“Going forward, we want to make every second tube in the world…” - Views on News from Equitymaster

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  • Mar 23, 2004 - “Going forward, we want to make every second tube in the world…”

“Going forward, we want to make every second tube in the world…”

Mar 23, 2004

Mr. Ashok Goel has been associated with Essel Propack Limited since 1984 and is currently the Vice Chairman & Managing Director of the company. He was instrumental in establishing the Company as a global player in laminated tubes. Today, Essel Propack is ranked no. 1 in laminated tubes in the world. Till recently, he was also overseeing the management of Essel Group’s leisure businesses viz. Essel World, Water Kingdom and Fun Kingdom. In an interview with Equitymaster, Mr. Goel shared his thoughts on the industry trends, the growth prospects of the company and his long-term vision. He believes that Essel Propack is different from its competitors for various reasons.

EQTM : The global economy has been perceived to be in the throes of an economic slowdown. As head of an Indian MNC, what’s your view on the global environment? What signs do you see that could mar or make India’s prospects?

Mr. Goel:  The first part of the question – the global economic slowdown – I do not think that’s true. What is certainly happening is that there is a quick shift in the whole arena of economic activities. There seems to be a shift from one sector to another. In some sectors, you will see a slowdown and some sectors are being seen as emerging engines for the world economy. Some industries are seeing a slowdown, but it is not that they are disappearing. They will disappear in one market, but are appearing in other markets. So to that extent, I will not like to put it as a global economic slowdown but rather as a dynamic change. Hence, I do not believe that there is a global economic slowdown.

EQTM : You talked about new growth engines. Any examples you would like to highlight…

Mr. Goel: Let’s take the Indian example. We never thought that the IT sector would gain so much prominence and prove to be such an economic booster. I also talked about the shift. The shift that I clearly see is that manufacturing activities will keep coming down in high wage markets. In the coming years, this trend of decline in manufacturing activities will gain further momentum, much faster than what we envisage. But these activities will re-emerge in low wage markets. To that extent, those shifts will also take place.

If you talk about regional specifics, then I would say from the North American market, it will move to South American markets. In Europe, the shift might take place from West to East or to CIS countries. From Middle East and Africa perspective, the shift will be somewhere towards the gateway countries like Egypt. In case of Asia, you will see more happening in certain sectors in India but for certain other sectors in China. Within ASEAN you will see a further subdivision. This is how I foresee the shifts to take place.

EQTM : Yours is one of the few companies that are really entrenched in the Dragon country – China. What is your view from inside? What makes India and China so different? Where does China have the advantage?

Mr. Goel: China has a tremendous advantage. This does not mean I want to demean India in any way. First and foremost single difference you find is that they really, literally welcome you. It is not merely the words that are spoken. The local authorities are the real hand holders for you. They are the real guides. They really carry you through, as long as you are on the right side of the law and your intent is very clear, they are the greatest hand holders and they make sure that you succeed.

And if you compare that with India, the political structure is different, nothing right or wrong about it. There is a central government and there is the state government. The liberalisation that has taken place, has taken place more at the central level. At the state level, this has not necessarily happened. The central government has no territory of its own so to speak (I am not talking about the Union Territories as such). Ultimately, it boils down to a particular state. It is here that the liberalization affect has not really rubbed off. We do all the lip service. Yes, some sectors have done very well like IT and it kind of became of fashion for state governments to talk about it. Some states had a natural advantage so they encouraged the sector. But generally speaking, liberalisation has not really happened at the state level. That’s the big difference that I see between India and China.

EQTM : In India, we talk about a single window when a foreigner comes into India to invest. Is there something like this in China?

Mr. Goel: It is much more than a single window. Apart from the regular single window, if you get stuck somewhere, they are the guys who find solutions for you, infact proactively, and without any ‘reciprocation’.

EQTM : You talked about India – state and centre. China must also have its provincial structure. Is there not a mismatch in the directions the center and the state take in China?

Mr. Goel: In China, what we find is that the provinces are much more autonomous and they can take majority of the decisions on their own. Each province has autonomy, but by and large, the approach and the direction is the same. And they really give you a red carpet welcome. Apart from the cultural issues, there is an inherent culture that you have to respect. But beyond that, there is no issue that you are encroaching on culture or any sentimental issues.

EQTM : Could you shed some light on the global laminated tubes industry? How big is the size and what is Essel Propack’s share in that?

Mr. Goel: The size of the laminated tubes market globally is about 11 billion tubes. Essel Propack, with 17 manufacturing facilities in 11 countries, has about 30% of it. It is estimated that two other global players hold around 25% between them. A large portion of the tubes are also made by a customer, as part of their vertical integration process. That’s the broad structure of the global laminated tubes market currently.

EQTM : What growth prospects you visualise for the sector? What is going to be your growth strategy for Essel Propack and your vision of Essel Propack over the next 5 to 10 years?

Mr. Goel: For this sector alone, there are immense opportunities. For example, there are still a large amount of tubes (about 14 billion tubes) that are still in aluminium globally. They still need to be converted into laminated tubes. Plus there is a trend that in old plastic tubes certain packaging is shifting towards laminated tubes. That is a new segment that is coming up. Then there are other markets called ‘low priced’ markets at lower price points, which we typically understand as developing or emerging markets. In these, different types of packaging are used, which offers opportunity for a shift to laminated tubes. So laminated tubes future in that sense, is quite good.

Essel Propack is growing at a healthy rate. This year too we will grow at a healthy rate. Currently, we make every third tube in the world. Going forward, we want to make every second tube in the world. That’s how I envisage Essel Propack to grow in the next few years.

