Asian Paints -Tapping the Global

Market

Asian paints is the largest paint manufacturer in India 63% market shareSet up the International Business Division under the leadership of Jalaj Dani in 1999 and had reach in 21 countries by 2005

In 2004, for the first time the International division as a whole had turned profitable but some of the individual markets were still in red.

The market comprised of two categories – Decorative Paints (construction sector) and Industrial Paints (automotive sector).

Objective of IBImmediate goal was to improve profitability through consolidation.

ROCE of global operation is less than 10% compared to 25% for domestic operations. Target to improve International Division’s ROCE to 15%

The company’s aims to be in the top 5 Decorative Paints company by 2008Needs to aim a consolidated growth of 70% to achieve the target

Situation Analysis

Global demand was expected to increase by 5% of value and 3.5% of volume by 2007.88% of the global paint production capacity was in North America, Western Europe and Asia.Rapid gains were expected from emerging markets.Latin America and Eastern Europe expected above average growth.India, Taiwan, and South Korea are good prospects.North America and Western Europe would have slow growth: Were 50% of the global market capacity in 2007.Consolidation on demand side led to domino effect on the supplier side.Competition was price based and global leaders were domestic leaders.The market comprised of two categories: Decorative paints (Construction Sector) and Industrial paints (automotive sector).CAGR of 3.5%.High barriers to entry.No single global market leader.

Global paint Industry

Low interest consumer products. Trading up to high performance and high priced. Dealers and contractors are major influencers. Female customers are generally the decision makers. There has been a shift from thinner to water based paint.

Industry facts: Working capital intensive.

50% of the COS comprised of cost of raw materials Heavy bulk product hence local production facility required. Price of crude based raw materials fluctuated

Hedging is the only recourse among major industry players.

Market Trends

Focused on decorative segment.

Continuous innovation through customer and dealer feedback helped to gain market share.

Streamlined internal operations through technology implementation to reduce costs and lower working capital costs.

Globalization strategy: Focused on emerging markets, Localized manufacturing and entered into Joint ventures instead of organic growth.

Regional Technology Centre to facilitate cross-pollination of best practices within the global firm, thereby increasing efficiency.

Lead Technology Centers which would be information powerhouses for each product line.

Asian Paints and its International Business Division

As competition within industry was price based, thus Brand Equity was an important source of differentiation.

Do it yourself trend was growing among developed market

Controlling at least 20% of the revenue in key market is crucial.

Leveraging the domestic strength is important to the success of global operations.

Managing working capital is the only home grown competency that has been leveraged at the global level.

By 2004, IB accounted for 12% of company’s consolidated revenue.

Asian paints had followed the path of inorganic growth because organic growth was very expensive.

Challenges

The company divided the market into three segments:

Leadership Markets: The Caribbean region, Bahrain, Fiji and Nepal were identified as markets where APL was already a leader. Total market size is $100million and APL had sales of $55million. IB would focus on efficiencies as well as market expansions in these subsidiaries.

Growth Markets: They were expected to drive APL’s growth globally. Market size was $3.3 billion. APL had less than 10% market share and Middle East region was most fruitful growing at 30%.

Turnaround Markets: Represented market size of $575 million but it had little significance to APL. APL was a niche player in these regions. Australia alone represented 90% market opportunity and APL was only operating in Brisbane.

Segmentation

Rural Marketing Initiatives since 1970.

Distribution is one of the main focus strategy of Asian Paints.

Advertising & Promotional Expenditure started in 1980s.

Advertising Methods- Radio, TVCs, Print, Internet, OOH, POP, Retail Outlets, Seminars, Workshops.

Company is using different techniques such as advertising Campaign, sales promotion, personal selling, direct marketing and public relation to increase sales.

Online marketing for urban customer as well as Asian paints has started customer helpline service (24x7).

Marketing Strategy

In order to decide upon which market to enter we can use the weighted average method to analyze the market competencies of the various countries. The weightage assigned to the various factors of competency is as follows:

GDP = 40%Market Share= 30%Per capita Usage = 20%Market Size = 10%

There is one assumption made while selecting the countries. Only those countries have been considered whose GDP is greater than equal to 5%.

Marketing Entry

We can conclude that :The company should expand in Bahrain, Nepal, Bangladesh, China, Malaysia, Sri Lanka and Thailand. On the other hand, the company should withdraw its operations from Australia owing as market is already saturated.

