OVERVIEW OF PAINT INDUSTRY Industry Overview Paint industry in India has been long considered as the barometer of Industrial

activity in the country. The industry has witnessed buoyant growth during the last decade riding on increasing per-capita disposable incomes in the country and the boom in real estate and automobile industry. Despite the sharp growth in recent times, the per capita consumption of paints in India remains very low at 0.8 kg per year compared with 4 kg in the South East Asian nations and 22 kg in developed countries. The global average per capita consumption is around 15 kg. This leaves much room for growth for the industry going forward as the Indian economy braces for a high growth trajectory in the current decade. The Indian paint industry is a Rs 49 Billion sector The demand for paints is relatively price elastic but is linked to the industrial and economical growth.

In Indian the organized sector control 65 percent of the total market with the remaining 35 percent being in the hands of nearly 2000 small scale units. In Indian the industrial paint segment account for 2 5 percent of the paint market while the decorative paint segment accounts for 75 per cent of paints sold in Indian . In most developed countries , the ration of decorative paints vis-vis industrial paints is around 50:50. All the industry major have a vast dealership network and are required to maintain high inventory levels. Most of the paint leaders have technical tie-ups with global paint leaders.

PRODUCTS: The products of the paint industry can be classified into two major segments decorative (architectural) paints and industrial paints. Decorative paints : The decorative paints segment can be classified into interior paints and exterior of cement paints .80% of the decorative paints account for interior paints, which consists of premium. Medium and economy categories .The premium category consists of plastic emulsions, the medium priced category consists of synthetic enamels and the economy category consists of distempers. The products under the decorative finishes can be limestone coating, primers, distempers, cement paints, matt/ luster finishes, enamels,

emulsions (first quality), and premium emulsions. Consumption of paints is skewed towards decorative paints that account for 70 % of paints sold in India. This is in a sharp contrast to the trend in developed countries, where the ratio is skewed towards the industrial segment. This segment is marked by the presence of a large number of players from the organized as well as unorganized sector. Competition is high and margins tend to be low in this segment. Products of this segment are relatively price sensitive. Demand for decorative paints is seasonal with bulk of sales taking place during the festival seasons from September to December. Besides sales remains slack during the monsoon months from June to August. Entry barriers in term of technological and funds requirements are relatively lower in the paints sector. However decorative paints are marketing savvy products and backed by large advertisement campaigns and dealership networks. These server as high cost entry barriers for new companies in this business .The huge investment required in setting up a vast marketing and dealership network to advertise and develop a brand over a period of time can only be afforded by companies in the organized sector .It is for this reason that smaller companies and small scale sector units are slowly losing market shares to the organized sector. Industrial Paints: Industrial pains comprising 30% of the market include automotive paints , high performance coating , coil coatings .The automotive segment is further bifurcated into OEMs and auto refinishes .The automotive and general industrial coating occupy top slot in terms of production. The industrial paints segment due specialized technology and high capital expenditure attracts fewer players. Most Indian companies have tied up with of are in the process of tying up with international paint majors to have access to the latest technology. A tie up with a global paint manufacturer also enables the domestic company to supply to local customers of its partner.