EQTM : So you want to expand to countries that you are not catering to…

Mr. Goel: Sure. How do we do that? We look at markets we are not present in, strengthen the markets where have a small presence. We can do this through mergers and acquisitions, we can do it through relocation of certain assets and sweating the assets. We can even go greenfield.

EQTM : What is your view on the outsourcing opportunities in the packaging side?

Mr. Goel: In case of laminated tubes, let me tell you that this being a voluminous product, outsourcing per se is not applicable. Because whenever you are transporting, you are transporting air, and that costs a lot of money. Therefore, in our case, we have to be where the customer is. In case of laminated tubes, it may happen to a small extent from one continent to another, but not across the globe. We decided very early in the day to go and grow with the customer. That is the policy we will continue to follow. Within your manufacturing process, some sub-segment of your entire value chain or a system or processes, you might outsource to third parties rather than manufacturing it in-house. Within sub-segments you can do outsourcing. That’s it.

As far as other packaging is concerned, the packaging which are not air, laid flat i.e., you can wind it so well that there is no air in between, those are the things that can be transported across continents. In this too, the quality, the price and the benchmarking will make a difference.

EQTM : In what way Essel Propack is different from its competitors? What threats do you foresee for Essel Propack and what’s going to be your strategy to tackle them?

Mr. Goel: We are different in many ways. The first fundamental difference is that we are the lowest cost producer of laminated tubes in the world. How did we achieve that? One, we are vertically integrated. Two, we keep on upgrading our own technology that we use and constantly innovate on that. Infact, not only the technology, we constantly innovate on the product itself. Then we keep on innovating on our processes. We keep hammering down the non-value adding costs in the value chain. That means, if it is costing the customer money but is not coming into our pocket, we think about how we can avoid that. So, there is a constant innovation around all aspects of our value chain. We make our own blown films, our own laminate, we make our tube and shoulder, and in many markets we make our own caps. So we are vertically integrated in that sense, which not many tube makers are. So that’s what makes us different.

What are the threats to us? The threats to us are two. One is, if we become complacent. That’s more internal and that’s the biggest worry that I have. We have to constantly guard against that. Two, there is a trend of what I call as ‘destructive competition’. Which means that some people who have eroded the value of their business in terms of bottomline, but want to create some value to the business by growing only the topline, get into a destructive pricing strategy. By which, there could be a pressure on the price of the tubes. We believe it will be short lived, but it is something we have to be watchful of. We have taken certain steps to counter this, but this does not mean our bottomline will be adversely affected. We are going to protect our bottomline. We believe that we have a solution, which I can’t reveal at this stage, that will not only protect our bottomline, but will allow us to grow and grow very well.

EQTM : Recently, you have made a decision to make ‘caps’ for the tubes. What is the thinking behind this move? How big is the potential in this segment? What’s the strategy for growth in this business?

Mr. Goel: Let me give you a little background. We started making caps in India way back in 1994. At that time, our strategy was clearly driven by the fact that we did not get the right quality of caps that fit into our process, as we have an auto-capping process, which was sensitive to the deposits that could reside in the cap. Such a small component was making us inefficient in our production system. So that was the motivation at that time to make our own caps. The idea was not to make a profit on it, but to have a constant stream of quality caps that did not disrupt our production. So we built up some capacities. In the bargain we might have made some profits while delivering value to our customers.

Then we asked ourselves: can we broaden our packaging arena? Therefore, we went into a 50:50 joint venture with Beri Cap, Germany, to make speciality closure that typically go in carbonated soft drink bottles.

When we opened our tube making plant in the US, we realized that we can make the right quality caps and closures. Therefore, we decided to hire the right people, so now we have a strategic business unit to handle this. And then we got a contract in this business for the caps and closures. We decided to use this as a launching pad for us to make caps, which to begin with, will primarily go into our own tubes. But here the motive is to make it into a SBU and provide a value proposition to the customer.

We realise that caps generally used in tubes are the lowest cost component and therefore the margins will also be low. Which is fine. The idea is to gain the confidence of the customer. Our customers typically use so many other different type of caps for different type of packaging (other than tubes), which are very high value added caps. Now that we have the contacts, how do we leverage on these contacts is the key. As far as cap segment size is concerned, the US market alone is worth US$ 4.5 bn. But at the same time, we also realize that this market is fragmented, so we have to also find our own market. We have relationship with our customers and these customers are typically big consumers of caps. We will leverage on this, expand and there will be a time when we will grow this to a specific size business. That is the thinking behind this move. Right now we are talking of only the US market, but going forward we can easily replicate this model to our other markets as well.

EQTM : If you were to give a message to Essel Propack shareholders, what would be that message?

Mr. Goel: Essel Propack has its sights very clear on enhancing value. We have a very confident and capable management team that constantly tunes and retunes themselves to the changing needs and responds to the market place. We are fully conscious of growing both our top and bottomline. Therefore, I do not foresee any pitfalls in the future. The fact that the situation currently seen in the market place has been prevalent in the last 3 to 4 years, yet we have delivered top and bottomline growth says a lot. Now we can only accelerate and we will accelerate.

EQTM : On a personal note, please shed some light on the personalities that have influenced you the most or to whom you look up to (and why)?

Mr. Goel: In a person’s life for different things you look upto different people. In various stages of life and various stages of learning curve, most people have different personalities to look upto. Therefore, it is difficult to single out one person.

EQTM : What else takes up your time besides managing Essel Propack? Any hobbies or books etc…

Mr. Goel: After work, I am a lazy person. But I have indulged in all sorts of games in the past like playing cricket, badminton, table tennis and other traditional Indian games. I read Harvard Business Review and other such magazines. But what I like is being alone, to have sometime to myself whenever I get the opportunity.

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