory due to variety are also solved as the result. ‘Colorworld’ has decreased

the importance of working capital management as a success factor because the

problems caused due to working capital intensiveness are being diminished.

o Integration of the supply chain: The supply chain of Asian Paints has been

integrated with the use if IT. This again leads to a reduction in inventory as the

responsiveness is much higher and the company can produce closer to the actual

demand and forecast demand more accurately. This has led to lower requirements

for safety stock and has also reduced chances of over or under stocking. Also, due

to the integration of the supply chain the coordination costs for managing

receivables have gone down and therefore receivable can be managed with more

efficiency. Also, since the orders are placed much closer to the demand, the risk

for the dealer is also lower and therefore there are lower chances of default.

Management of working capital:

o Low debt: Asian Paints has a low D/E ratio of 0.5212 and this has led to lower

interest costs and therefore better and higher cash flows. Asian Paints is also in

the process of reducing its debt further, which shall further improve the cash

position.

o Lower debt periods: The cash to cash cycle of Asian Paints is not very good

mainly because of low payables and low period of payables payments while their

credit period for their debtors is much higher. They are trying to reduce this

problem by reducing the credit period to the dealers to a certain extent. They

could cite the advantages being offered by IT integration and Colorworld to


53


induce dealers to pay early. Also, schemes offered for early payers should help

them reduce their cash to cash cycle and improve working capital management.

Their recent drive towards providing value added services to end customers is being

motivated by reasons other than working capital management but it also helps in reducing

the dependence on working capital and leads to better working capital management

because:

Made to order: Since the orders are directly taken from the customer, the paints shall

be made to order and therefore there is no risk of over or underproduction for such

orders. This drastically reduces the inventory problem.

Lower risk of default: The exposure per customer in the direct to consumer market is

much lower. This reduces the risk of default as defaulting of one customer does not

lead to major losses. Also, Asian Paints could evaluate the customer before the

transaction. For the customer, too, the purchase of paints would not be such a high

value transaction that he would find it tough to pay for it, while the exposure and risk

while supplying to dealers is higher.

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7 Asian paints strategy

7.1 Corporate Strategy

Currently Asian Paints is the market shaper in the decorative segment with a large market

share (53%) and is second in the Industrial segment with a share of 16% behind Goodlass

Nerolac who have a share of 40%. Historically, Asian Paints has focused on the

decorative segment while simultaneously trying to maintain a significant presence in the

industrial segment. Asian Paints stated corporate aim is to establish itself as one of the

top 5 decorative players in the world. Asian Paints future strategy would be in alignment

with their past strategies. Asian Paints would be focusing on growing at a high rate in the

decorative segment while trying to establish itself in significant niches in the Industrial

segment.

Growth in any industry can be achieved through one of three different routes.

a) Expanding the consumer Base (Market Penetration oriented): This strategy is used

when the industry is in the nascent stages and the market for the product needs to

be developed. This is a period during which the early entrants into the market are

involved in “Concept Selling” thereby trying to develop a market for their

product.

b) Increasing the individual company’s market (Market Share oriented): When the

industry comes out of the growth phase and as competition increases, the

positions in the market for the different players becomes similar to a zero-sum

game and growth can be got only at the expense of the competitors. Product

differentiation becomes the key parameter of competition during this period.

c) Increasing Consumer-Consumption: After the market gets stabilized with a few

established players, consumer loyalties get built up and the switching costs

increase. The market shares of the different companies stabilizes around a mean

range. This is a phase when the industry players look to increasing per-capita

consumption for fueling growth. During this period companies launch newer,

improved versions of their products, thereby trying to fuel growth by “Up-

55


gradation”. Companies involved in the product manufacturing start playing a role

in offering product related services, thereby trying to increase consumption.

Companies move higher up this hierarchy as the market matures. The cost of growth

of each of these approaches progressively increases. This is the reason that most

companies resort to geographical expansion once the market matures, rather than trying

to increase per capita consumption. (For e.g. Coke’s entry into India was a move to

expand its market geographically as increasing its volumes in the mature market of USA

would have proved very costly.)

Asian Paints has also taken this route of geographic expansion to increase its

market share in the global market. Geographic expansion into similar markets also gives

the player an added advantage of the learning curve effect as market changes can be more

easily predicted with the help of knowledge acquired from experience in previous

markets. This knowledge of developing markets could be AP’s significant advantage over

the other global majors in the fight for global market space among the developing

markets.

