1、March 2023India:The next chemicals manufacturing hubAuthorsAvinash Goyal Ayush Gupta Chris Musso Jakob Fischer Marco Moder Nitika Nathani Rupali Jain Sanchay Vaidya Ulrich WeiheIndia:The next chemicals manufacturing hubAcknowledgmentsMcKinsey&Company would like to thank the Indian Chemical Council(I

2、CC)for inviting us to be the knowledge partner for their 16th annual summit on India Chemical Industry Outlook.We are particularly grateful to Bimal L.Goculdas(President,ICC and MD,DMCC Specialty Chemicals),Kamal P.Nanavaty(Chairman of Expert Committee Conference&Exhibition,ICC and President,Relianc

3、e Industries)and Rajen Mariwala(Vice President,ICC and MD,Eternis Fine Chemicals).Multiple industry leaders shared their valuable insights,we would like to thank Ravi Kapoor(MD,Heubach Colour),Rajendra Gogri(CMD,Aarti Industries),Kartik Bharatram(Deputy MD,SRF),Suresh Ramachandran(Country Head&Manag

4、ing Director,Arkema India),Pankaj Mehta(President and Strategy Head,Aarti Industries),Vivek Gadre(President,Atul),Raghunadhan A V(Chief General Manager,IOCL)and Soutrik Ganguli(Policy Analyst,Reliance Industries).A special thank you to Sanjoy Bhattacharya and Sothi Selvam Dhandapani(Director General

5、,ICC)for their guidance.Several colleagues around the globe contributed immensely to shaping this report.We are very grateful to Craig Poppleman,Divy Malik,Lalit Naik,and Victor Gujik for their inputs.The report was made possible through the efforts of the McKinsey working team that included Ayush G

6、upta,Kundan Parashar,Nitesh Dutt,Rishi Juthani,Sanchay Vaidya,Vedika Gulati,and Vibhor Agarwal.We also thank Sarath Kumar,Saravanan Mani and Vikas Gujaran from the Visual Aids team for designing the report and Akriti Agrawal,Amrutha Penumudi,Anamika Mukharji,Fatema Nulwala,Raksha Shetty,Rohan Moorth

7、y,and Sankalp Khandelwal from the McKinsey Communications team for their editorial inputs.AuthorsAvinash Goyal Senior Partner,IndiaAyush Gupta Engagement Manager,IndiaChris Musso Senior Partner,USAJakob Fischer Senior Partner,JapanMarco Moder Partner,South KoreaNitika Nathani Partner,IndiaRupali Jai

8、n Partner,IndiaSanchay Vaidya Engagement Manager,IndiaMarch 2023ContentsExecutive summary 2An era of sustained robust growth:The 2040 outlook 4Benchmarking Indias manufacturing competitiveness in chemicals Potential winning opportunities in Indias chemical sector 16Implications and questions for Ind

9、ian and global companies to reflect on821Indias chemical industry has been a global outperformer in demand growth and shareholder wealth creation over the last decade.It now stands poised to play an increasingly dominant role across both consumption and manufacturing in the global arena.Over recent

10、years,changing geopolitical scenarios have led to many countries focusing on domestic self-sufficiency and localized supply chains.However,benchmarking Indias manufacturing competitiveness reveals that India has a strong starting point vs other key global chemical clusters that could translate into

11、India becoming the next chemicals manufacturing hub.India:The fastest growing global demand center for chemicalsDomestic consumption in India is set to grow at a 9-10 percent CAGR in the coming years as illustrated in Exhibit 2,on the back of rising disposable incomes,a favorable demographic dividen

12、d,increasing global preference for biofriendly alternatives,and growing diversification of global chemical supply chains1.With this growth,Indias share in the global chemicals sector could triple to 10-12 percent by 2040,creating an additional USD 700 billion market value,over and above the current

13、contribution of USD 170-180 billion(as of 2021).The Specialty Chemicals segment is likely to be a key driver of this growth.It has the potential to contribute more than USD 20 billion to Indias net exports by 2040,a 10 x jump from the current total of USD 2 billion as shown in Exhibit 3.Benchmarking

14、 Indias manufacturing competitiveness in chemicals Benchmarking against six global chemical clusters surfaces both Indias strengths and areas of improvement as a global destination for manufacturing chemicals.Indian chemical companies often face obstacles in feedstock availability due to lagging cra

15、cker capacity and low access to building blocks and key minerals.Additionally,India faces dearth of skilled R&D talent and challenges in timely EC&land approvals.Despite this,India is cost competitive in several chemical segments due to low capital and operating expenses such as labour,utility and o

16、verhead expenses etc.Coupled with promoters focus on high profitability and a culture of process innovation,Indian chemical companies generate one of the highest EBITDA per unit of investment in fixed assets.This is evident from global leadership of multiple Indian firms across segments like Agroche

17、micals,Pharma Intermediates,Dyes&Pigments,Carbon Black etc.Potential winning opportunities in Indias chemical sectorMany sub-segments in Indias chemicals sector offer opportunities for building at-scale businesses.Winning plays exist across Specialty Chemicals(agrochemicals,flavors&fragrances,cosmet

18、ic chemicals,etc.),Inorganic Chemicals(caustic,fluorine,etc.)and petrochemicals(C4,C6 and C8 derivatives).These sub-segments score high on both cost competitivenessa function of domestic feedstock availability,trade balance,capacity utilization,scope of process and tech innovation,etc.and market att

