The Indian Aroma Chemicals Industry

Presentation to IFEAT Kochi 17th October, 2005

Mr. ARUN NIMBALKAR,

Director, Moraya Global Limited

arun@morayaglobal.com

Contents
Evolution of the Industry

Conclusion

A View of the Future

Indian Aroma Chemicals Industry

Current Structure of the Industry

Trends & Challenges Principal Products

Contents
Evolution of the Industry

Conclusion

A View of the Future

Indian Aroma Chemicals Industry

Current Structure of the Industry

Trends & Challenges Principal Products

The Indian aroma chemicals industry is comparatively very young .

The Industry has its genesis in the war years 1940 -1950
The Second World War created raw material scarcity Initial efforts by few fragrance manufacturers to reduce the cost of inputs and to improve the supply of some chemicals by manufacturing them from local raw materials

Today the $ 270 million Industry* is on the cusp of rapid growth

* Industry sources

The Industry has seen enormous changes in the last decade .

Import Substitution Responding to the pressures of liberalization Globalization of Industry markets

Economic Gains

Tariff Barriers Assured Market R&D of new aroma chemicals from locally available raw materials Essential Oils based industry Wide price gap between domestic and international markets No incentive for exports

Liberalization of aroma chemicals import. Entry of new players with larger capacities, driven by R&D Initial attempts to from JVs with foreign firms Rapid growth in local FMCG Industry Petrochemicals based Aroma Chemicals Products like phenyl ethyl alcohol, derivatives of alpha campholinic aldehyde, iso-e-super, coumarin introduced

Indian firms emerging as cost efficient suppliers to global F&F firms Greenfield ventures with capacities planned for global markets Industry adopts the same high industrial quality standards practised by the best Tremendous activity in allied specialty chemicals spillover of pharmaceuticals

INWARD FOCUSED
1950s - 1980s

REACTIVE
1990s

EFFICIENT
2000s

Today India is a significant player in the global aroma chemicals trade

Exports - EU 3500MT $ 33.81 mn 2500 MT $ 25.25 mn 2002 2003 2004 6000 MT $ 55.45 mn

Exports - Others Exports - USA 2000 MT $ 24.05 mn 2000 MT $ 21.25 mn 2002 2003 2004 5000 MT $ 46.36 mn

500 MT $ 5.25 mn

1500MT $ 10.00 mn 1000 MT $ 9.09 mn

2002

2003

2004

Source: Industry Sources, PCTAS database, Published Indian Customs data

The Industry is concentrated in Western & Southern India

Reasons for the Geographic spread Presence of supplier chemical industries Presence of consumer industries
Others 15% Benzenoids 50%

Share by Quantity
Musk Chemicals 2%

New Delhi

Turpenoids 33%

Kolkata
Gujarat

Share by ValueMusk
Mumbai 25000 15000 Bangalore Chennai Kochi 80s 90s 2000s Average Annual Production (MT) 10000
Turpenoids 40% Others 10% Benzenoids 48% Chemicals 2%

Source: Industry Sources, Published Indian Customs data

Contents
Evolution of the Industry

Conclusion

A View of the Future

Indian Aroma Chemicals Industry

Current Structure of the Industry

Trends & Challenges Principal Products

The Indian Aroma Chemicals Industry Structure .

Supplier Industries Aroma Chemicals Firms Buyer Industries

Essential Oil Producers Naphtha Manufacturers Terpene Manufacturers

Others (15%)

Benzenoids (50%) Terpenoids Based (33%) Musk Chemicals (<1%)

Domestic Market (70%) Exports (30%)

Rivalry between firms intense yet each firm has identified certain aroma chemicals and build competencies in manufacturing and R&D Processes of that chemical

Suppliers to Indian Aroma Chemical Firms

Supplier Industries Firms

Essential Oils Producers

Naphtha Manufacturers

Terpene Manufacturers

Cultivators of oils like Peppermint oil, basil oil. International Suppliers of essential oils