In its quest for global geographical expansion, AP has chosen both the organic

and Inorganic routes for expansion; AP has grown both by expanding its own markets

and by acquiring newer players. AP has set itself a target of achieving two thirds of its

growth organically and a third from acquisitions. AP has chosen the acquisitions route

because entering into new markets, establishing their own presence and distribution

networks, understanding the consumer mindset and running a business could be a time

consuming proposition.

Asian Paints can adopt two approaches to fuel its growth strategy in the

decorative segment via acquisitions.

1. The first approach would be to use Acquisitions as a means to providing

incremental growth. This would be the case when the acquisition is small and the

56


acquisition has been motivated by the need to enter into the market rather than a

strategic reason to capture synergies and leverage their size.

2. The second approach would involve attempting to change the industry dynamics

drastically by acquiring all the bigger players of the industry. The fallout of this

would be that Asian Paints would get the necessary freedom to develop and grow

the Paints market of India without pressures from the competition. Historically,

Asian Paints has had both customer focus and competition focus. The pressure

brought about by the competition could have been the reason for the inability of

AP to bring about a high degree of consumer discrimination. If Asian Paints were

to acquire the remaining big players of the Industry, Asian Paints would enjoy

monopoly power in the industry and it could then attempt to capture the entire

consumer surplus by bringing about price discrimination among various customer

segments. This method could be attractive if the benefits accruing out of utilizing

monopoly power outweigh the costs involved in acquiring those players.

In the current scenario, the other existing big players are GN, ICI and Berger. Among

these GN and ICI are parts of global giants who themselves are also capable of

playing out the same strategy. Infact, in 1997, ICI had made a takeover bid for Asian

Paints that was foiled only by an intervention from the government of India. Under

these circumstances, the resistance to a takeover bid by these players is likely to be

very high and this would increase the takeover costs exponentially. (Especially

because both of these players are also capable of using monopoly power if they

acquire a majority share in the market). Moreover, due to the Indian market still being

in the growth stages and the Indian consumer still having a low ability to pay due to

the prevailing economic conditions (developing economy), the extent to which

monopoly power can be used is also low. (The extent of utilization of monopoly

power would be a inverse function of the price elasticity of demand and this

monopoly power could be low in the Indian scenario, if the market is price-sensitive).

Due to these factors mentioned above, the acquisition approach entailing acquiring of

the other big players of the Indian industry seems to be both infeasible and not

beneficial and therefore, not likely to happen.

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So, it can be concluded that AP’s acquisitions would be to bring about incremental

growth in its market share in the industry. AP would embark on an acquisition based

growth strategy in both India and abroad.

AP’s foreign acquisition strategy would be driven by the acquired company’s

presence in the market and the entry it can provide for Asian Paints in the new market.

AP should look to acquire players that have a healthy market position and are poised for

growth in their home market.

AP’s domestic acquisition strategy would be driven by the acquired company’s

ability to provide a distinctive competency in a segment in which AP is not so strong.

AP’s attempted acquisition of Snowcem is based on this premise. Snowcem has a

significant presence in the exterior paints market, a fast growing segment in which AP

has little competency.

In the industrial segment, AP’s strategy should be to acquire competencies in

some specific promising niches, either through acquisitions or Joint Ventures. The

industrial segment is largely comprised of a large number of niches in which companies

exist as near monopolies. Of the different sub segments in the industrial segment,

automotive paints is the biggest. AP has had a long-standing tie-up with PPG, which is

the global leader in Automotive Paints. With the help of this tie-up AP has acquired the

automotive client accounts of Hyundai, Ford etc.

AP should also look to acquire domestic players operating in the industrial

segment if they are operating in an attractive segment and have the requisite technology.

AP’s recent acquisition of Haucoplast was also motivated by this. Haucoplast has the

requisite technology to compete in the white goods segment of the industrial segment

which is one of the fastest growing subsegments of the sector.

Asian Paint’s Acquisition strategies are discussed in greater detail in the next

chapter.

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7.1.1 Asian Paints Overall Corporate Strategy

For any firm operating in a market,, there are four generic strategies open to it. They are

depicted in the above diagram. Here it will be analyzed where is AP playing in which

market, and how are they doing it.

Defend: this is the rural and the urban market in which AP is playing. They are a target

to many global companies, which are playing in Indian market via Indian arm of their

operations like ICI has Berger, Kansai has JN.

Deepen: this is the industrial segment of Indian paint industry where AP has a weak

presence. They have a presence in automotive segment but rank a poor second. They

need to form alliances with foreign players to enter into this segment. They can also look

for tie-ups with the company, which have tie-ups with those companies whose daughter

arm is operating in India, to lock the account. Their move of taking over Haucoplast is

one step in this direction. Their tie-up with PPG has given them a good presence in

automotive segment, capturing clients like Santro, GM, Ford etc.