19、ractiveness,an indicator of market size,demand growth,export potential,etc.The future of Indian chemical sector looks promising,and the country could potentially become the driving force of the demand&supply of the world chemical market.Having said this,it becomes imperative for the global companies

20、 to understand the implications and reflect upon the resource allocation mix,the business model and the overall business strategy,before commencing or scaling up their operations in the country.Further,Indian companies need to ponder upon questions around right type of business,the right mode of ent

21、ry,the feasibility variables,the global footprint from the go-to-market&asset perspective,leveraging the existing supply chain,if possible,among others.1 Including value created by the pharmaceuticals sectorExecutive summary2India:The next chemicals manufacturing hub1.An era of sustained robust grow

22、th:The 2040 outlookOver the last few years,the Indian chemicals sector has exceeded all shareholder expectations,outperforming not just the overall equity market(Exhibit 1)but also the majority of its upstream and downstream industries.This exceptional growth has been fueled by consistent revenue ex

23、pansion,increasing margins,and rise in multiples.The sector is projected to grow at 11-12 percent during 2021-27 and 7-10 percent during 2027-40 tripling its global market share by 2040.This growth is expected to be driven by a range of factors:Rising domestic consumption:India is expected to accoun

24、t for more than 20 percent of incremental global consumption for chemicals over the next two decades.Domestic consumption and demand is expected to rise from USD 170-180 billion in 2021 to USD 850-1000 billion by 2040(Exhibit 2).Changing consumer preferences:The growing demand for biofriendly produc

25、ts globally could benefit India,as it is among the leading producers of many chemicals that are used in such products.Shifting supply-chains:Triggered by the evolving geopolitical scenario and the trend to diversify from the existing core manufacturing markets;firms are seeking to make their supply-

26、chains more resilient.With its strong value proposition,India could be a preferred destination.Exhibit 1TRS performance trends of top chemical companies across geographies I In nd de ex xe ed d T To ot ta al l S Sh ha ar re eh ho ol ld de er rs s R Re et tu ur rn n (T TS SR R),Dec 11=100,USDC Cu umm

27、u ul la at ti iv ve e T TS SR R,C CA AG GR R,P Pe er rc ce en nt tD De ec c 2 20 01 11 1 D De ec c 2 20 02 22 2D De ec c 2 20 01 17 7 D De ec c 2 20 01 19 9D De ec c 2 20 01 11 1 D De ec c 2 20 01 17 7D De ec c 2 20 01 19 9 D De ec c 2 20 02 22 2Note:Top 500 global companies considered for the analy

28、sis272-9-3-9-8Source:Capital IQ1 Rest of World includes companies across Middle East,Africa,Latin America,Australia&New Zealand2000202322800600,0002012North AmericaIndiaEuropeGreater ChinaRest of WorldJapanAsia ex.China,India,Japan152Asia ex.China,In

29、dia,JapanRest of World1IndiaChinaJapanNorth AmericaEurope4India:The next chemicals manufacturing hubWidening trade deficitIndias current trade deficit,at USD 9-10 billion2,is expected to balloon to USD 40-42 billion by 2040.While exports are projected to grow at a CAGR of 9.5-10 percent to USD 140-1

30、45 billion by 2040,imports are likely to match growth at a CAGR of 9-9.5 percent to USD 180-185 billion(Exhibit 3).2 Basis Ex-Im data by UN Comtrade and McKinsey mapping of 6 digit HS Codes to chemical segments(inorganic,specialty and chemical)Exhibit 3Indias chemicals sector is expected to have a t

31、rade deficit of$40-42 Bn by 2040;Specialty Chemicals has the potential to contribute$20 Bn to net exportsI In nd di ia a C Ch he emmi ic ca al ls s T Tr ra ad de e B Ba al la an nc ce e,USD Bn02021ExportsImports528402133242-185I In nd di ia a C Ch he

32、 emmi ic ca al ls s s se eg gmme en nt t-w wi is se e E Ex xp po or rt ts s a an nd d I Immp po or rt ts s,$BnSpecialtyInorganicPetchem19.7%9.4%8.7%7.5%11%9.2%11.2%10.8%9-1xxxxNet exports($Bn)Net imports($Bn)Note:Excludes fertilizers,pharma end-products and consumer products;includes

33、pharma intermediate chemicalsSource:MoCPC report(Chemical&Petrochemical Statistics at a Glance 2021),Invest India,“India Petrochemicals Scenario 2040”by EIL and IOCL,IHS Markit,UNComtrade,McKinsey Global Institute,McKinsey Fertilizer Demand Model,Press search1 2040 projections assume that the ratio

34、of imports/consumption and exports/consumption at sub-segment level remain the same in 2020 and 2040Exhibit 2India is expected to become a$850-1000 Bn chemicals market by 2040,taking 10-12%share of the global chemicals marketI In nd di ia a c ch he emmi ic ca al ls s mma ar rk ke et t,USD BnSource:M

35、oCPC 2021 report:Chemical&Petrochemical Statistics at a Glance,Invest India,“India Petrochemicals Scenario 2040”by EIL and IOCL,IHS Markit,UN Comtrade,McKinsey Global Institute,Press searchIndia Chem as%of Global ChemCAGR(Percent)--30060-65140--25-

36、30550-1-75189 9-1 10 0%p p.a a.Inorganic1Pet-Chem2FertilizersOthers3Specialty11 2027 estimations basis sub-sector level CAGRs from IHS Markit;2040 projections basis end-use sector nominal GVA CAGR(weighted)2 Estimated basis EIL 2020 and 2040 projections;5%price CAGR as

