The Hindu Business Line : Paint cos gearing up to meet auto sector needs

SUPPLYING to the automobile industry is both attractive and difficult. Compared to last fiscal, the total 2004 domestic vehicle sales for the April-December period was up 11.51 per cent, from 44,54,968 units to 49,67,995 units. Certainly a sector to be associated with, save the reputation of automobile manufacturers as the toughest bargainers around.

Automotive paint, possibly the first thing that catches a customer's eye, had seen sales growth of 25-26 per cent in the recent past at the original equipment manufacturers' (OEM) level, Mr Murali Sundaram, Vice-President (Industrial Marketing), Goodlass Nerolac Paints Ltd (GNP), said.

In line with automobile companies mulling de-bottlenecking and brownfield capacity expansion, paint suppliers are also enhancing capacity. Goodlass will add "at least 40-50 per cent" capacity in automotive paints through its new Rs 100-crore Haryana plant.

The plant will augment supplies to the company's longstanding customer Maruti Udyog Ltd (MUL), besides catering to the needs of Hero Honda and Suzuki's two-wheeler plant. The company's current domestic market share is estimated at 65 per cent, with supplies to all OEMs except GM, Fiat and Hyundai.

Equity stake by Kansai Paints of Japan helps, most auto industry paint supply deals decided at the international level, Indian car sales at the sub-one million level only reinforcing that approach.

The next biggest domestic competitor is Asian Paints-PPG at an estimated 20 per cent market share, BASF and Berger being the other players.

Globally, PPG, Dupont, BASF, Kansai, Nippon and Dupont Herberts Automotive Coating dominate the automotive paints turf.

But rising volumes aside, maintaining margins is an effort, given tough bargaining by the user industry and rising input cost. "Cost is the biggest challenge, it can't be passed on," Mr Sundaram said.

At Goodlass, automotive paint contributes 40 per cent of revenues, but its share in profit is less.

For the company, tussle with cost begins at the currency level, the rupee ruling strong against the dollar but losing ground to the euro and yen. Automotive paints need imported pigments and aluminium paste, the latter's price further affected by short supply, courtesy sudden growth in demand for silver colour.

Indigenisation is difficult, as these items undergo the expensive `Florida Weather Test' abroad for UV resistance and the vehicle market here is not yet big or sophisticated enough to warrant full localisation (not to speak of import duties which have also declined).

Resins are made in-house, but titanium dioxide prices have been going up. By controlling cost, margins are possible, yet product cost is worrisome. Value-added products like eco-friendly paints could help. But, India with no policy incentives does not seem to be ready for water-based paints, which also require revamping of OEMs paint shops.

Being looked at are paint-related services to OEMs, such as creating new shades, quick response to their needs, cutting the cycle time in painting and reducing the per unit consumption of paint.

Thus, Goodlass was closely associated with picking shades for Tata Motors' cars while last year through TVS Motor and Bajaj Auto, it introduced an acrylic cathodic electro deposition (CED) primer which truncated the traditional application of a two-stage coat — CED primer followed by black paint — on motorcycle frames.

On the face of it, the OEM-paint company linkage seems hospitable to a service thrust. Painting is a sensitive job, one in which five layers of coatings have to be mutually compatible.

This automatically forges a preference for end-to-end solutions, though exclusive tie-ups are not a strict norm. However, the same sensitivity of product and process that adds premium to paint manufacturers is checking their appetite for a full-fledged presence in the OEM's paint shop.

Currently, companies like Goodlass have personnel posted on OEM shop floors to ensure quick response to their needs. For example, it maintains the health of Tata Motors' dip tank, which has at any time roughly Rs 3 crore-worth of paint material inside.

Kansai has group company, Kansai Plant Engineering, which sets up paint shops. Theoretically therefore, Goodlass should be pitching for paint shop management at OEMs. But will it?

There are instances of outsourced paint shop management abroad. But in a market like India, where auto OEMs have just embarked on aggressive cost cutting, there are risks.

Mainly — who will bear the cost of `re-work'? Paint shop environment is controlled for a variety of factors such as temperature and humidity. A slight change can affect the quality of coating.

At present, with paint companies just delivering products and OEMs doing product quality check, the onus of re-work is on the OEMs. Should the paint shop too veer into paint company ambit, re-work cost will linger as the latter's risk.

All this, raises an important question — can automotive paints be a standalone product line, or is sustenance dependent on additional margins from other products? Goodlass has decorative paints for support. "It isn't all that bad, we can control costs and maintain margins," Mr Sundaram said.

CED primer — a promising biz

GOODLASS may have a promising business in its new acrylic CED primer. When TVS Motors' Hosur plant went in for the product, it was a global first for Kansai. From there, the product moved to Bajaj Auto's Chakan facility and thereafter to its third client, TVS Motors' Mysore plant.

According to Mr Sundaram, the new product has helped save cost because it chops an earlier two-stage primer coating process to a single stage, reducing cycle time.

India is the world's second biggest two-wheeler market and there is the possibility of Goodlass not only feeding the domestic market with its new product, but also catering to exports.