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Thursday, December 22, 2016

INDIAN INDUSTRY SPECIAL..... Indian agrochemicals industry: On the throes of change

Indian agrochemicals industry: On the throes of change 

The importance of agriculture to the Indian economy and for food security cannot be overemphasised. Despite the emergence of a strong services sector, and lofty ambitions to ramp up the share of manufacturing, there is no escaping the fact that agriculture underpins India’s rural economy. It accounts for 15% of gross value added and 60% of rural households rely on it for their livelihood.

Raising agricultural productivity
The challenges facing Indian agriculture are many, but can be summarised as ‘doing more with less.’ Pressures of population, urbanisation and industrialisation are shrinking land for farming, even as demands from an increasingly affluent population – including in rural India – are rising. The availability of water for irrigation has become a bone of contention, leading to disputes not just with neighbouring countries, but also between States. Ground water depletion has reached alarming levels, especially in areas that were at the forefront of the Green Revolution that turned India from an importer to exporter of foodgrains.
Raising agricultural productivity is paramount. It has languished at one of the lowest in the world due several factors including fragmented land holdings, lack of mechanisation, and use of traditional practices that have outlived their utility. Raising this will require diverse approaches including consolidation of land holdings to benefit from economies of scale; use of mechanised farming; wider adoption of high-yielding seeds, including genetically modified ones; better nutrient management, including balanced fertiliser usage; and integrated pest management (IPM) combining chemical and biological approaches.
The conventional agrochemical industry, supplying chemicals needed for pest management, and its modern avatar, offering seeds and chemical treatments as part of integrated solutions, are a vital part of this effort. Estimates of crop losses due to pests are difficult to come by, but a figure of 25% cannot be far off the mark. Infestations are getting more frequent and acute, and this has been attributed to a variety of reasons including climate change. In a constant game of one-upmanship, the chemical armoury needs to be replenished continuously to combat resistance. The strategy needs to constantly evolve but it is clearly not just about spraying toxic chemicals.

Robust agrochemicals industry
Agrochemicals and pharmaceuticals
India’s agrochemicals and pharmaceuticals industries have often been compared, and there are similarities. From a manufacturing standpoint, both leverage strengths in chemistry and (batch) process technology development. The companies involved make active ingredients or formulations or both, and technology barriers are greater in the former than the latter, though marketing challenges are the other way around. India is now the leading producer of several large volume technical agrochemicals and active pharmaceutical ingredients, though China has an edge in some value chains. Both industries are also dependent on  for imports of critical raw materials and inteChinarmediates – a matter of concern that needs to be urgently addressed.
In the marketplace, the agrochemical and the pharmaceutical industries are very different. The integrated model of life science companies is no longer in vogue and most companies split up in the early part of the century to focus on one or the other.

Vulnerabilities of Indian companies
While there is much to be proud of when it comes to the progress of India’s agrochemicals industry, it is important to recognise its vulnerabilities. The market is skewed towards insecticides – not surprising given India’s tropical climate – and the share of fungicides and herbicides is still small. But the distribution is slowly becoming more balanced for several reasons. For one, the introduction of genetically modified cotton (Bt-cotton), with an inherent resistance to pests, has dramatically shrunk usage of insecticides (though not eliminated it). For another, the evolution of the agricultural basket – with a larger proportion of horticultural products, fruits & vegetables, at the expense of foodgrains and cotton – have led to greater use of fungicides. A shortage of labour – surprising for a populous country – is the drive for greater herbicide usage, as mechanical removal of weeds gives way to chemical approaches.
Much of the industry is focussed on making and marketing older generation products that could be edged out by newer ones, protected by patents, that are more efficacious, targeted and safer to human health and the environment. These molecules are without exception being brought in by multinational companies that have spent tens of millions of dollars in their innovation. While they appear expensive, the value proposition they offer to farmers seems attractive enough.

Growth approaches
Given the limitations posed by their individual and collective size, it would be far fetched to expect Indian agrochemical companies to invest in research for new molecules. Their continued participation in the India growth story will hence hinge on their ability to adopt one of four broad business strategies: going global, forging marketing alliances, entering into toll & contract manufacturing arrangements and focusing on formulation development. Several companies are adopting one or more of these, but more need to do so for a sustainable future.
A select band of companies in agrochemicals and pharmaceuticals have built integrated capabilities and now get more revenues from exports or international operations, than domestic sales. The number is greater in pharmaceuticals, and their focus has been on the discerning and developed markets in the US, Western Europe and Japan. Likewise, about half a dozen companies in the Indian agrochemicals space have also built on their strengths and established a presence in the big markets of the world – in North and South America, and parts of Asia and Africa. They will continue to expand geographically and in terms of the portfolio on offer.
At the same time, several new products innovated by multinationals are now being offered to the Indian market in partnership with domestic companies with the necessary infrastructure to service this fragmented and geographically dispersed market. This is a win-win strategy: the international major can operate with their lean structures in focussed segments, leaving others to the Indian partner; and the latter can offer a more complete basket of products, including tried & tested generics and more recent introductions.
Toll & contract manufacturing is commonplace in the pharmaceutical industry and is increasingly seen in agrochemicals as well. India brings well-known skills that enable low-cost operations, and for generics, in particular, this is crucial. The opportunity is likely to expand as nearly 15 actives, with a market value in excess of $4-bn, are expected to go off-patent by 2020.
The leading Indian companies are also well placed to carry out innovations in formulations and delivery systems. There are several public sector laboratories that have the technical expertise and these should be encouraged to partner with the industry in greater numbers than hitherto. This is an opportunity to create intellectual property, offer a better value proposition to end-users and stand out in the crowded space of generics.

Industry in the throes of change
The business of agrochemicals is changing dramatically. The industry is now seen as a part of a holistic set-up with a portfolio of seeds and biotechnological capabilities complementing the traditional chemicals business. The global business landscape is also seeing significant reorganisation with several mega-deals in the making: the Dow-DuPont merger; the acquisition of Syngenta by ChemChina; and the most recent announcement by Bayer to buy Monsanto.
These dynamics will play out directly in the Indian market where all of the multinationals have a presence, but they could also impact existing relationships with Indian vendors and realignment of marketing strategies as well.

Ravi Raghavan

Chemical Weekly 20 Dec 2016

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