In Australia the three largest players have a captive hold on the market with 75% market share and Asian paints have a very low presence

Also the profitability in Oman is too low and the market potential is very challenging and therefore a very low growth opportunity.

The per capita consumption in India is still very low and the market is projected grow at 13% to 15% in the next decade. Asian Paints enjoys strong brand equity in India

However, the company cannot be dependent on the Indian market alone. It makes sense for the company to leverage its competencies in other emerging market.

Should enter or not?

Q1 – Does global expansion detract the company from its local market?

The main aim of Asian Paints is to stick to the core values of the company, ensuring product quality and improving on the same. Since APL is already present globally in 21 countries, it has to decide whether being present globally is adding positively to the company’s bottom line or not.

Going by past data, APL has been fairly successful in international markets ventures and contributes to up to 18% of its revenue. One major success is SCIB in Egypt where it is among the top 5 paint companies. Profit has also been continuously increasing on both year on year basis as well as taking 2002 as base. Thus, we see that APL was able to sustain its profitability in the domestic market.

As given in Exhibit 3a, we can see that, since 2002 till 2005, APL has consecutively made more profits from its domestic + international operations rather than that from domestic operations alone.

2005 2004 2003 2002 Consolidated APL consolidated APL Consolidated APL consolidated APL

PAT 38.73 38.66 32.33 32.88 30.93 31.56 23.52 25.69% increase 20% 18% 5% 4% 32% 23% IB 0.07 -0.55 -0.63

2003 2004 2005 INDIA IB INDIA IB INDIA IBEBIT 61.89 2.52 64.79 7.18 72.37 9.4

GROWTH 5% 185% 12% 31% CAPITAL 142 39.16 144.74 38.11 152.74 57.78 ROCE 44% 6% 45% 19% 47% 16%

As given in Exhibit 3a, we can see that, since 2002 till 2005, APL has consecutively made more profits from its domestic + international operations rather than that from domestic operations alone.

Also from Exhibit 3b

Asian Paint Ltd. Main aim was to ensure product quality and improving on the same. It has been decently successful in its international ventures, which contribute almost 18% of the revenue of the firm. In Egypt it is among the top 5 companies in the world. From the table above, it can be seen that the PAT of APL in the domestic market has been increasing year on year from 2002 to 2005, thus it can be seen that international expansion has not affected domestic operations at all. Also, if we see the consolidated PAT from 2002 to 2005, it has been increasing year on year.

ROCE for APL from Indian operation has been consistent which averages around 45%. IB ROCE has shown increase from 2003 to 2004 but has decreased in 2005. But data clearly suggests that APL is close to its target ROCE in global markets. Thus, the international operations did not detract the company from its domestic operations. It continued to maintained profitability as well expenditure in proportion to revenue increase.

Q2 – Evaluate the course of action adopted by the company in different markets. APL had devised certain criteria on the basis of which it made investments in a particular foreign country

A market that has enough growth opportunities for APL that it can become one of the top 3 in 5 years of entry

A market that does not offer very intense competition with MNCs

The market has a GDP growth in excess of 6%

If we consider the 3rd objective, we see that APL can only enter China. Thus a weighted approach would have to be used to determine which markets to enter.APL used a matrix strategy based on 4 parameters (GDP, market size, per capita usage, market share)

Assigning weights to each parameter. Let GDP have 20 %, Market size by volume and value have 10% each , per capita usage have 20% and market share have 40 % weights.

APL had classified the markets into three segments – leadership market, growth market and turnaround market.

Leadership Market – These are markets where APL is already a leader. So they would focus on market efficiencies in these subsidiaries. Eg - Caribbean region, Bahrain, Fiji and Nepal. The combined market share was $100 million and APL had combined sales of $55 million. Assumed penetration level doubled in near future, growth potential is moderate.

Growth Market – These are markets which are expected to drive the growth of APL because they have very less market share in these regions. Eg - markets in South East Asia (Thailand and Malaysia), the Middle East (Egypt and UAE) and South Asia (Bangladesh and Sri Lanka). The total size of this category was about $3.3 billion. APL typically held less than 10% share in this category.

Turnaround – These are markets which are of very less significance. APL is a niche player in these regions. Eg - Oman and Australia