Demand Supply Dynamics The Indian Paint Industry grew by 18% from Rs. 95 bn. in FY06 to Rs. 112 bn in FY07. The industry has a positive correlation with GDP as both have same drivers for growth. Demand for paints is both, derived as well as direct. The demand for decorative paints is a direct demand whereas the demand for industrial paints is a derived demand. Demand drivers for Paints Industries Increase in Per capita consumption of paints: The per capita consumption of paints in developed countries is around 15-25 kgs and world average is around 15 kgs. Comparing this with domestic consumption, Indias contribution to world paint markets is 0.6% with per capita consumption of around 800-900 gms. Based on the expenditure in the construction activity and increase in the repaint activity coupled with industrial growth, the industry is expected to increase at a 11.85% CAGR over next three years Increase in Real Estate Investments: The demand for decorative paints is directly related to the increase in the investment in the real estate thus increasing the cement area. Out of the total demand for decorative paints, around 30-40% of the demand comes from the fresh construction (Source: CrisInfac). The size of real estate industry is estimated to grow to Rs. 18,517 Bn, over next ve years period (Source: CrisInfac). Investment in real estate will be primarily led by housing, which is expected to account for nearly 90% of total investment in the sector (Source: Cris-Infac). Indias robust economic growth and resultant increase in income are speeding up the pace of urbanization. In India, about three fourth (3/4) of real estate development is for residential use and balance one fourth (1/4) is predominantly for commercial use. Housing investments (permanent, non-slum houses) are expected to grow at a TAGR of 12% over the next 5 years period. On other hand, repainting activity which accounts for 70% of the decorative paint demand is also increasing, mainly due to increase in per capita income. The demand from the repainting activity has increased by 6-7 percent in last two year. Based on the expected investment in the housing, demand for paint is expected to increase at a CAGR of 12 percent over the next 5 years (source: CRISINFAC). Increase in Industrial Paints: The industrial paint segment is divided into automotive industrial paints and nonautomotive industrial paints. Increase in income levels of the consumers contributes towards the growth in the auto-segment and growth in the industrial segments like power, road and infrastructure leads to growth in the non-automotive segment. Along with these, growing needs for consumer durables and export opportunity for auto ancillaries will also contribute towards the growth of industrial paints.

Increase in Per Capita Income: The above mentioned increase in demand for paints is backed well by increase in per capita income. Due to increase in disposable income, Indian consumer is expected to shift from lime wash to paints and those already consuming paints would move up the value chain. On other hand, the increasing capacity would also drive automotive and consumer durable, thereby increasing the consumption of industrial paints. Prices in line with substitute product: Large scale of operations and technical know-how have helped prices of paints to come down. They are now in line with those of substitute products like lime wash, distemper etc., manufactured by local players. This gives consumers the incentive to shift from lime to paints.

PESTEL Parameters POLITICAL: Government Policies The government has passed a legislation that it is necessary for buildings to have an exterior paint every 5 years The Paint Industry gets some relief because import tariffs have been imposed at 35% which makes it very expensive to import Paints from other countries and it become cheaper to buy domestic Paints Anti-Dumping mechanisms are employed so that countries such as the USA do not dump large quantities of paints because that is going to affect the local sellers as buyers would prefer to buy from the low-cost foreign paint ECONOMIC:

Paints 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. SOCIAL: Rise in Income: Lifestyle based spending by the Indian middle class is helping decorative segment of this industry. Contemporary wood finish formulations are replacing the more traditional lacs and exterior emulsions taken over from cement paints. More educated consumers & increased aspirations for better homes & lifestyles. TECHNOLOGICAL: A good technology backup helps the industry because the failure of any one of the technical thresholds might be supported by other technological backups which can prevent any further problems in the future. ENVI RONMENT: The external environment has a significant effect on the industry. The chief reason for this is that the demand for the industrial paints segment is a derived demand. It depends on the user industries such as automobiles; white goods etc. though with a time lag .The past yes has seen a drop in demand for automobiles and hence the industrial paints manufacturers expected a dip in sales this years. Environment concerns too can have an effect on the fortunes of this industry. For instance the concern about toxic fumes being emitted from paints that use petroleum products as solvents, has led to the invention of water-based paints. These are still not very popular in India, though Goodlass Nerolac has launched a range of water-based paints recently (the Alls capes range). Government regulations affect this industry as much as they affect any other industry. Being import intensive, import duties being raised of lowered can cause trends changes in the cost structure of the players .The recent trends of import and excise duties have been largely favorable to the industry. COMPETITION WITHIN THE INDUSTRY

The industry is characterized by intense completion. Roughly 50 per cent of the volume comes from the unorganized sector, mainly due to the low entry barriers and the history of high excise duties. The number of players in the unorganized sector is greater than 2000 making them a force to reckon with. Within the organized sectors itself, the decorative paints segment is with ness to intense competition due to the fact that a large part of the customers perceives very little differentiation between brands. The primary determinate of success in such a scenario is the distribution strength. In the industrial paints segment, the competition is based more on the technology that goes into the products .Also because of this fact, the unorganized sector is smaller in this segment .