37、sumed for 2021,2027 and 2040 projections3 Includes pharma products(vaccines,injectables,OSDs,medical devices etc.)as per NICs industry division 21.Also includes some personal care consumer products(e.g.Shampoo,hair oil,toothpastes,soaps etc.)as NICs industry division 205.2%10-12%3-3.5%3 3-4 4x x11.5

38、%11%11%6%8-9%7-9.5%8-9%10-11%5-6%8%Note:2040 projections assume that the ratio of imports/consumption and exports/consumption at sub-segment level remain the same in 2020 and 2040.Govt.policies could change this mix over time.5India:The next chemicals manufacturing hubOut of the three main segments

39、of the sectorInorganic3,Petrochemicals4 and Specialty5only Specialty is expected to be a net exporter.By 2040,its net exports are expected to rise by around ten times,from about USD 2 billion in 2021 to USD 21 billion.Almost 80 percent of the exports in the segment would come from four sub-segments:

40、agrochemicals,dyes and pigments,cosmetics and personal care,and food ingredient chemicals(Exhibit 4).Due to limited cracker infrastructure and scarcity of key feedstock and minerals,both Petchem and Inorganic segments will have a trade deficit.At USD 41 billion,Petchems deficit will be almost twice

41、as large as Inorganics USD 21 billion(Exhibit 3).Imports in Petchem would likely be fragmented across products,with the two largest imported products,PVC and Polypropylene accounting for just 13 and 8 percent of imports,respectively.Exports in the segment,meanwhile,will be driven by the C8(Paraxylen

42、e)and C6(Benzene)building blocks and bulk polymers PP,LLDPE and HDPE.In the Inorganic segment,imports will be driven by Phosphorus,Potassium and Titanium(together accounting for 70%of total imports)and exports by Carbon Black,Sodium and Titanium(together accounting 65%of total exports)as can be seen

43、 in Exhibit 43 Includes Potassium,Bromine,Caustic,Carbon Black,Fluorine,Sodium,Phosphorus,Titanium,Calcium,Silicon and Sulphur4 Includes building blocks(C1-C8),intermediates and end-products5 Specialty chemicals include:Dyes&Pigments,Agrochemicals,Electronic chemicals,Flavors and Fragrances,Cosmetic

44、 chemicals,Nutraceutical ingredients,Food&Feed additives,Plastics additives,Rubber-processing chemicals,Adhesives and sealants,Construction chemicals,Specialty polymers,Cleaners,industrial and institutional,Surfactants,Textile chemicals,Water management chemicals,Paper chemicals,Flame retardants,Lub

45、ricating oil additives,Antioxidants,Petroleum refining and chemical process catalysts,Biocides,and Corrosion inhibitorsExhibit 44-5 key segments could drive 50%+of trade balance across Specialty,Inorganic and PetchemNote:Excludes fertilizers,pharma end-products and consumer products;includes pharma

46、intermediate chemicals Source:MoCPC report(Chemical&Petrochemical Statistics at a Glance 2021),Invest India,“India Petrochemicals Scenario 2040”by EIL and IOCL,IHS Markit,UN Comtrade,McKinsey Global Institute,McKinsey Fertilizer Demand Model,Press searchMMa aj jo or r c co on nt tr ri ib bu ut to or

47、 rs s t to o e ex xp po or rt t/i immp po or rt t,2 20 04 40 0,USD Bn40%27%7%5%19%3%32%22%11%10%25%20%14%9%9%8%41%Sub-segment export,%Sub-segment import,%SpecialtyInorganicPetchem26%18%6%9%5%36%36%21%15%7%21%13%8%5%5%65%5%PETPolyester Fiber(Filament)Polypropylene(PP)ParaxyleneBenzeneOthersFood&Feed

48、additivesCosmetic ChemicalsDyes&PigmentsFlavors&FragrancesOthersAgrochemicalsOthersTitaniumSodiumCausticCarbon BlackHDPESBRPolypropyleneOthersSAPPVCTitaniumPotassiumCarbon BlackOthersPhosphorusCosmetic ChemicalsFlame RetardantsDyes&PigmentsPlastic AdditivesOthersAgrochemicalsSpecialtyInorganicPetche

49、m6India:The next chemicals manufacturing hubBenchmarking Indias manufacturing competitiveness in chemicalsExhibit 5Macro BenchmarkingGlobal chemicals manufacturing hubs selected for benchmarking against IndiaChinaIndonesiaSaudi ArabiaGermanySouth KoreaVietnamLeadingComparable to peersLaggard/needs i

50、mprovementCategoryB.Labour&utilitiesA.Feedstock availabilityC.Capital costsD.Policy environmentVariables8.Material costs($/unit)9.Machinery costs(USD)2.Average Hourly Wage(USD/hr)3.Total Labour Force(Mn)4.Industrial water usage costs(USD/m3)5.Electricity costs(USD/kwh)6.Availability of R&D talent7.C

51、onstruction costs(USD/sq.m)10.EBITDA per unit of investment in fixed assets(%)11.Real interest rates(%)12.Corporate tax rates(%)13-23.Ease of doing business metrics24.Environmental Clearance1.Domestic availability of petchembuilding blocks RemarksOne of the lowest manufacturing labor wages in the wo

52、rld1.Highest workforce availability,next to ChinaComparable to peersComparable to peersLimited availability of R&D talent for chemicals companiesOne of the lowest infrastructure costs up to 70%lower than some of the other chemicals manufacturing hubs around the worldTop Indian companies have the hig