59

Exploit new markets by creating products

/services by leveraging

existing competencies differently

Defend existing markets

by strengthening existing

competencies

Build new competencies

to create the future

Build complement

ary/ new competencies to fortify position

in existing markets Distinctive Competencies

Market Opportunities

Existing

New

Existing New

Defend Deepen

Discover Develop


Discover: this forms the basis of fast growth. AP has identified opportunities abroad in

developing countries similar to India. To enter into these countries they adopted the

process of acquisition.

Develop: till now paint industry has been a product-oriented industry. There maybe a

huge potential in the service side of it. AP has taken some initiative in this direction by

introducing color-world. Also they have started providing service in painting and interior

decoration. They are trying to disintermediate the chain and become a part of it. They can

take it to new dimensions by acquiring the whole chain and becoming full service

provider. Providing a painter is removal of pain element, but they need to see whether

value-adding services are possible. These can be as integrated to provide an umbrella

service. This can span whole gamut, right from approaching a customer (permission

marketing), to suggesting the correct shade keeping in mind various factors, to providing

painters. But the most important part of it would be constant reminders to the customers

to repaint, or upgrade.

7.2 Asian Paints Acquisition targets

Asian Paints could choose to go the Mergers and acquisitions route to either extend its

presence to the markets in which it is not present now or to capture market share from

these companies and make its position at the top of the decorative paints segment more

secure.

The Indian market has witnessed a lot of takeovers and acquisitions in the recent past.

Asian Paints itself has acquired Hawcoplast in the powder coatings segment; Berger

Paints has acquitted Rajdoot paints etc. Asian Paints had to face a takeover bid by ICI

(India) which itself is a subsidiary of ICI Plc worldwide. A lot of the companies existing

in India are subsidiaries of the major global companies. Goodlass Nerolac, the leader in

the industrial segment and second to Asian Paints in the decorative segment is also a

subsidiary of Kansai Paints, Japan.

60


India is an important market for most of these companies to expand into and therefore

these subsidiaries have been setup here. Also, most of these subsidiaries are focused on

the same segments in India as their global parents are focused on a global scale.

Therefore, none of these subsidiaries are in the non-focus areas of their global parents

therefore these subsidiaries are basically a method of method of market expansion and

entry for the global players into the Indian market.

For, Asian Paints, it would be really difficult to takeover the Indian arms of global majors

because these Indian arms are subsidiaries of the global players and they are looking to

establish a presence in India through these companies and they would definitely not be

looking to hive them off.

That does leave a few companies that Asian Paints could target for takeover. Again, these

takeovers could mainly be aimed at consolidating and increasing their market presence

and garnering a even larger share of the market share in India. Another reason for these

takeovers could be to enter into area that Asian Paint has been unable to capture so far

and establish itself in this arena.

Targets could include a company like Berger Paints (subsidiary of the UB group) for

consolidating market position or a company like Snowcem for entering and capturing the

exterior paints market and also consolidating its position its position in the market as a

more integrated solution provider for a customers needs.

Companies where Asian Paints is looking to acquire only because it wants to acquire the

market share of the company, Asian Paints should be careful because these companies

would come with a lot of areas which might not be the core areas of Asian Paints, which

it might have to hive off later. Also, it might not be worth buying a company that has a

marginal market share.

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Let us evaluate Snowcem as a potential takeover target mainly because of two reasons,

entry into newer relate markets and a lot of hype about the recent plans of Asian Paints to

acquire Snowcem.

7.2.1 Possible acquisition of Snowcem

In the decorative range of paints Asian Paints is the market leader and has its presence in

almost all the segments. One of the major areas in which it does not have a presence is

the exterior cements paint area. The exterior paints market is expected to be the high

growth area for atleast five years into the future. This is the area that Asian Paints has

entered now with its exterior emulsions. Snowcem is the market leader in this area with a

market share of 26% in the cement paints and 50%13 share of the textured finish area.

If Asian Paints decides to takeover Snowcem, it would provide Asian Paints with

leadership in the total decorative segments market including the exterior paints market in

its portfolio. It could also look at upgrading the customers from Snowcem’s cement

paints to the more advanced exterior emulsions that it has begun offering.

The acquisition of Snowcem would also fit nicely into its strategy of providing value

added services, as they would be able to provide a complete solution for any customer,

which approaches them. The customer need not go to any other dealer of any other

company to get any part of his house painted. This would be a major advantage that

Asian Paints could later leverage and use to improve market position.

