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Tips for Indian chemical trading houses to penetrate world market

Key challenges facing Indian chemical trading houses

  • Increasing global competition
  • Regulatory compliance
  • Warehousing/transport costs
  • Lack of capital for acquisitions
  • Accessing finance, bank support
  • Pressure on margins
  • Retaining principal/suppliers
  • Gaining principal / suppliers
  • Retaining key accounts/customers
  • Customer migration/relocation
  • Lack of adequate number of trained staff
  • Retaining key employees
  • Succession planning

Basic needs

  • Need for focussed approach
  • Adequate domain knowledge
  • Collaborative approach and joint ventures
  • Need to scale up operations
  • Long term tie up with producers
  • Price forecasting expertise
  • Need for maintenance of updated date base
  • Forward planning capability and readiness to tackle any unforeseen issues

Regulatory issues

The issues relating to health, safety and environmental regulations—such as Europe's Registration, Evaluation, Authorisation and Restriction of Chemicals legislation (REACH) have increased the regulatory compliance burdens.

Many distributors in India are unable to compete with global distributors, who can absorb the regulatory costs and have the required expertise to do so.

Relationship

Supplier and distributor relationships often change with the changes in economy and development of new technologies.

Such changes may destabilise the distribution business, if the distributors would not be adequately prepared to face such eventualities.

Expertise

Inadequate management capability and non availability of adequate talent are limiting Indian distributor's growth and are upsetting their desire and plan for creation of strong and progressive business models to operate in the global market.

Distributors need competent people to serve in different segments.

Since the distributing companies are not as large as producers, they have difficulty in attracting and retaining the talent.

Expectations of customers (buyers)

A comprehensive product portfolio for distribution is an advantage in the world market and having global coverage helps add new customers.

Customers abroad increasingly expect chemical distributors to offer broad product bundles and to set up and operate a safely operated global network for sourcing and delivery.

Expectations of overseas producers

Ultimate priority of producers abroad is to professionalize distribution management for all channels, which involves developing the distribution channel strategy, selecting the right distributors and the right distributor interaction model and doing a better job of managing distributor's performance.

Most overseas producers prefer distributors, that can dedicate technical and sales resources to their products in addition to providing value added services, for promoting the products in the market.

Cash flow management

There is need for networking technical management and the business needs, driven by excellence in cash flow management.

Many Indian distribution houses are yet to develop such capabilities in adequate measures.

Profit generation

When the distributors pay adequate attention with competence to achieve productivity improvements, the distributors can get the maximum profitability.

As the distributors try to set a good price, the producers after try to load distributors with inventory, which creates piquant situation for the distributors.

Such scenario points to the need for adequate understanding of the role and activity of each other, between the producers and distributors. Distributors need high level of comprehensive management expertise to become more profitable and learn how to evolve with the need of manufacturers.

Mutual dependence

Stocking, marketing, transportation, packaging, and other services will continue to trend depending on producer's need.

Supplier and distributor relationship may be cyclical but have to be necessarily based on mutual goodwill.

As the producers do not have enough sales coverage, this makes it difficult for them to go to the market to sell their product, which is where distributors come in. Producers can not operate with out the active support and cooperation of the distributors.

The distributor and the producer need to take more of a partnership approach to understand each other.

Tips for aspiring entrants into world chemical distribution business

Not a free entry area

At the first sight, a number of individuals and organizations may think that the entry into world chemical distribution business would be a no risk activity, requiring little capital and providing the option of quitting the business at any time, in case of any particular difficulties.

This view is far from true and indicate the lack of awareness of ground realities.

Any aspirant who seek to get into chemical distribution business without adequate preparation and pre investment study, would be forced to learn at the cost of time and investment.

Any entry into chemical business distribution must be preceded by in depth study of the problems and associated risks and issues and should also involve careful analysis of the opportunities. Such factors should be related to the strength of the promoters of distribution company before taking investment decision.

SWOT (Strength, Weakness, Opportunity, Threat) analysis of the new entrant is very much needed. This step is essential to chalk out the action plans to get the benefits of distribution business and reap the rewards.

Need for focused approach on short listed products

The relevant factors in the food processing industry may not be relevant in the fertilizer industry. So, to begin with, it is necessary to decide the area where a new entrant would want to trade and market.

While entering distribution business, it should be very clear that the focused approach should be only on a few shortlisted chemical products.

The choice of products for distribution must be shortlisted based on the study of demand supply scenario, regulatory issues relating to the product, factors influencing the demand, price drivers.

At best, number of products handled should be limited to 5 to 6 to start with, since there will be number of intricacies involved, which would be known only in the course of time for a new entrant.

Aspirants seeking to enter into distribution business must have familiarity with the products that would be shortlisted. Otherwise, special efforts must be put forth to gain knowledge about the various aspects of the shortlisted products.

With regard to the focused products, keeping close track on various developments on continuous basis are necessary and are of vital importance.

Choice of suppliers

Global chemical market is large and it is also segmented. This is so, in view of the depth of the chemical industry and the diverse demand of the consumers in different industries and different countries.

While seeking to enter into such wide field that is recording continuous and varied developments, the most important aspect for a new entrant is choice of suppliers. Selecting right supplier is essential for successful business.

In the case of new entrants, well established producers may not be keen or interested in entering into business deals, in view of the inexperience and small size of the new entrant distributors.

Most established producers may already have their supply chain figured out or are locked in long term contracts and may be unwilling to replace an incumbent distributor.

Further, multinational producers are known to be frequently involved in price fixing exercise either towards their customers or set low prices to discourage new competitions, and therefore, the producers would be doubly cautious and careful in choice of the distributors.

In such circumstances, a new distributor needs to have adequate strength and competence in some particular areas, that would be attractive for a producer.

It would be helpful for a new entrant to differentiate himself by offering technical services in the case of speciality chemicals.

Author Details

N.S. Venkataraman

Director

Nandini Consultancy Centre,

M 60/1, 4th Cross Street,

Besant Nagar, Chennai - 600 090

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