53、hest EBITDA to Gross PPE ratioStable policy rate environment,comparable to leading economiesComparable to leading economiesTop quintile in protecting minority investors,getting electricity/credit and dealing with construction permits Approval challenges often lead to production delaysSufficient:C4,C

54、6,C8Insufficient:C1,C2,C3,C7Competitive in resolving insolvency and trading across borders Scope of improvement in registering property/land,paying taxes,starting a business and enforcing contracts1 While average hourly cost is low;due to lower productivity there is an advantage but not always as si

55、gnificant unless productivity is high2.While it is clear that the Indian chemicals sector is geared for robust growth,its manufacturing competitiveness is less clear.Benchmarking the sector against six global chemicals clustersChina,Germany,Indonesia,Saudi Arabia,South Korea,and Vietnamacross 24 var

56、iables shows that though India is more or equally competitive on most counts,other countries have a competitive edge over India in a few crucial respects.(Exhibit 5)8India:The next chemicals manufacturing hubAn analysis of Indias competitiveness This section analyzes Indias competitiveness in chemic

57、als across four categories feedstock availability,labour and utilities,capital costs,and policy environment:Petchem feedstock availability:India is self-sufficient C4,C6,C8,but is deficient in C1,C2,C3,C7 In the Petchem segment,India possesses abundant feedstock for higher carbon building blocks(C4,

58、C6,and C8).Consequently,its combined surplus production of Butadiene(C4),Benzene(C6),Paraxylene(C8)and Orthoxylene(C8)is significantly higher than that of its peers.However,for building blocks C1,C2,C3,and C7,India does not have sufficient feedstock to meet its downstream requirements.There is limit

59、ed availability of Ethylene and Propylene in the merchant market as Indian refineries use these for captive consumption for producing bulk polymers.As a result,India is dependent on imports for intermediates and end-products derived from Ethylene and Propylene.Similarly,India imports large quantitie

60、s of Methanol and Toluene for domestic consumption(Exhibit 6).Exhibit 61 1.E Ex xc ce es ss s p pr ro od du uc ct ti io on n o of f P Pe et tc ch he emm b bu ui il ld di in ng g b bl lo oc ck ks s (2020,000 kTA)S Se el lf f-s su uf ff fi ic ci ie en nt t i in n C C4 4,C C6 6,C C8 8H Hi ig gh h i imm

61、p po or rt ts s o of f C C1 1 a an nd d C C7 7Source:“India Petrochemicals Scenario 2040”by EIL and IOCL,IHS Markit,UN Comtrade,Press Search L Li immi it te ed d f fe ee ed ds st to oc ck k a av va ai il la ab bi il li it ty y i in n C C2 2,C C3 3India doesnt have enough Ethylene and Propylene domes

62、tically for downstream requirements.Intermediates&end-products derived from Ethylene and Propylene generally have high imports E Et th hy yl le en ne e (C C2 2)P Pr ro op py yl le en ne e (C C3 3)I Immp po or rt ts s mme ee et t 1 10 00 0%d de emma an nd d f fo or rI Immp po or rt ts s mme ee et t 1

63、 10 00 0%d de emma an nd d f fo or rEthylene Propylene Diene MonomerAcrylic AcidTEG,Polyethylene GlycolN-butanolI Immp po or rt ts s mme ee et t 5 50 0%+d de emma an nd d f fo or rI Immp po or rt ts s mme ee et t 5 50 0%+d de emma an nd d f fo or rEthylene DichloridePropylene GlycolAcrylonitrileA.Fe

64、edstock availability:India is self-sufficient in C4,C6,C8 but has supply deficit of remaining building blocks 1.22.20.2-0.5Benzene(C6)-2.0-0.1-1.1IndiaChinaGermanyIndonesiaKoreaVietnamSaudi Arabia00-0.1Orthoxylene(C8)-0.20.30.100.500-0.30.2Butadiene(C4)-0.30-0.4-0.70.62.0-13.1Paraxylene(C8)6.01.4-2.

65、0-0.2-4.24.4-0.5-11.1-1.9Methanol(C1)-0.20.3-0.1-0.4-0.4Toluene(C7)-0.1-0.1LeadingComparable to peersLaggard/needs improvement9India:The next chemicals manufacturing hubLabor and utilities:India has abundant low-cost labor and competitive water&electricity costs,but faces a shortage of R&D talentInd

66、ia has the worlds highest labor availability,more than 470 million,after China.Among the six peers,its labor costs are also one of the lowest,at less than USD 2 per hour.Indias industrial grid electricity and water costs are also globally competitive,at USD 0.1 per kWh and USD 0.6-0.8 per m3,respect

67、ively.However,Indias chemical sector faces a shortage of skilled R&D talent.Only about 1,400 chemical engineers graduate from Indias top 25-30 universities every year.Even from this limited pool,the majority either opt for higher studies or switch streams.This has led to low availability of speciali

68、zed PhDs.India,therefore,is dependent on foreign talent for its chemical R&D needs6.Capital costs:India is competitive across the boardIndias infrastructure costs,across construction,material,and machinery7,are up to 70 percent lower than other global chemical manufacturing hubs.For instance,constru

69、ction costs in India are 5x lower vs Germany.Similarly,Indias material costs are 4.5x lower vs Germany and 3x lower vs Saudi Arabia(Exhibit 8).At 25 percent,Indias corporate tax rate is comparable among peers.Indonesia has slightly lower tax rate at 22%,while Vietnam and Saudi Arabia have a tax rate