Five Forces in Present Paint Industry:

Threat from New Entrants:-MEDIUM

Brand, distribution network, working capital efficiency and technology play a crucial role. Low capital intensive and government interference leads to no/low entry barriers. Indian paint industry has tremendous growth potential and decent profit margin and hence faces the threat from entry of new competitors. The decorative paints market can be entered into by a new company, or by an existing company diversifying its products to include paints and coatings (decorative is not a technology-intensive industry); also, a player established elsewhere may begin activities in this region. But industrial paints manufacture calls for latest technology and superior products which a new player will find a tough nut to crack. However, global players like BASF etc can still make an entry into this segment too.

All said, the manufacture of paints and coatings is generally a high-volume & automated process, which tends to favor larger companies able to generate scale economies that offset the initial capital outlay on production equipment and facilities. Also the Indian paint industry is dominated by a handful of strong players with well-known brands and products covering all price points, and deep entrenched distribution network which will help them to keep competition at bay in the short and medium term.

Threat of Substitute products:-LOW Lime-wash is the immediate substitute for paint. However, paint is a better form of coating with protective and aesthetic qualities and hence a superior product; whereas, lime-wash is an inferior quality coating Price elasticity leads to little risk from substitute products i.e lime wash.

Bargaining Power of Suppliers:-MEDIUM Price increase constrained with the presence of the unorganized sector for the decorative segment. Sophisticated buyers of industrial paint also limit the bargaining powers of the suppliers. It is therefore that margin is better in decorative segments. Major raw material being crude based(constitutes 40-50% of the total raw material cost) the suppliers have more control over the price. Crude Oil derivatives are key raw materials for paint industry and their prices move in tandem with Crude Oil. However other key inputs for paints and coatings are pigments such as titanium dioxide, and epoxy and other resins, as well as containers for packaging. Generally, these can be sourced readily from several companies, thereby weakening supplier power. Major players also tend to adopt strategies of identifying substitute raw materials and technologies

Bargaining Power of Customers:-MEDIUM.

Decorative paint companies have a better bargaining power since they deal with large number of brand- conscious fragmented retail customers who have low bargaining power. Industrial paint companies on the other hand have low bargaining power since they deal with other user industries, for e.g. OEMs, who are bulk buyers and hence wield high bargaining power.

Rivalry among existing players - HIGH:

In both the categories, companies in the organized sector focus on brand building. Higher prices through product differentiation are also followed as a competitive strategy. The paints and coatings market is fragmented. The brand share of Asian Paints is still 6.4%, with that of Berger and Nerolac 2.7% and 2.3% respectively. Modest organic growth also makes it more difficult for a company to grow its own top line without impinging on its competitors. Exit barriers are high with most companies highly diversified and owning substantial specialized production assets.

Thus overall, the industry is moderately attractive

SWOT ANALYSIS OF THE INDUSTRY Strengths Imp of brand image as barriers to new entrants For companies like Asian Paints and Nerolac, the brand image is of real importance. This is because the presence of their brand image has made it very difficult for new entrants into the market to get a good hold in the market. This makes the Paint Industry a very oligopolistic market because of the difficult entry of new firms.

Good technology backup.