Large petrochemical complexes like Reliance Industries, IPCL etc. International Diversified Chemical Companies Bayer, BASF

Imported especially from China, South America

Indian Aroma Chemical Firms

Range of aroma chemicals being manufactured is impressive, but firm production capacities are small
350 different aroma chemicals being manufactured 8 to 10 medium / large manufacturers (~ 1000T per month) and 45 to 50 small scale manufacturers
AROMA CHEMICALS FIRMS

Sector dominated by Indian firms

Divisions of F&F companies, divisions of large diversified chemicals, medium to small niche producers based on specialized knowledge of a product or process technology
Others (15%)

Benzenoids (50%) Terpenoids Based (33%) Musk Chemicals (<1%)

Adoption of new technologies

Modern methods of analysis QA/ QC Standards, ISO certification irrespective of size

Technologies being commonly employed

Hydrogenation, Freidel Crafts Reaction, Grinard Reactions, Various types of pressure reactions, cyclizations, pyrolysis and oxidations

Buyer Industries - Indian Flavours & Fragrances Industries

BUYER INDUSTRY ($1.2 BILLION)

FLAVOURS INDUSTRY

Although the market demand is dominated by cheap flavours, there is a growing sophistication in demand.
The market is dominated by MNC firms like BBA & Quest with more than 60% share

END USER FMCG INDUSTRY ($10 BILLION)

Has recorded good growth based on the changing lifestyles of Indias middle classes Dominated by domestic companies and by the unorganized sector with more than 60% share. In the cosmetics and toiletries product group, the principal demand is from hair care and skin care

FRAGRANCES INDUSTRY

Buyer Industries - Global Flavours & Fragrances Industries

There are some 500 companies participating in the world F&F market.
Of these, under half are engaged in merchant sales, the rest being brokers, dealers, refiners, processors and suppliers. Only 15 global F&F houses market the full range of products BUYER INDUSTRY ($11.84 billion)

FLAVOURS INDUSTRY ($6.88 billion)

INDIAN AROMA CHEMICALS FIRMS

Exports $110 million

Traders

END USER FMCG INDUSTRY

In the last decade the top ten F&F companies have absorbed about 60 others Givaudan (12.4%), International Flavors & Fragrances (IFF), with 11.1%, Firmenich (8.7%), Symrise (7.3% ), Quest (5.5%) and Takasago (4.6%).

FRAGRANCES INDUSTRY ($4.96 billion)

Source: Flavours & Fragrances, 2005 SRI Consulting

Contents
Evolution of the Industry

Conclusion

A View of the Future

Indian Aroma Chemicals Industry

Current Structure of the Industry

Trends & Challenges Principal Products

The principal Aroma Chemicals from India include

Aroma Chemicals
Aroma Chemicals

Benzenoids

alpha Amyl cinnamaldehyde, Anethole (1-methoxy-4-propenyl benzene), P anisaldehyde, benzaldehyde,benzyl acetate, benzyl benzoate, benzyl Salicylate, cinnamaldehyde, coumarin, diphenyl oxide, eugenol, isoamyl Salicylate, methyl benzoate, methyl salicylate, PEA, benzophenone cinnamic alcohol, dimethylbenzylcarbinol and its esters, esters of phenylacetic Acid, methyl anthranilate, methylcoumarin, strawberry aldehyde Citronellol, geraniol/ nerol, hydroxycitronellal, Ionones, L Menthol, Methyl ionones, Alpha terpineol, damascones, geranonitrile

Terpenoids

Musk Chemicals

Musk amberette, musk xylol, musk ketone, ambrettolite, tonalide etc.