70、 of 20 percent 8.Germanys tax rate,meanwhile,is the highest,at 30 percent.Indias average real interest rate,is also competitive9.While it is lower than the average rate in Indonesia and Vietnam,it is higher than South Koreas and Chinas(Exhibit 8).6 Basis ICT,industry interviews7 Turner&Townsend Cons

71、truction Index;press search8 Trading Economics and World bank Data9 Based on data from the World BankExhibit 7E Ea as sy y a ac cc ce es ss s t to o c ch he ea ap p l la ab bo or r2 2.G Ge en ne er ra al l l la ab bo ou ur r c co os st ts s (2020,USD/hr)Source:General labor costs from Turner&Townsen

72、d and local press search;Total manpower from World Bank;Industrial electricity costs from World Bank,and local press search;Industrial water usage costs from CEIC Data,DE Statis,IBNET tariff data,and local water department websitesB.India has one of the lowest labour costs in the world and competiti

73、ve utility costs40.0-42.03.0-3.51-1.5VietnamIndonesiaKoreaSaudi ArabiaGermany1.5-2.01.0-2.0ChinaIndia11.5-12.07.0-8.03 3.T To ot ta al l MMa an np po ow we er r (2021,Mn)475629GermanyVietnamKoreaSaudi ArabiaIndonesiaIndiaChina4 4.I In nd du us st tr ri ia al l g gr ri id d e el le ec ct t

74、r ri ic ci it ty y (2022,USD/kWh)C Co ommp pe et ti it ti iv ve e u ut ti il li it ty y c co os st ts s5 5.I In nd du us st tr ri ia al l w wa at te er r u us sa ag ge e c co os st t (2022,USD/m3)LeadingComparable to peersLaggard/needs improvement0.100.090.070.070.340.080.08VietnamIndonesiaSaudi Ara

75、biaChinaIndiaKoreaGermany0.8-1.00.5-0.71.7-1.91.8-2.00.7-0.90.6-0.80.5-0.7KoreaVietnamSaudi ArabiaChinaIndonesiaIndiaGermany10India:The next chemicals manufacturing hubOn the back of these low rates and a razor-sharp focus on profitability,Indian firms outperform their global peers on the measure of

76、 EBITDA-to-gross-PPE ratio.The top 15-20 Indian companies generate an EBITDA of more than 40 percent per unit of investment in gross PPE10significantly higher than the 10-30 percent reported by their counterparts across the world.10 Calculated using data from annual reports and Capital IQExhibit 8C.

77、India has the lowest construction&infrastructure costs in the world and competitive tax&real interest ratesSource:Turner&Townsend Construction Index,Capital IQ,EIU,World Bank;Press Search1 Average cost of one unit of each-Concrete,Standard brick per 1000,13mm plasterboard,and Structural steel beams(

78、tonne)(100 tonne+job)2 Considered data of top 20 listed chemical companies of each country for Dec 22 TTML Lo ow w c co on ns st tr ru uc ct ti io on n&c ca ap pi it ta al l c co os st ts sC Co ommp pe et ti it ti iv ve e c co or rp po or ra at te e t ta ax x a an nd d r re ea al l i in nt te er re

79、es st t r ra at te es s7 7.C Co on ns st tr ru uc ct ti io on n c co os st ts s (USD/sq.m)8 8.MMa at te er ri ia al l c co os st ts s (USD)19 9.MMa ac ch hi in ne er ry y c co os st ts s (USD)1 10 0.E EB BI IT TD DA A/G Gr ro os ss s P PP PE E (%)21 11 1.C Co or rp po or ra at te e T Ta ax x r ra at

80、 te es s (%,2022)1 12 2.R Re ea al l i in nt te er re es st t R Ra at te es s (%,avg.2019-2021)6249931,1021,3333,112618VietnamSaudi ArabiaGermanyIndonesiaIndiaChina8609451,2032,6443,823GermanyIndiaSaudi ArabiaIndonesiaChina4974287428801,554GermanyIndonesiaIndiaSaudi ArabiaChinaLeadingComparable to p

81、eersLaggard/needs improvement10-15%10-15%China10-15%30-35%15-20%Korea20-25%VietnamGermanySaudi Arabia40-45%IndonesiaIndia25%25%22%20%30%20%28%KoreaGermanySaudi ArabiaVietnamChinaIndiaIndonesia5.5%7.1%-2.1%2.3%Korea-0.6%GermanySaudi ArabiaChina3.2%2.1%IndonesiaVietnamIndia11India:The next chemicals m

82、anufacturing hubRegulatory environment:India has made good progress over the years,but more needs to be doneOver the last 5 to 7 years,India has made substantial improvements in its policy and regulatory environment,making it much easier for enterprises to establish themselves and flourish.These imp

83、rovements have included the introduction of the Insolvency and Bankruptcy Code(IBC)in 2016;a revamped universal tax regime in the form of the Goods and Services Tax(GST);and simplification,digitization,or discontinuation of large number of compliance requirements.Among other things,these changes hav

84、e made it easier for businesses to receive credit,apply for construction permits,and manage insolvencies.As a result of these developments,Indias Ease of Doing Business Ranking jumped from 143 in 2015 to 63 in 2020,and its manufacturing FDI during FY16-20 exceeded the figure for the preceding five-y