For the financial year 1999-2000 the company earned a net profit of Rs14.93 crore

on a turnover of Rs153.15 crore. Its net worth stood at Rs70.29 crore while

its total asset is valued at Rs185.68 crore.Error: Reference source not found

Asian Paints has a Debt/Equity ratio of 0.52, which is low debt, and a very healthy ratio.

It is also in the process of retiring debt, which shall improve the D/E ratio even further. It

is also a company that has shown a healthy growth in the past and is expected to do well 13 Source: www.capitaline.com

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in the future. It is considered to be a blue chip company and has a very good financial

performance. All this would enable it to easily raise additional capital if required. The

company might be wary of raising additional debt because the increased interest

payments would stretch its working capital. Working capital management is one of the

crucial financial functions of paint companies and problems with cash flow, due to

additional interest payments, could cause unwanted problems in other areas. But the

company could easily raise equity if required and fund its acquisition through such an

equity issue. Any cash that is excess or not required for efficient working capital

management could be used. In fact, an executive of Asian Paints mentioned that the

company was trying to improve its cash position so that it could fund such acquisitions.

The takeover of Hawcoplast was initiated after such improvement in the cash position.

7.3 Business Strategy

The business strategy of AP has been on the basis of acquiring a series of short-

term competitive advantages by adopting measures that raised the Cost of doing business

for all its competitors by raising the hygiene factor in the business. So far, Asian Paints

has been using its distribution strength and logistical efficiency to attain this advantage.

The advantage obtained by leveraging on distribution strength is short-lived and

ultimately imitable. Moreover, AP has established such an extensive network that getting

incremental advantage out of improving the distribution network could be very difficult.

The next logical step for AP to look for to gain competitive advantage would be through

either channel control or through occupying mind space. AP should try to increase the

window of competitive advantage by using Marketing as a tool to acquiring competitive

advantage. Some of the industry characteristics could be used to gain insights about the

competitive scope of Asian Paints.

7.3.1 Urban strategyThe industry is characterized by the presence of intermediaries who have a very high

influencing power on the purchase decisions of the consumer, especially in the urban

areas. Asian Paints strategy for acquiring higher product demand could be three pronged.

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1. Use these intermediaries for initiating demand: The intermediaries (the painters,

contractors, designers, decorators etc.) could be used as a marketing arm of the

company. They could acts as spokespersons of the company and promote the

company’s products to the customers. Some of the bigger contractors could be

paid a commission for bagging contracts that involve purchase of Asian Paints.

2. Occupy part of the intermediary space and try to sideline other intermediaries:

Asian Paints should open a service arm, which would provide the services

provided by the existing intermediaries in the market. For operationalising this

strategy, AP could select a few of the existing intermediaries, give them the tag of

Asian Paints service wing, and follow a franchisee model of operations. Being

present in different seditions of the value delivery system and having a strong

brand equity in the Paints market would give AP the credibility to operate a strong

service arm. The service based strategy of AP could have two different

approaches

a. AP could become a service provider with the aim of providing a

supporting arm to the Products business. In this case, the fundamental aim

of the service sector would be to remove the transaction costs of the end-

consumer by providing all the aspects of painting in a bundled fashion.

The service sector could be set up as a loss making venture with its

fundamental function being bringing in more customers for the product. In

this case, AP’s main business would be in the manufacturing business and

the service sector would act as marketing arm for this. The ideal analogy

to this kind of service would be the financing services arm of motorbike

manufacturers of the country. All the financing services are, in

themselves, loss-making, but by offering credit they remove the

transaction costs of the consumers, thereby increasing product demand.

(Or)

b. AP could change the industry dynamics totally by providing value added

services as an intermediary player. The company could play the role of

interior decorator and paints consultant and help the consumer in

designing and painting his house. In this scenario, AP would be changing

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the business from being a product based one to a service based industry

and would be appropriating value through the services it provides.

The first approach would entail creating a service arm that can cater to a large

market, whereas the second one would necessitate the creation of a well-

qualified service arm which is capable of providing value-added services. AP

can follow both these approaches and cater to different market segments. The

value-addition services arm would cater to the premium end of the market

who have a very high willingness to pay and the other bundling services arm

would cater to the demands of the masses.

3. AP could try to reduce the power of the intermediary by increasing the Pull for

the product. The role of the influencer could be drastically reduced by increasing

the power of the end-consumer. AP can also try to increase end-consumer power

by removing information asymmetry between customer and manufacturer. AP can

achieve this by establishing a strong brand name for its brands. The possible

utility of branding in this segment has been analyzed as presented in the next

chapter.