Weakness Scarcity of Raw Materials

There is a major weakness in the availability of raw materials as they are quite scarce. Raw Materials such as Titanium Dioxide, Pthalic Anhydride, Pentaerythritol and other Organic Pigments are really meager in their availability and therefore it becomes difficult in manufacturing in bulk Requirement of high working capital There is a constant requirement of a significant amount of working capital for day to day operations of the company and therefore that shows that constant revenue and sales is very important Seasonal demand and hence in off seasons it can lead to cash flow problems Paints are produced in batches and companies need to maintain a wide range of shades throughout the year even though sales are concentrated in the second half of the year due to seasonality of demand

Opportunities Fiscal incentives provided by Government. Commodity to fmcg Rise in disposable income Threats Foreign companies entering as sole players With the reduction in excise duties, the price advantage of the unorganized sector is being eroded. This has meant the reduction in the market share of the unorganized sector . Outsourcing is likely to show declining trends as new capacities are coming up in the organized sector Within a few years, manufacturing of paints would not be profitable for most small players and a shakeout appears to be on the cards With large players targeting the unbranded low value, mass volume segment, the unorganized players would have to make way for large companies. Therefore, growth in decorative paints is likely to come at the expenses of the unorganized sector.

MAJOR PLAYERS AND THEIR SHARES The major players existing in industry are: 1. 2. 3. 4. 5. 6. Asian paints. Goodlass Nerolac paints. Berger paints. ICI paints. Jenson and Nicholson paints. Shalimar paints. The leader in the high volume medium and mass segments of decorative paints, Asian paints has been consolidating its market leadership over the past few years and now has the biggest slices of 30% of the market of decorative paints where as Goodlass Nerolac paints has the highest market share in the industrial paint segment. Critical Success Factors 1. Cost and price drivers : The paint industry costs and prices are driven by raw material costs The paint industry costs and prices are driven by raw material costs which constitute about 57% of the cost of sales, and government levies which constitute 38% of the cost of paints. There are more than 300 inputs going into the manufacture of paints and about 70% of them are based on petroleum. The petroleum prices, therefore, are one of the most important cost drivers. The price drivers include the extent of concentration in the paint industry which is very high. This leads to very low margins at each level with the final retailer making as little as 4-5%. 1. Working capital management. The industry has a high raw material content; the number of finished products is also large with varying pack sizes. Sales in the decorative paints segment are seasonal with more than half the sales coming in the September-November festival season. Debtor levels also tend to be high in this industry. (a)Distribution. Marketing of decorative paints requires extensive dealer networks, especially in the urban and the semi-urban markets. (b)Plant location. Plant locations help service distribution networks and bulk consumers. (c)Technology. This is particularly important in the industrial paints segment. (d)Foreign collaborations are most important for players in this segment.

Industry present & future trends:-

The Indian paint and coatings industry is riding high on the growth in the Indian automobile industry, new construction in the housing segment and improving infrastructure throughout the country. Thirty percent of the paint business is comprised of new construction projects. GDP growth projections of six to 6.5% in the current year mean a growth of nine to ten percent in Indian paint business. The growth will be 12-13% in the industrial segment and eight to nine percent for decorative paint. The Indian automobile industry has been performing remarkably well and will benefit the market leader in the segment, Goodlass Nerolac. As for the future, the industry has predicted a CAGR of eight to nine percent for the next five years compared to last years growth levels of 27.4% for cars and 8.9% for two wheelers. The Indian housing industry is likely to do well in the current year as well, recording a growth rate of 35% last year. As a result of the overall health of Indias economy, it is safe to predict a nine to ten percent growth rate for the Indian paint industry in the next five years. Consumers can look forward to new product launches, some for application in special areas. Companies will be increasing the value added services available to customers by offering a variety of finishes through specialized and trained applicators. There will be more options like ranges of colors/finishes for wood applications through the tinting machines. Additionally, the trend towards water-based coatings is likely to set in both for industrial and decorative applications. While India has not yet embraced the DIY concept as cheap labor is still available, exclusive retail chain stores sponsored and run by Indian paint companies will become a reality. The Indian paint industry has progressed well and moving ahead is likely to be influenced by several factos including new technologies, new innovative products, new associations, consolidation of industry and poor performers getting out of the market. Ultimately, in the years ahead there will be only four or five key players operating in the Indian paint market.