85、ear period by three times(Exhibit 9).On some parameters,however,India lags behind its peers.These include the ease of starting a business,registering property,paying taxes,and enforcing contracts.Getting timely environmental clearances(ECs)is also a major challenge in India.According to a report by

86、the Comptroller and Auditor General of India,ECs in India are delayed nearly 9 out of 10 times,with the average period of delay being about 6.5 months.This becomes a source of significant capital drain for Indian chemicals manufacturers,who are often forced to wait for months,sometimes even years,to

87、 get clearance to initiate production in a finished facility.Exhibit 9Policy reforms since 2015 have led to improvements in ease of doing business rank along with$240+Bn of FDI inflowsSource:Ease of Doing Business Reports,World BankR Ra an nk ki in ng gs s a ac cr ro os ss s E Ea as se e o of f D Do

88、 oi in ng g B Bu us si in ne es ss s p pa ar ra amme et te er rs s (2015-20)C Ch hi in na aI In nd do on ne es si ia aK Ko or re ea aG Ge er rmma an ny yI In nd di ia a20202020202020202020(since 15)2020V Vi ie et tn na amm1 13 36 6283725619713.Protecting minority investors2 22 2-1 11 15 51233252714.

89、Getting electricity2 25 5-1 11 15.Getting credit2 27 7-1 15 57 733.Dealing with const.permits5 52 2-8 85 55.Resolving insolvency6 68 8-5 58 8568.Trading across borders1 11 15 5-4 41 0919.Paying taxes45140321251 13 35 5-2 23 311520.Starting a bus

90、iness1 15 54 43 33 328.Registering property1 16 63 3-2 23 351392146822.Enforcing contracts6 63 3-8 80 03273522702 23 3.O Ov ve er ra al ll l r ra an nk ki in ng gLeadingComparable to peersLaggard/needs improvementExhibit 10Most Indian chemicals manufacturers faceproduction delays due to E

91、C hurdlesSource:CAG Report,201684%56%59%93%82%89%Grant of clearance to applicantConveying decision to applicantAppraisal by Expert Appraisal CommitteeGrant of terms of referenceRecommenda-tion of EAC to ministryScrutiny of final EIA report2 24 4.S Sh ha ar re e o of f p pr ro oj je ec ct ts s t th h

92、a at t f fa ac ce ed d d de el la ay ys s a at t d di if ff fe er re en nt t s st te ep ps s o of f E EC C (%,CAG Report 2016 latest available)K Ke ey y mmi il le es st to on ne es s i in n E EC C f fi il li in ng g p pr ro oc ce es ss sLaggard/needs improvement12India:The next chemicals manufacturi

93、ng hubCost competitiveness across sub-segmentsMacro trends play a pivotal role in developing a broad-based picture of Indias strengths and improvement areas in chemical manufacturing.However,at the sub-segment level,cost-curve benchmarking serves as a better guide to cost competitiveness.This approa

94、ch shows that competitiveness is a function of a variety of factors that can differ greatly from product to product.For instance,it shows that while feedstock availability is the main determinant of competitiveness in some segments,innovation and capabilities developed by Indian companies can sharpe

95、n the countrys competitive edge in others.The following three cost curves illustrate this clearly.C6 Derivative-IsobutyleneIn producing isobutylene(a derivative of butadiene),Indian firms might have up to 15 percent lower costs than in China(despite only a little difference in raw material costs),up

96、 to 35 percent lower than in Germany(even though raw material costs are lower in Germany),and up to 45 percent lower than in Saudi Arabia.With this clear cost advantage,India commands two-third of the market for Iso-Butyl Benzene(IBB),an Isobutylene derivative used in pharma APIs and perfumes(Exhibi

97、t 11).C2 Derivative-Ethylene DichlorideProduction costs of ethylene dichloride in India are typically higher than in Germany and Saudi Arabia,despite advantages in labor costs and plant overhead expenses.This is because of limited availability of ethylene for merchant sales in India.As a result,Indi

98、a imports more than half of its EDC requirements,primarily from the Middle East,Europe,and North America(Exhibit 12).Exhibit 11Pet-chem competitiveness:India is highly cost competitive in C4,C6 and C8 derivatives due to domestic feedstock availability E.g.IsobutyleneIndiaSource:IHS,ITC Trade Map,Ind

99、iaPetrochem,Press Search1 Includes raw material cost and by-product credits 2 Other direct cost includes maintenance materials,operating supplies and control laboratory related costs3 Isobutylene from Isobutane by the Oleflex Dehydrogenation process4 Considered for average plant size:India(105 kTA),

100、China(30 kTA),Saudi Arabia(33 kTA),Germany(42 kTA)I Is so ob bu ut ty yl le en ne e3 3C Co os st t C Cu ur rv ve e1,3009006001,1001,200500700400903008001,0000020010050Quantity(kTA)Manpower CostPlant Over headOther Direct Cost2Utility CostRaw Material Cost1ChinaGermanySaudi ArabiaCash costs4(cents/Kg

101、)13India:The next chemicals manufacturing hubExhibit 12Pet-chem competitiveness:India has low cost-competitiveness and high import dependency for C1,C2,C3 E.g.Ethylene Dichloride(EDC)Source:IHS,ITC Trade Map,IndiaPetrochem,Press Search1 Includes raw material cost and by-product credits 2 Other direc

102、t cost includes maintenance materials,operating supplies and control laboratory related costs3 Ethylene Dichloride by Direct Chlorination:Liquid-phase HTC process(Oxy Vinyls)4 Considered for average plant size:India(383 kTA),China(384 kTA),SE Asia(390 kTA),Saudi Arabia(385 kTA),Germany(552 kTA)5613,