AP has actually been taking efforts along all the three above mentioned lines to gain

competitive advantage. AP has started a service arm and is attempting to do

Permission marketing; which essentially means that a marketing team contacts

individual homes and offers specific Painting solutions to them free of cost. AP ‘s

Colourworld is also an effort in the direction of providing value-added services. AP’s

helpline is a tool designed to reduce information asymmetry and therefore increase

end customer power.

Parallel execution of strategies suggested in 2 and 3 could lead to a situation of

eventual disintermediation in the industry. Simultaneously occupying intermediary

space and reducing intermediary power could ultimately lead to a situation when the

intermediary providing service gets integrated with the parent company operations

65


and the other intermediaries get totally eliminated, thereby removing an entire layer

in the value-chain. (Similar to the Dell model of operations).

7.3.2 Rural strategyThe above-mentioned strategies can be used for the urban segment. The dynamics of

the rural segment are slightly different and different strategies need to be adopted for

these. The rural segment is not mature enough to appreciate service related offerings

and therefore the strategy should be product related. The basic strategy that has to be

adopted in the rural segment is one of customer up gradation. The penetration of the

rural segment has been achieved by offering a basic product well tailored to match the

low willingness to pay of the rural consumer.

After basic penetration levels of the category have been achieved and the traditionally

used proxies eliminated, the rural consumer can be offered a “higher ” range of

products with a view to up grading the consumers. The highly value sensitive rural

consumer is likely to react positively to product offerings that provide a good cost

benefit equation, even if the products are costlier.

7.3.3 Strategy for international marketsFor the newly acquired global companies, utilization of the learning curve effect and the

knowledge base from having functioned in a developing country would be the most

crucial factor for growth. AP can hasten the process of market growth and maturity in

these regions by leveraging on its experience and launching newer products at a faster

rate.

7.4 Differentiation and the role of branding

AP realized that the market was evolving into a pull-oriented market. Thus they

embarked on two different strategies in 80s, one for rural, the other for urban markets. In

rural market they mostly sold the concept of the paint, while the urban market, which had

already evolved, was becoming more variety conscious with additional benefits. It was a

typical case of Product Life Cycle (PLC), which operates at 3 levels

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Product level

Product sub category level

Brand level

In my context, paint is at the product level. There is low product familiarity thus concept

selling is required. That is exactly what AP doing in rural markets, and what it did in

early 70s when they focused their attention on removing the perception of luxury item

from paint. In sub category level, paint can be classified as interior, external, emulsion,

distemper etc. The urban market had matured to this extent by late 90s when the premium

segment of plastic paint started making inroads. When a market is sufficiently matured, it

starts differentiating, and then the brands play an important role. This is the current and

future strategy of AP, with a few additional concepts. In this chapter I will discuss those

issues.

7.4.1 Branding

It is imperative to define a brand before moving into the strategy of AP. A brand is a

name, term, symbol or design, or a combination of them, which is intended to signify the

goods or services of a seller or group of sellers and to differentiate them from those of

competitors.

There are three basic broad strategic routes open to any company to meet competition in

a market place; they are given in the diagram.

Niche market is ruled out for the big players, as far as decorative segment is

concerned. They are national players, and it would not be economically viable for them to

play in the niche markets. Rather that was AP’s initial strategy when they started making

serious inroads in the paint industry. They kept a very close watch over their distribution

network so that no local player could identify gap in the offering, and carve a niche for

itself.

Their overall strategy has always been to keep the cost under tight control. But

they never fought in the market with price. Rather they raised the cost of doing business

for the competitors and kept the cost constant. This was a unique feature of their strategy.

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7.4.2 Classification of paintLet us take a close look at the differentiating strategy. Differentiation can be based on

product, channel and promotion. “Product”, however, lends the maximum scope for

differentiation. Here I should be careful to point out that a product can be a brand also.

Thus in those cases when the product attributes are same in a product category, then the

intangibles play an important role. This is where branding becomes important.

To understand the importance of brands in paint industry, it would be useful to analyze

the following factors:

Understand the type of industry paint is

The consumer purchase pattern for paint

The benefits sought by the consumer

For this purpose a few frameworks are provided below.

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Strategic Advantage

Narrow

Broad

Cost Features (Tangible + Intangible)

Cost

Leader

Niche

Differentiator

Competitive advantage


Whether the brands play any role in a product category, it will depend on the

priority of the benefits, which the consumer seeks. In India, market is divided into rural

and urban. in rural market, concept for the paint has been sold, but the people there still

look for the basic offering. Some of those are a medium to cover the walls, reliability, etc.