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Asian Paints Asian Paints is the leader in the Indian paint industry. It has an overall market share of around 30% and a 54% market share in the decorative paint segment. The company, through a 50:50 joint venture with PPG Industries, US, also has presence in the automotive paints segment. The company has significant global presence through acquisitions, which are being restructured. The management of the company is acclaimed for consistently outperforming industry and its peers in the last decade. Being well focused on its core business of paints it has posted a CAGR of 19% and 22% over the last five years in topline and the bottomline respectively Competitive Strategies Asian Paints was founded in 1942 as a small Indian partnership fin-n at a time when the paint industry was fiercely competitive. Two marketing breakthroughs propelled the company to leap into the decorative segment. The first was the introduction of smaller sized cans into the market where the paint was sold in bulk. The second was a dealer expansion thrust to reach out to end customers and offering them quality paints which were hitherto available to them in the urban areas only. These two steps meant going beyond selling paints and, in particular, responding to the consumer's unmet need. The result was that in 1967, Asian Paints captured the top position in the decorative paints segment. Today the company is not just a leader in the paint industry but sells twice as much paint as any other company in India.. In 1994-95 the company had a turnover of Rs. 614 crores and 38% share of the organised paint market. Marketing Strategies

The success of Asian Paints is primarily attributed to marketing acumen. The company has made excellent use of the electronic and print media, besides publishing informative brochures for all its products. The company's mascot "Gattu"-created to give an ethnic touch-has almost become synonymous with the generic product. Critical Success Factors Distribution

The marketing success of Asian Paints was based on the realization that the semi-urban market was untapped and the small consumer neglected. To reach those consumers in small towns, the company built a broad distribution network across the whole country. From small .towns Asian Paints moved to reach out to the metropolitan market. Today, the network with 15,000 retailers across the country is making the company responsive to a large customer base.

Use of Information Technology To strengthen the distribution network, the company has gone in for computerization at the branch and the depot level. All branches and 45 depots across the country are connected to the four plants and the Product Management Group at the Head office through the VSAT. The use of IT has meant faster flow of information, more efficient management of supplies, and better inventory control. Technology Tie-Ups The company has a technical collaboration with PPG of the USA and Nippon Paint Co, Japan for the manufacture of automotive paints, powder coatings, and coil coatings. Through this move, Asian Paints remains a step ahead because companies like Daewoo and General Motors that use PPG paint overseas are likely to source their automobile paint requirements from Asian Paints. Technical inflows (from Sigma Coating of the Netherlands) have also added to manufacturing capabilities in the areas of heavy-duty marine coatings, anti-corrosion paints and high-tech resins (that serve as raw materials), thus ensuring that product quality even in sophisticated items match international standards. Product Line Extensions As stated earlier under conceptual issue, line extensions, as a part of marketing strategy is a low-cost, low-risk way to meet the needs of various customer segments. It can satisfy consumers' desires to provide a wide variety of brands under a single umbrella or family name. Asian Paints' strategy to penetrate into the hitherto unexplored distempers market was a similar move, which was a departure from its earlier strategy of concentrating an higher-end products. New Market Penetrations The search for new markets and overseas opportunities has led the company to neighboring Nepal and the distant South Pacific Islands-Fiji, Tonga and the Solomon Islands. The company also exports its products to the Middle East, South East Asia and Europe.