103、0007,0008,000017,0001,00016,00015,00014,00011,000506,00012,0005,0002,0004,00010,0009,00003,000Q Qu ua an nt ti it ty y (kTA)Plant Over headUtility CostManpower CostOther Direct Cost2Raw Material Cost1Cash costs4(cents/Kg)Ethylene Dichloride3Cost CurveIndiaChinaGermanySaudi ArabiaSE AsiaExhibit 13Spe

104、cialty Chemicals competitiveness:India is highly competitive globally E.g.Cost leadership in AgrochemicalsSource:IHS,ITC Trade Map,IndiaPetrochem,Press Search1 Includes raw material cost and by-product credits2 Other direct cost includes maintenance materials,operating supplies and control laborator

105、y related costs3 Considered average capacity of 5 kTAC Co os st t C Cu ur rv ve e f fo or r a a k ke ey y F Fu un ng gi ic ci id de eC Ca as sh h c co os st ts s3 3(cents/Kg)000020900200160Q Qu ua an nt ti it ty y3 3 (kTA)Other Direct Cost2Plant Over headR

106、aw Material Cost1Utility CostManpower CostIndiaChinaGermanySE AsiaAgrochemicalsIndian agrochemical companies have a compelling cost advantage over their global counterparts,predominantly because of low raw material costs and labor costs(Indias labor costs are less than half of Chinas)as illustrated

107、in Exhibit 13.14India:The next chemicals manufacturing hub3.Potential winning opportunities in Indias chemical sectorToday,the Indian chemical industry offers several opportunities to build at-scale businesses across several Specialty,Inorganic and Petrochemical segments.Identifying these opportunit

108、ies calls for the right balance between market attractiveness and cost competitiveness.While cost competitiveness is generally a function of feedstock availability,trade balance,and scope of value addition via process or tech innovation,market attractiveness is a composite of current market size,exp

109、ected CAGR and macro trends.Specialty chemicalsWith a net trade surplus,the Specialty segment is the strongest pillar of Indias chemicals sector.In all,16 specialty chemicals sub-segments perform well on both cost competitiveness and market attractiveness.Two of these sub-segments(as illustrated in

110、Exhibit 14)are:Agrochemicals:Agrochemicals in India is currently a USD 5.5 billion market11,growing at a CAGR of 8.3 percent.By 2040,it is expected to account for almost 40 percent of Indias overall chemicals exports and nearly 13 percent of the global ag-chem market.Food and Feed Ingredient Chemica

111、ls:Constituting flavors and fragrances,food and feed additives,and nutraceuticals,this sub-segment is a USD 3 billion market in India,growing at a CAGR of 7-9 percent.11 Includes local and exports marketExhibit 14Ranking of top 25 Specialty Chemicals segments on cost competitiveness and market attra

112、ctivenessC Co os st t c co om mp pe et ti it ti iv ve en ne es ss s f fo or r m ma an nu uf fa ac ct tu ur ri in ng g i in n I In nd di ia a1 1HighMediumLowLow1 Basis domestic feedstock availability,2022 imports and exports by India,scope of value addition via tech or process innovation2 Basis India

113、 market size(2022),India consumption CAGR(2022-2040),global market size(2022),and macro trendsAttractive segments selected basis market size&growth,competitive cost of production for manufacturing in India,historical performance and macro trendsAttractive zoneIndia market size(USD Bn,2022),bubble re

114、presentative of$300 MnNutraceutical ingredientsPaper chemicals,specialtyCosmetic ChemicalsSpecialty polymersConstruction chemicalsAntioxidantsSurfactantsRubber-processing chemicalsDyes&PigmentsAdhesives and sealantsWater management chemicalsPetroleum refining and chemical process catalystsFood&Feed

115、additivesAgrochemicalsTextile chemicalsBiocidesCorrosion inhibitorsElectronic ChemicalsFlavors and fragrancesCleaners,industrial and institutionalPlastics additivesLubricating oil additivesFlame retardantsLowM Ma ar rk ke et t a at tt tr ra ac ct ti iv ve en ne es ss s2 2MediumHighSource:IHS Markit,

116、UN Comtrade,Press search16India:The next chemicals manufacturing hubInorganic chemicalsAs inorganic chemicals require little processing as compared with other segments,the Inorganic chemicals segment is predominantly dependent on feedstock availability.India,unfortunately,has a scarcity of raw mater

117、ial for most chemicals in this segment.However,it has a high demand for many inorganic chemicals,making it an attractive market.Six sub-segments emerge as an opportunity for building an at-scale business in the segment,backed by high growth rate of end-use industries and natural feedstock advantages

118、.Two of these(as illustrated in Exhibit 15)are:Fluorine:Growing at a CAGR of more than 10 percent,fluorine is expected to become a USD 4.2 billion market by 2040.Its growth will be driven by rising demand from two of its main end-use industries:pharma and ag-chem.Sodium and Caustic:This sub-segment

119、is expected to register CAGR of nearly 10 percent.By 2040,sodium and caustic could become a USD 13 billion and USD 11.5 billion market respectively.Exhibit 15Ranking of Inorganic Chemicals segments on cost competitiveness and market attractivenessC Co os st t c co om mp pe et ti it ti iv ve en ne es