Any brand, which has been with the concerned market for an extended period of time,

with a good basic offering, can make inroads in such a market. AP scored heavily here

because of their earlier decision of going to the rural market, and thus reaped first mover

advantage, where reliability and assurance is synonymous with AP and AP’s brand

mascot, “GATTU” lovingly referred to as “ chhota bachcha”. In urban market people

look more than basic offering. They also look for a look and feel with the paint. Thus the

phrase, one buys shade and not colour. Also function/role of a brand in paint market is

optimization of choice, sign of high quality performance, and the power of the

manufacturer’s brand become quite important14.

How much brands play a role also depends on the stage of the industry. When the

market is germinating, the basic offering is most important, like paint industry in India in

50s. When it starts taking a definition, then the variety starts playing a role, and people

look for particular offering that suits their needs. This is the time when brands can be

used to establish the link between those needs and the product benefits. If these links can

be built at this stage, it helps the firms in the next stage, when the differentiation starts

occurring. The brands become most important at this stage, as the market is highly

fragmented and one needs to differentiate oneself on the basis of intangibles.

14 Strategic brand management by J N Kapferner, page number 31

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It will be important to see at which stage of the decision making process does the

brand play a role. When the cost of buying goods is high, which is true in the case of

paints as one buys it in bulk to paint the whole establishment and it is infrequent

purchase. Brands play an important role in this case to bring that brand to the

consideration set, but not necessarily result in the purchase. This is the case with the

paints. Whereas if the soap industry is analyzed, it is apparent owing to the low cost of

purchase and the frequency of purchase, brands can result in direct purchase. Similarly if

the product benefits can be easily discerned, then the role of brands goes low. By the

term, understanding of Product features, I imply that the consumer can form the link

between observable product attributes/features and the benefits sought. As it has been

stated earlier, paint industry is not a product driven, as the basic offering is the same

across the players. Thus the switching cost for a consumer would be zero to shift between

the brands. It would be like buying any rice (belonging to a particular category) as it is

quite easy to see and understand the quality of rice. That is not the case with paints.

Therefore brands play an important role, as the benefits are more emotional than the

physical.

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Understanding of product features

Low

High

Low High

Paints

Cost of purchase

De

crea

sin

g im

por

tan

ce o

f th

e b

ran

ds

Increasing importance of the brands


A logical parameter, which comes out of above matrix is the trialability. The fact that

people have very high switching cost if trialability is low makes branding very important

in these categories. In the case of paints, trialability is low thus brands would play a

major role. As trialability is the parameter that helps the evaluation process of the

consumer, it is the crucial link that could bring a product from the consideration set to the

purchase set. Trialability reduces the asymmetry of information between the product

features and consumers and therefore aids evaluation. Since trialability in the paints

industry is very low, firms have tried to find a suitable substitute for this to remove

information asymmetry. To counter this, firms resorted to aid of computers. AP

introduced color-world. The introductions of service centers, colorworlds, computer

simulation centers are all efforts in this direction. AP has realized that due to the inherent

brand value and proposition, the brand is well entrenched in the minds of the consumer

ad is therefore present in the consideration set. But since the cost of purchase is high, the

value of brand in making the switch from consideration set to purchase set is low. AP’s

efforts have been to increase information dissemination and aid this process.

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Trialability

Low

High

Low High

Paints

Cost of purchase

De

crea

sin

g im

por

tan

ce o

f th

e b

ran

ds

Increasing importance of the brands


As it is typical of any durable industry, where frequency of the purchase is low, and the

involvement is high it is the case with paints. Brands would be useful to get the attention

in consumer’s consideration set, but the actual purchase would not take place. But if

brands could be supplemented with information, then the brands can affect the purchase

step of the buying decision process.

Keeping all the points in mind, it was a good decision taken by AP to brand their

products. It can be said here that AP also had the advantage of “path dependence.” As it

went to the rural and semi-urban areas early, they already had a presence in the

consumer’s mindset there. Thus they had to back their basic product offering with the

appropriate emotional benefits, and bundle those in a brand. They could always talk

about trust and reliance, which are very in the priority list of the customers. They were so

successful in their endeavor of using the brand that people had instant recall of tractor

brand, even though they had no idea about AP.

In more developed urban market, they used the power of information. By setting

up Helpline, highly informative website and introducing the concept of color-world, they

facilitated the knowledge dissemination. Thus they helped the more sophisticated

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Frequency of purchase

Low

High

Low High

Paints

Involvement

De

crea

sin

g im

por

tan

ce o

f th

e b

ran

ds

Decreasing importance of the brands


customers to take a conscious decision. This was also the segment where they bundled

more emotional benefits. This was the reason why “mera waala pink” ad campaign was

run. They indicated that they have any and every shade, which a person may want,

indicating a very high reliability. Each brand was so successful that people had instant

recall of particular brand like Apcolyte, Utsav, Apex etc.