Launch of Low Priced Brand as Growth Strategy In late 1992, Asian Paints introduced the brand called Utsav as a long term strategy to penetrate the rural market. The overall marketing strategy adopted by Asian Paints for this distemper is now detailed. Urban Decorative In 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. 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 decisionmaking 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. Rural Decorative Segment

The 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. SWOT Analysis STRENGTHS Market Leader Asian Paints currently enjoys about 30% market share, and the closest competitor which is Goodlass Nerolac (GNPL), has less than half of Asian Paints market share. Comprehensive nation wide coverage of the market Urban, semi-urban and rural areas all have access to Asian Paints products. They have quite a number of brands, covering all segments and filling all gaps. For example, they have brands in different price slots like Utsav for rural lower-end markets and Apcolite for high end-markets. Brand recall Asian Paints logo Gattu, an impish boy with the paint tin and brush, is most popular and easily recognized. Widest product range in terms of products, shades, pack sizes - 40 different decorative, some in 150 shades, 8 different pack sizes. The pricing strategy is oriented to middle/lower end consumers The pricing strategy is such that both the middle and lower end consumers are beneficiaries of this product due to low pricing for some variants of the product. Therefore they can enjoy the product and the good quality offered by it. Asian Paints is strong in inventory control Asian Paints average inventory level is 28 days sales against 51 days for the industry and it has 45% edge in inventory carrying costs

In-house production, no outsourcing, high reliability in suppliers, superior in quality assurance Corporate reputation has been a major strength for Asian Paints. The image is that of a successful and well-managed company. They have won many accolades and awards. For example, 1995 Corporate Excellence Award from HBSA and ET, IDBI study rated Asian Paints as one of Indias most excellent companies. Another study rated Asian Paints among top 5 paint manufacturers in the world. They have an enviable track record in breaking the position of MNCs in the Indian paint industry.

WEAKNESS Asian Paints has a major weakness on the technology front in industrial paints. Most paint firms have technology tie-ups with manufacturers abroad. For example, Goodlass Nerolac has a tie-up with Kansai paints, which has provided the company with Cathodic Electro Deposition (CED) technology. Since Kansai is the supplier to Suzuki, Japan, Goodlass with its Kansai connection finds it easy to tap Maruti in India. Asian Paints has not been able to make any significant advances either with Maruti or the auto segment in general. Berger has a technical tie up with Herbets, Germany, for automotive paints, Valspar Corp, USA for heavy-duty coatings and Teodur NV, Holland for powder coatings Rural bias of logo Gattu. This is likely to contradict the new positioning for the premium brands meant for urban markets Widening product mix puts strain on production distribution, accounting, inventory management and administration. The innovation that goes into the introduction of new products is not enough and therefore that leads to a similar line of products being available all the time with no new excitement for the consumers

OPPORTUNITIES

Asian Paints has always encashed on opportunities that have come its way. It has maintained a product profile keeping the market trends in picture. It shifted to a predominance in industrial paints than industrial paints than in decorative paints

The Government has constantly given incentives to Asian Paints for their production and distribution networks and that has been an area to capitalize by inducing further incentives and reducing production cost The automobile industry accounted for 50% of the industrial paint market Boom in Indian housing sector: Increasing urbanization, cheaper housing loans and a shift from semi-permanent to permanent housing structures have been driving growth in Decorative paints segment which constitutes major part of the industry Heavy infrastructure spending: New projects in roads, ports and industrial segments increases revenues from protective coatings for civil applications and road-marking paints to all parts of the building paints sector, whether interior, exterior, waterproofing or floor coatings.

THREATS

Foreign Companies entering as sole players and their domination GNPL and Berger might end up capturing the Industrial Market segment Competitors have gone in for hi-tech with Instacolour spot mixing. For example, J&Ns Instacolour offers 626 shades. Automated paint blending in retail points already there. ICIs Touch Colour and Bergers Colour Bank are indicative of this.