120、 ss s f fo or r m ma an nu uf fa ac ct tu ur ri in ng g i in n I In nd di ia a1 1HighMediumLowLowM Ma ar rk ke et t a at tt tr ra ac ct ti iv ve en ne es ss s2 2MediumHigh1 Basis domestic feedstock availability,2022 imports and exports by India,scope of value addition via tech or process innovation2

121、 Basis India market size(2022),India consumption CAGR(2022-2040),global market size(2022),and macro trendsAttractive segments selected basis market size&growth,competitive cost of production for manufacturing in India,historical performance and macro trendsAttractive zoneIndia market size(USD Bn,202

122、2),bubble representative of$200 MnSulphurFluorineSodiumCarbon BlackPhosphorusCalciumTitaniumBrominePotassiumSiliconCausticSource:IHS Markit,UN Comtrade,EIL and IOCL Petrochemicals Perspective Plan,Press search17India:The next chemicals manufacturing hubExhibit 16Ranking of top petchem segments($200

123、Mn market size)on cost competitiveness and market attractiveness-for companies with low or moderate backward integrationC Co os st t c co om mp pe et ti it ti iv ve en ne es ss s f fo or r m ma an nu uf fa ac ct tu ur ri in ng g i in n I In nd di ia a1 1HighMediumLowLowLowM Ma ar rk ke et t a at tt

124、tr ra ac ct ti iv ve en ne es ss s2 2MediumHigh1 Basis domestic feedstock availability,2022 imports and exports by India,scope of value addition via tech or process innovation and capacity utilization levels2 Basis India market size(2022),India consumption CAGR(2022-2040),global market size(2022),an

125、d macro trendsNote:Only primary chain/building block considered for products where multiple C1-C8 feedstocks are requiredAttractive segments selected basis market size&growth,competitive cost of production for manufacturing in India,historical performance and macro trendsAttractive zoneIndia market

126、size(USD Mn,2022),bubble representative of$100 MnUnsaturated Polyester Resin(UPR)N Ni it tr ro ob be en nz ze en ne e:D DN NB B,P PA AP PAcrylic Acid EstersA Ammi in ne es sEthoxylate SulphatesButdiene derived rubbers(Butyl rubber,NBR,SBR,PBR)Ethyl AcetatePolyether PolyolsButyl AcrylateP PE ET TABSL

127、 Li in ne ea ar r A Al lk ky yl l B Be en nz ze en ne e (L LA AB B)SAPPolyethylene(LDPE,HDPE,LLDPE)P Pu ur ri if fi ie ed d T Te er re ep ph ht th ha al li ic c A Ac ci id dEthylene-vinyl Acetate(EVA)Chlor-alkali(EDC,VCM,PVC)Metallocene LLDPE(C6)Epoxy ResinAcetic AcidMethylene DiphenylDiisocyanatePo

128、lypropylene(PP)FormaldehydeDiketene&derivativesIsopropyl AlcoholP Ph he en no ol lOlefins(Alpha,Linear Alpha,Poly Alpha)P Ph ht th ha al li ic c A An nh hy yd dr ri id de e (P PA A)A Al lk ky yd d R Re es si in nStyrene/PolystyreneA An ni il li in ne e a an nd d r ru ub bb be er r c ch he emmi ic ca

129、 al ls s c ch ha ai in nPolycarbonate(PC)C Ch hl lo or ro ob be en nz ze en ne e d de er ri iv va at ti iv ve es sEthylene OxideP Po ol ly ye es st te er r f fi ib be er r(s st ta ap pl le e,f fi il la amme en nt t)EthoxylatesEthylene GlycolsC4C8C3C6C2MiscellaneousC1Source:IHS Markit,UN Comtrade,EIL

130、 and IOCL Petrochemicals Perspective Plan,Press searchPetchemIn petrochemicals,opportunities are highly dependent on scale and vertical integration capabilities of chemical companies.For example,backward integration at the cracker level makes bulk polymers(Polyethylene,Polypropylene,PVC etc.)score h

131、igh on market attractiveness and cost competitiveness.However,other companies are better suited to focus on products where feedstock are easily available in the merchant market(e.g.,C4,C6 and C8 derivatives)as illustrated in Exhibit 16.18India:The next chemicals manufacturing hubImplications and que

132、stions for Indian and global companies to reflect on4.India has the potential to become the consumption and manufacturing engine of the global chemical industry.It is witnessing rapid economic growth,is home to a rising middle class and requires lower capital and operating expenses.However,numerous

133、challenges still persist including limited domestic feedstock availability,delayed regulatory approvals and scarcity of skilled R&D talent.These enablers and obstacles have influenced the spectrum of chemical sub-segments falling in the consideration pool,in terms of both market attractiveness and c

134、ost competitiveness.Global chemical companies interested in entering or scaling up their businesses in India should,however,strategically ponder upon several questions,such as:Should we cater to Indias demand via exports or a local manufacturing base?What should be our resource allocation strategy f

135、or Indian operations?What could be the right business model to overcome Indias structural challenges?Similarly,Indian chemical companies need to reflect upon numerous questions,such as:What type of business is suitable to enter and what is the best mode of entry?Where are we truly advantaged from th

136、e geographic stand-point?Where does the business stand across the feasibility variables(technical,economic and social)to enter a sub-segment?What would it take to be a real global player across assets,talent and go-to-market?Can we leverage the existing supply chain,if possible?20India:The next chemicals manufacturing hubMcKinsey and Company March 2023 Copyright McKinsey&Company Designed by INO VG&Design team McKinseyIndia McKinseyIndia McKinseyIndia McKinseyIndia