There were two problems with this brand strategy of AP.

1. They had introduced many brands, which had good recall but independently. That

is, AP as a brand name had no value. A good parallel that could be drawn here is

with Madura garments here. They have most prominent brands under their

portfolio in readymade wear, but almost no brand equity as Madura garments.

Earlier AP had adopted Product Brand Strategy where a particular name is given to one

and only one product with an exclusive brand positioning.

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7.4.3 Shift in brand strategy

There are various advantages of product brand policy like allows freedom to operate in

many markets, without producing dissonance in other markets, freedom to move to new

markets, failure of one brand doesn’t affect other brands and so on and so forth.

The flip side is this is a costly policy as one cannot draw from the parent brand. Thus

each product launch is like a new product. This policy makes sense where the market is

growing at a rapid pace enabling quick return on investments. When the markets start

saturating, this advantage disappears. This could be the reason why AP is slowly moving

towards Source Brand Strategy.

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1.1.1.1.1.1.1.1 Company X

Brand A

Product A

Positioning A

Brand B

Product B

Positioning B

Brand C

Product C

Positioning C


This strategy is the one, which is conceptualized by the authors of this report. All the

moves taken by AP indicate towards this direction. It benefits a company in such a way

that there is a two-tiered sense15 of difference and depth. Parent brand offers its

significance and identity, modified and enriched by the daughter brand to attract a

specific customer segment. This limits the scope in a sense that the core, spirit and

identity of the parent brand should be very respectable. AP seems to be moving in this

direction with giving the same colored logo to all the packs, and prefixing the product

range with Asian Paints.

2. Gattu was used as a brand mascot to increase the brand recall. Mascots make lots

of sense in a country like India where illiteracy — or multiple languages — is still

a big issue. Gattu was first dreamed up when the company was still small and

struggling against large British companies like Imperial Chemicals. This

mischievous, aggressive, very Indian urchin made a lot of sense then, attacking

the large foreign players.

It came as a shock to the marketing world when AP announced that Gattu is going to be

“terminated.” The reasons cited were many and far, mainly from the so called elite of

15 Strategic brand management by J N Kapferner, page number 201

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1.1.1.1.1.1.1.2 Parent Brand

Brand A

Promise A

Products A

Brand B

Promise B

Products B

Brand C

Promise C

Products C

Personal brand names

Specific communication

Products


advertising coterie. In the words of Mr. Shombit Sengupta, founder of Shining Brand

Consulting, “I have never found any relation between the high technology oriented

quality of painting in today’s world and Gattu of Asian Paints, rather a conflicting image

of a naughty boy and a serious value-driven paint company”. PM Murty, president,

decoratives, gave a more rational reason. According to him, “Gattu didn’t really fit with

the company’s new visual identity.”

The stance taken by the authors is of caution. Gattu was invented to take the global

players head on, when the company was a fledgling. But today, when AP is itself the

dominant player, after dislodging those foreign players, Gattu makes less sense. Also Mr.

PM Murty is right in claiming that the mascot can add little in its attempts to be a more

up-market, market leading player.

There is a negative side to it, which is worth mentioning here. Gattu was one of the

driving forces in penetrating rural markets, and even today AP derives a large sales

turnover from this market. On talking with some of the field personnel, one thing came

out very clearly. All of them were pretty apprehensive about the negative effect this

removal will have. Company responded to this by saying that Gattu wouldn’t be totally

removed in an abrupt manner. But that it was going to be “phased out”, slowly and

steadily. I think that the brand equity for Gattu is huge, and company might be taking a

big risk by eliminating it. What future has in store for them remains to be seen.

8 Possible Future Changes: Right now, the industrial segment is characterized by a lot of joint ventures. There basic

reason for the happening of these joint ventures has been the change in the customer

demands. In the past, the Indian industrial paint segment was very underdeveloped and

the players were not very discerning about the type of paint that was put on their products

or on their machinery. With the maturing of the markets the industrial segments began

demanding paints that were most suited for the type of products that they were producing

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or using. These types of specialized paints required much better technology than was

being used at the time.

The tie-ups and JVs began forming soon after this change in demand patterns because the

Indian players realized that they did not have the technological competency to develop

the paints that were being demanded.

Around this time, the large multinational players started looking at India as their next

destination for market expansion. The same market maturity that created the need for

technology for the established Indian players could have been the signal for the global

players to enter the Indian market. But these global players were not aware of the Indian

market conditions and did not have the understanding of the demand patterns of the

market. To enter the market they needed this market understanding, therefore they were

looking for setting up JVs with Indian players in India.

