Multinational FMCG players lag on 'Make in India' front

Since being elected with a record mandate last year, Prime Minister Narendra Modi has passionately espoused the cause of ‘Make in India’, aimed at giving a fillip to local manufacturing. After oil, consumer durable & electronics goods continue to be the second-largest item on India’s import bill. But data compiled by BS Research Bureau for the past five years point to the trend that many fast-moving consumer goods (FMCG) firms owned by multinational companies (MNCs) have been importing more than they are exporting.

Of the four top MNC companies in the FMCG segment, Hindustan Unilever (HUL), Procter & Gamble Hygiene and Healthcare and Gillette India have consistently seen higher imports than exports from 2010-11 to 2014-15. Colgate-Palmolive, which was a net-exporter in 2010-11 (imports of Rs 65.75 crore versus exports of Rs 71.35 crore), turned a net-importer thereafter, with imports rising consistently between 2011-12 and 2014-15, show data. Imports include raw materials (CIF basis), spare parts, finished goods and other imports, while exports include exports (FOB basis) and services provided.

Emails sent to HUL and Colgate-Palmolive had not elicited response till the time of going to press. A P&G spokesperson, when contacted, said: “India continues to be one of the fastest-growing markets for the company globally and a priority for the parent. A majority of P&G India’s domestic volume is made in India, across six state-of-the art plants & manufacturing sites here, in line with P&G India’s focus on delighting Indian consumers with product innovations that deliver superior performance and value.”

Some experts are not in disagreement with P&G. They say imports by these firms are more for raw materials than finished goods. “Production of everyday items like toothpastes, toothbrushes, soaps, detergents, hair oils and shampoos does not entail heavy capital expenditure,” said Ajay Bodke, head of investment strategy & advisory, Prabhudas Lilladher.

“Typically, companies import raw materials from producer nations because it is cheaper for them to import do so — palm oil from Indonesia, for example. Palm oil goes into making soaps, which are produced locally. Importing from abroad would mean these products would attract import duties. That would make them out of reach of common consumers and hit sales,” Bodke added.

G Chokkalingam, formerly executive director & CIO of Centrum Wealth, who now runs Equinomics Research, an advisory of his own, said FMCG was a category that actually responded to the ‘Make in India’ call well, even before it became fashionable to do so. “If you look at HUL’s gross block over the past five-six years, it has almost doubled from roughly Rs 2,500 crore in 2009-10 to around Rs 5,000 crore in 2014-15. This means the firm has been investing in fixed assets like plant and machinery, which are used for production,” he said. Gross block is the value of fixed assets before depreciation.

One of the reasons for higher imports is finished goods. Industry watchers say companies tend to import finished goods mainly when they launch or test market for new products, as was the case with HUL’s Axe deodorants, which were imported until a few years ago. It makes sense for them, given the low volumes in the initial phase. But when volumes achieve a critical mass, these products are manufactured locally. However, one exception here is Gillette. Its US-based parent manufactures the high-end razors sold by Gillette India only at select locations globally due to the complexity involved. For others, that might not be the case.



But despite investing in local production, India is still not an export hub for these companies, as data reveal. There are many reasons why the exports are not significant, and are unlikely to be in the near to medium term.

Naveen Kulkarni, co-head (research), Phillip Capital, said: “Most of these firms have manufacturing units located abroad, so exporting from India makes little sense. It remains small. Much of what they produce in India is for the domestic market.”

Other analysts agree. They cite the insignificant size of the market in other countries. A Mumbai-based analyst tracking FMCG, said: “The unfavourable ratio of exports to imports is because India is a big market within the Saarc grouping. So, the denominator (sales) is too big for exports to appear significant. The other reason is that the exports are predominantly to only nearby countries or to those where there is a sizeable Indian population. Compared with India these markets, except Pakistan, are small. The demand in, say, Sri Lanka or Bangladesh, would be low.”

Apart from the size of the market, experts also believe India does not have the cost advantage. Unlike information technology and automobile components, where India has an advantage because of skills and low labour costs, there is little benefit for the FMCG segment.

“Another factor for lower exports is that there is no cost advantage of manufacturing in India vis-à-vis other markets, unless we are talking of high-value or labour-intensive products. That is not the case with FMCG products. Look at the labour cost as a proportion of sales. Though it is lower than in other Asian countries, the arbitrage is not so significant as to offset the logistics cost — of transporting goods from India to these markets,” the analyst quoted above said.

Another analyst who did not wish to be named said India was still not competitive as a manufacturer of FMCG products — purely on a cost basis. There also are restrictions on exports in particular categories — like a 10 per cent cap beyond which you cannot export.

He sums up by saying: “For consumer companies, what counts is creating brands rather than manufacturing, since the latter can be outsourced.”

	Exports (Rs crore)					Imports (Rs crore)
Company	FY11	FY12	FY13	FY14	FY15	FY11	FY12	FY13	FY14	FY15
HUL	1352.27	489.80	654.80	547.91	573.43	1449.63	930.03	906.09	930.93	976.73
Colgate-Palmolive	71.35	99.39	113.47	80.32	81.59	65.75	116.13	142.78	176.28	179.25
P & G Hygiene	9.69	4.81	7.56	17.41	23.80	106.05	105.08	134.01	150.36	167.83
Gillette India	51.04	45.01	14.75	18.31	15.18	153.27	179.20	111.80	152.69	148.65

Notes:                            
Imports is aggregate of (raw materials -CIF) + store & spares + finished goods and other imports                            
Exports is aggregate of exports (FOB) and services provided                            
For P&G Hygiene and Gillette, the year ending is June; hence, latest data is for period ending June 2014                            

Source: Capitaline                            
Compiled by BS Research