Porters 5-Force Analysis THREAT OF NEW ENTRANTS - LOW 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 barriers are huge. That may have been one of the reasons that ICI isnt 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 its 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 doesnt 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. BARGAINING POWER OF BUYER - HIGH 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. For any industry, the key factor affecting the competitive scenario in the market is the end-users or the buyers, and the paints industry is no exception to that. Paints are sold through direct sales as well through distributors. While architectural paints mainly follow the retail channels, industrial paints are sold directly to end-use companies. It has been observed that these buyers, both direct end-users and retail channel, are becoming increasing powerful with their growing bargaining power. End-users are demanding higher quality paint for the same or a lower cost. Paint manufacturers are continuously being forced to reduce prices, and those who fail to do so are losing out to the closely fought competition. In recent years, it has also been seen that, due to economic recession, end-users have lower purchasing power and this is forcing paint companies to reduce prices in order to keep up their sales volumes. THREAT OF SUBSTITUTES - MEDIUM The threat of the substitutes 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 substitutes 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 substitute 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 dcor. Stones are also being used in many cases. Most companies have an identical range of products for the decorative-paint market. In the industrial segment, the range of products is more customized and guided by the technology support provided by the collaborators.

In the case of decorative products the technology has been mostly indigenously perfected over the years and the products can be divided on the basis of interior and exterior application or in categories like water-based and solvent-based. Moreover, most companies have been advertising their products in the exterior emulsions category, which has expanded the market and triggered a shift from cement paint. While solvent-based enamels are still popular in India, outside India there is a clear shift visible from solvent- to water-based glossy enamels. India will take some time before this change is accepted on account of three hurdles currently faced including cost (water-based is expensive), low level of gloss in water-based enamels and the psychological barrier that water-based coatings cannot be superior to solvent-based coatings for protecting wood or metal surfaces. Companies not working on operational efficiency business models have been losing. Asian Paints and Goodlass Nerolac have been aggressively working on cutting costs/operating expenses. Berger has been managing well with economical yet acceptable formulations and low operating costs. BARGAINING POWER OF SUPPLIER - LOW 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. Price increase is constrained with the presence of the unorganized sector for the decorative segment. Sophisticated buyers of industrial paints also limit the bargaining power of suppliers. It is the major reason why margins are better in the decorative segment comparatively. To aggravate the situation, the cuts in price of product are being accompanied by increase in the raw material prices. Resins prices have been rising in the past few years for almost all kind of paints. Thus, paint companies are getting squeezed from both directions resulting in thinning of their profit margins. Another challenge on the resin front is that the introduction of newer technologies and newer types of resins are pushing out few conventionally used resins. Governmental regulations against paints containing volatile organic compounds (VOC) will be a major factor in throwing out certain kinds of paints from the market. This will definitely affect the resin situation in the market and would require the paint companies to adjust accordingly. Companies have to be proactive and cannot sit back and wait for other companies to act because these will be the companies which will surely lose out in the market in the medium run, if not the short. RIVARLY AMONG ESTABLISHED FIRMS HIGH

The per capita paint consumption in India is only around 0.5 kg as compared to over 10kgs in developed countries. Out of the total market, approximately 25-30% is the unorganized sector. Competition is very strong in the Indian paint market. Unlike some other large markets like China, the Indian market is not very fragmented. A few top companies control major stakes in different segments of the market: decorative coatings are dominated by the likes of Asian Paints, Goodlass Nerolac and Berger. Asian Paints alone claims to have over 40% of the architectural coatings market. Goodlass Nerolac is very strong in the industrial segment especially for automotive coatings. With its joint venture with Kansai Paints, it controls over 50% of the OEM coatings market. Not only is the competition high, it is also constantly increasing with companies fighting for a bigger share of the pie. Major companies, like Asian Paints, are investing heavily into activities like brandbuilding, distribution and marketing strategies. Asian Paints has reportedly set up more than 2500 tinting outlets, which provide customers with more than 1000 shades to choose from. Besides marketing initiatives, companies are also expanding their production facilities to increase their presence in the market. In 2003, Asian Paints announced the construction of a new decorative and automotive coatings plant in Tamil Nadu. Goodlass Nerolac's growth is also visible in the recent capacity expansions at their Jaipur plant and the setting up of a new Greenfield plant in Haryana. Berger Paints is in the process of setting up a 25,000 MT plant in Jammu which is expected to commence full operation by July 2005. As the market becomes more sophisticated and purchasing power rises, customers are more inclined towards superior quality, branded products and greater choice. As the market matures, players in the unorganized sector are expected to get increasingly squeezed. This process would be catalyzed by the reduction in excise duty, which has considerably shrunk the price differential between the organized and the unorganized sectors. Along with some consolidation expected in the organized sector, the top few players in the industry will gain a stronger hold on this market in the future. At the same time, though demand for sophisticated and niche finishes is growing, most people don't want to pay too much more for these. The trends towards more choice in shade and effects, and better quality shifts the balance in favour of the larger players, who have the finances to invest in R&D and are also able to exploit economies of scale to deliver affordable options. VALUE CHAIN