Sustainability of Joint Ventures = fn (Complementarity of competencies, Transferability

of competencies)

At the time when the joint ventures were formed the competencies that the players had

were complementary i.e. the foreign players had the technology and the Indian players

had the market understanding. But the sustainability of these ventures is not very high

because, the transferability of competencies is also high. After a period of existence in the

market, the foreign players shall start understanding the Indian market and he shall no

longer feel the need to partner with the local player. On the other side, depending upon

the tie up, the transfer of technological competencies shall also happen in the direction of

the Indian partner. There shall come a time when the partners shall no longer feel the

need for each other and this could lead to any of the following three consequences:

Break up of the JV: Both the players could decide that they do not want to

continue with the Joint venture and that they could survive on their own in the

marketplace. The disadvantage of this action is that from being partners, the two

companies might become competitors with similar technologies and market

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understanding. But there is a chance of this happening if one of the players feels

that it has been able to transfer the competencies of the JV partner to itself

effectively and the partner has not been able to garner all the competencies that

the second partner had and it is confident that it would be able to get a majority

market share even if it has to compete with its erstwhile partner.

Take over of the company of take over of the JV: This is a more likely scenario.

The global players who are entering in the market are entering with a view of long

term market presence. Therefore, a situation where they have to break off with the

Indian partner and compete with it would not suit them too much because then

they would have to almost start from scratch and set up the business though they

would have gained the competencies they had lacked. The more preferred way for

the global partners would be to ensure that it gets adequate market understanding

and then take over either the Joint venture or take over the company. The reverse

takeover where the Indian partner takes over the JV partner is not very likely

because the global companies coming to India are much larger than the Indian

partners. In Indian cases, similarly, the chances of Asian Paints getting taken over

through a JV are quite small though the possibility does exist.

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9 ExhibitsExhibit 1:

Porter’s five-force model

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Existing rivalsBergerGNICIJNPL

SubstitutesWhite cementWhitewashBrick structureStone structure

Threat of new entrantsGrowth rate much higher than global, thus global players maybe interested.Huge potential to increase per capita consumption. Thus latent need.Companies can erode into APIL’s industrial market by forming more JVs

BuyersFragmented market for decorative, thus low power.Low switching costIndustrial paints, corporates have high power.

SuppliersTiO2 being imported. Few suppliers, thus high power.Availability of substitutes for RM low, thus high bargaining power


Exhibit 2:

Distribution channel

Factory

Fast moving categories/shades Slow moving

Branches/Depots (48) Regional Distribution Center

Stock Points

(found at larger branches -- same function as branches)

Dealer retailer (12,000 - 14,000)

Retailers (rural)

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Exhibit 3

Plant Locations

Company West India North India South India East India

Asian Paints Mumbai Kasna PatancheruAnkleshwar

Goodlass Nerolac Mumbai Kanpur ChennaiAhmedabad

Berger Paints Vithal Pondicherry Howrah

ICI Thane Balanagar Rishra

Jenson & Nicholson Panvel Bulandshahar N 24 Parganas

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Exhibit 4Organization structure

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Asian PaintsCEO

VP, Sales & Marketing

VP, Finance & Control

VP, HR VP, Corp. Strategy

VP, SCM VP, Systems

General Sales Manager

Regional Manager

Area Sales Manager

Sales Supervisor

T.S.I

General Mktg Manager

Group Brand Manager

Brand Manager

Management Trainee


10 Bibliography

10.1.1.1 Websites

www.indiainfoline.comwww.domain-b.comwww.chemb.comwww.asianpaints.comwww.ppg.comwww.EconomicTimes.comwww.thehindubusinessline.comwww.businessworld.comwww.paintstore.com/pwc/mkit/survey.html

and other websites that provide publicly available knowledge

Databases

Crisinfac – CRISIL’s Industry Intelligence DatabaseIBID – News Clippings DatabseCapitaline – Financial and Research Reports on Companies

Books

Marketing management, by VS Ramasawmy. 2nd editionStrategic brand management by J N KapfernerBuilding Strong Brands by David AakerValuation: Measuring and Managing the Value of Companies by Kopeland, Koller and Murrin

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http://www.paintstore.com/pwc/mkit/survey.html

http://www.businessworld.com/

http://www.thehindubusinessline.com/

http://www.EconomicTimes.com/

http://www.ppg.com/

http://www.asianpaints.com/

http://www.chemb.com/

http://www.domain-b.com/

http://www.indiainfoline.com/

Asian Paints Corporate Strategy

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