Others

Fatty aldehydes, esters of PTBCH and OTBCH, heterocyclic compounds such as indoles Pyrizines and quinolines

Contents
Evolution of the Industry

Conclusion

A View of the Future

Indian Aroma Chemicals Industry

Current Structure of the Industry

Trends & Challenges Principal Products

The basic building blocks for rapid growth are in place

The Industry enjoys number of advantages
Skilled & Disciplined Manpower
In both technical and managerial disciplines Good Work Ethics, Widespread knowledge of English Competencies in chemistry and process development

Strong Industry - research institutions linkages resulting in productive research in newer products and newer processes
Research institutions include National Chemical Laboratory (NCL), Mumbai University Department of Chemical Technology (UDCT), Regional Research Laboratories

Rich Bio diversity and geo climatic conditions for essential oil bearing crops Rule of law and Intellectual Protection (IP) regime in place Rapidly increasing size and sophistication of domestic demand Rapid adoption of new technologies

The constraints to the growth are structural in nature

Indias Infrastructure is struggling to support the rapid growth
Issues of logistics
Indian Ports suffer from enormous bottlenecks
Indian roads and airports are underdeveloped and the transportation systems less efficient

Huge Investments are needed to set up the required infrastructure

The bureaucratic setup has a drag effect on any business initiatives

Enlightened policy like in the telecom sector, the need of hour in a number of sectors to attract domestic investment as well as FDI The small capacities of the firms are not conducive for competing on a global scale, resulting in low surpluses Low firm surpluses and comparative low returns with other sectors resulting in investments in R&D and low innovation

Availability of capital to the sector is low

Contents
Evolution of the Industry

Conclusion

A View of the Future

Indian Aroma Chemicals Industry

Current Structure of the Industry

Trends & Challenges Principal Products

Indias growing middle class will make India a very attractive market for aroma chemicals
Indias household class Aspiring India is expected to drive the demand for FMCG and other retail goods Based on these projections the end user non food FMCG market is expected to be $22 billion in 2010 from the current size of $10 billion (CAGR-10%) The growth is to be led by rural and suburban India where the sector is expected to witness more than 50% growth by 2010
Household Income Classes (2004) Real Annual Segment Size Household Income (Millions of HH) (avg size of HH =5.4)

Global India Aspiring India Struggling India Destitute India

> $10,000 $ 4000 - $ 10,000 $ 1500 -$ 4000 <$ 1500

1 40 110 40

According to the Mckinsey study on Indias Food industry, it is expected to grow to $50 billion by 2006

The Aroma Chemicals Industry will have rapid growth based on derived demand for FMCG goods
Increase in income levels Increase in availability and range of products

Source: Mckinsey Quarterly, Winning the Indian Consumer, 2005 Associated Chambers of Commerce and Industry (ASSOCHAM)

Indias aroma chemicals industry could be a supplier base for the global F&F Industry .
Increasing improvement in Indias Infrastructure
India has begun to address the structural issues that constrain growth like infrastructure and huge bureaucracy Govt. policies in these regards are becoming less politically contested

The Industry is expected to consolidate through acquisitions to achieve capacities to compete globally & to address issues related to finance The industry would be a base for manufacture of number of intermediate products. With the Private sector contributing 75% of GDP, wide scope for JVs, collaborations, partnerships
It would be lucrative to manufacture in India

The industry could be a R&D base for the global F&F Industry .
The cost of developing molecules that look promising into products is costly and long winded affair
3 to 4 years to bring the laboratory bench to the perfume counter

R&D Outsourcing to India can be carried out

Indias technical manpower and world class research institutions could support a more cost effective and market oriented R&D model for large F&F companies Indias large bio diversity could be used to develop newer aroma chemicals

The industry could also support the R&D activities in developing better processes for better products

Contents
Evolution of the Industry

Conclusion

A View of the Future

Indian Aroma Chemicals Industry

Current Structure of the Industry

Trends & Challenges Principal Products

In Conclusion
The Indian Aroma Chemicals Industry is poised to grow rapidly, thanks to the tremendous growth of the domestic end user markets and switching of international buyers to Indian suppliers due to favourable economics .

There exists a window of opportunity for using India as a supplier base for manufacturing & R&D by entering into partnerships with Indian firms. The pace at which the opportunities are unfolding to create a more competitive global aroma chemical industry is remarkable.
We live in interesting times ..

Thank You