1: RAW MATERIAL PROCUREMENT Backward integration immunizes AP to the fluctuation in raw material prices. Raw materials produced at the plants are transferred to AP at cost or a low margin over cost. More than half the produce is sold to external clients. It is a profitable business in itself. It is impractical to diversify into commodities or crude oil derivatives. 2: PRODUCTION Production plants of AP are spread across India. AP currently operates at 87% capacity. AP has plans to increase production capacity. Spare plant capacity readies you for demand spurts but at the same time is adversarial to margins. It is a trade-off the answer to which lies in an efficient distribution network and better demand forecasting which we will see how AP is implementing. 3: OPERATIONS AP is using i2 and SAP technology for its SCMv. This enables AP to set weekly timing requirements on a plant, unit and machine-by-machine basis. Strategic Advantages Increases operational efficiency in the supply chain. Provides data for accurate sales forecasts. Improves service level to 87-90% for all SKUs thereby ensuring little loss due to stock out; good retailer relations. Risks & Challenges Retailer level sales data not part of SCM module

4: SUPPLY CHAIN MANAGEMENT Effectiveness and operational efficiency is analyzed in term of supply chain length. Using the financial statements the length of the supply chain (in days) is found out to be(GO TO http://www.scribd.com/doc/36261329/CS-Final-Report-2) Strategic Advantages Short supply chain takes less time to respond to spikes in demand. Short supply chain reduces inventory carrying cost for raw material and finished goods. Low safety stock requirements at dealers/retailers end.

5: WORKING CAPITAL MANAGEMENT The objective of Supply Chain working capital management is to analyze the impact of inventory, accounts payable and accounts receivable on the performance of the firm AP has very low working capital as compared to its competitors. Low working capital in a business with price sensitive customer and volatile demand is a sizeable advantage The incentive of discount and efficiency of the supply chain have helped to maintain the customer relationship and keep the working capital in check. Strategic advantages Low working capital leads to better cash flows (for investment in other initiatives without dependence on external financing). Improved margins. 6: DISTRIBUTION NETWORK AP has a 3-Tier distribution network via CFAs cutting down other intermediaries as far as possible. The fast moving SKUs are supplied by the plant directly to the Depots, whereas the slow moving SKUs follow a route from RDC to Depots before reaching the dealer network. RDC provides stocking facilities & thereby economies of operation for the Slow moving SKUs. There are two types of dealers in APs network; exclusive and common dealers. Dealers are segmented based on sales volume, product mix, and a number of other criteria. Strategic advantages Having lesser intermediaries improves the cost benefit passed to the end customers and reduces holdup risk. Improved margins. Differentiating dealers also increases motivation levels of dealers to increase sales. Extensive network leads to economies of scale in distribution. Different supply chain for different SKUs, improves operational efficiency. Risk and challenges Cost of distribution and maintaining such a large dealer network is critical for the company 7: MARKETING AND SALES

Company has made excellent use of the electronic and print media, besides publishing informative brochures for its products. The company's mascot "Gattu", created to give an ethnic touch-has almost become synonymous with the generic product. All the big players have presence in all the product categories and offer economy, medium and premium product ranges which enhance competition

ASIAN PAINTS GENERIC STRATEGY