David'S Challenge
Newcomer Sun Ceramics is in the danger of being overrun by bigger rivals, as the ceramic tiles industry passes through a bout of severe over-capacity and falling prices. How should this fledgling protect itself in a market dominated by strong, feisty brands? A 'live' case study followed by analyses by a distinguished panel of experts.
To take stock of the situation and devise a plan for survival, KV Khopkar, Sun Ceramic's vice president (marketing) had asked for a meeting with his managing director, Vinod Motwani. Also in attendance is S J Padgaonkar, vice president (technical) and M Ismail, general manager (sales).
7.30 pm 19th July 1997, Mumbai
On a piece of paper, Khopkar wrote down the questions that had to be raised, discussed and answered.
lThe Alibaug plant has already achieved over 90 per cent capacity utilisation. And the layout has been prepared to increase capacity to 10,000 sq mts a day.
Do we use this opportunity? Or would it make more sense to locate the new plant elsewhere?
lBoth raw material and finished goods inventory levels are high. How could we bring down our working capital requirements? What could be done to improve collections?
lOur investment of Rs 35 crore in the Alibaug plant will probably break even in 1998. Given that the market is expected to pick up
next year, would it make sense to start above-the-line promotion once again?
lA shake-out also seems imminent, and only the toughest and the nimblest will survive. Quo vadis?
Khopkar highlighted the last question with little squiggles, and let a flood of memories into his mind.
3.00 pm 13th February 1995
During the initial days, Khopkar had had a long briefing session with Vinod Motwani. Motwani told him, "We three brothers have felt the need to diversify. Our brand of asbestos cement roofing sheets, Roofit is doing fairly well, but the market is saturated. Having been in the construction material business for over three decades, we understand the intricacies of this business perfectly.
We have identified ceramic tiles as a profitable venture. The construction industry is booming. India needs 15.5 million homes, and tiles have become more of a necessity. Even builders have felt the need to offer their buyers something more. Consumers today are more discerning..."
Khopkar: "Yes. Disposable incomes are on the rise. And people are more aware on how to spend their money."
Motwani: "We persuaded a couple of experienced personnel from H R Johnson and Somany to join us when we set up Sun Ceramics as a division of Aurangabad Asbestos Cement Products Limited (ACPL). A plant was commissioned at Alibaug, with a capacity of 24,000 tonnes per annum, giving around 5,000 sq mts of wall tiles per day."
Khopkar: Why Alibaug? And why the specific capacity?
Motwani: It's influenced by what is the ideal size of the kiln.
Khopkar: And why only wall tiles?
Motwani: Frankly, the decision on capacity is more to do with our comfort levels. We feel that 5,000 sq mts is the optimum size today for starting a project, and installing a capacity of 10,000 sq mts would definitely be oversized. We have made provisions for increasing capacity later. You know we are new to this business, so we don't want to go overboard. We'll take it slowly and steadily.
Also the sales ratio of floor tiles to wall tiles is at 2:3, and there exists a supply-demand gap. I also have noticed that people initially used to cover their walls with tiles only half way up, but now they are laying tiles to touch the bathroom and kitchen ceilings.
Khopkar knew that the market was characterised by several well-entrenched brands, so he put the next question, "What's going to be the difference between our tiles and the competition?"
Motwani: "We are planning to use a new process called Double Rapid Firing. All the while, there were three predominant manufacturing processes for ceramic tiles "� Double Slow Firing, Single Rapid Firing and Double Rapid Firing. Old players like H & R Johnson and Somany used the first process, which took 45 days to come out with the finished product.
Spartek in 1985 revolutionised the industry with its Single Rapid firing technique and shortened the production process to 45 minutes. Suddenly, ceramic tiles became an attractive industry for newcomers.
You know, Khopkar, many people from the industry advised us to use the Single Rapid Firing process, but we decided not to. Any plant manager in a factory using this process surely would be an unhappy fellow. He has to keep his mind alert 24 hours a day to see if the tiles are properly baked in the kiln, and cross his fingers hoping the tiles are consistent. Besides, this process gives only 65 per cent first quality tiles.
But we have decided that we will give the very best to the Indian consumer. We plan to use the Rapid Double Firing process at our Alibaug plant, which takes anywhere between 60 and 90 minutes. We have a technology tie-up with Sacmi Imola of Italy. The process advantage is that though it takes a little longer than the Single Firing process, it gives at least 85 per cent first quality tiles, which means my realisations are better, since I have a fewer percentage of second quality and third quality tiles to be sold. I can exercise a greater degree of quality control in this process. And if I do find any defect, the whole process need not be stopped to rectify the problem. As you know, in the process industry, time lost is money lost.
Also, this process gives a better gloss, making our tiles stand apart from the rest. We will not be manufacturing tiles in the traditional size of 8" x 6" and 8" x 4", because this is a common size manufactured by the big guys as well as the unorganised sector. Why should we get crushed between the two, with another me-too product? So we will be the first in India to launch wall tiles in a unique 8" x 12" size, which I'm sure will floor the market. And we can price it at a premium."
Khopkar had his work cut out for him. One of his first tasks would be to start Sun's sales and distribution route from scratch, as the Motwani Group's existing distribution structure was not geared for ceramic tiles.
11.00 am 27th July 1997 The four of them met at Sun Ceramics' new office at Mahim, where they had shifted just a week ago. Today they had to discuss the gameplan for Sun. Khopkar put forth his questions.
Padgaonkar spoke first. "You know, I'm actually surprised that Nitco has opened its 10,000 sq ft per day plant just across our plant gates. I still think that Alibaug is not exactly an ideal place for a ceramic tiles plant. It is too close to the sea, and infrastructure is nothing to write home about. Perhaps the only advantage of setting up a plant in a
backward area like Alibaug is the tax holiday."
Khopkar: And of course, the proximity to the biggest market in the country, the western part, which contributes 44 per cent of the country's tile sales.
Sooner or later, we will have to decide whether to hike capacity. The industry in sharply fragmented. The organised sector forms 90 per cent of the business. But there are close to 31 players jostling for Rs 740 crore of business. Though the total installed capacity of the industry is at 925,000 tonnes, 8 companies have either shut down or been referred to BIFR, bringing down the effective capacity to 8,07,000 tonnes.
Then again, six companies "� H & R Johnson, Kajaria Ceramics, Spartek, Bell, Murudeshwar and Somany-Pilkington hold sway with 56 per cent of the total installed capacity.
To compound this situation, the demand for tiles has plateaued at 15 per cent, while manufacturers have already increased capacities by 150 per cent. The market simply cannot absorb this. It is becoming impossible to hold our price line. Today, the prices of tiles have reached their lowest point ever. Six months ago, it cost Rs 520 for a box of 25 (8" x 12") tiles. Now, the prices have dipped to Rs 410. It is hurting us more because we operate on a smaller scale.
Padgaonkar: Yes. Being in a continuous process industry, capacity utilisation is a critical variable for us. But then staying small also has its drawbacks. Fixed overheads as a percentage of total costs are as much as 28 per cent. So the more we make, the lower is the per unit cost.
At this present moment, the cost of raw materials are on the upswing. Items like wollostonite, dolomite, talc, zirflor, feldspar, borax, penta is steadily moving upwards, and raw materials form as much as 35 per cent of our manufacturing costs.
Fuel prices too, are heading north. Mind you, they form close to 12 per cent of the manufacturing cost. We use LPG and propane, instead of the immensely economical natural gas, and the price of LPG had been rising at the rate of 20 per cent over the last two years.
Though basic raw material like clay is cheap, the cost of freight offsets this. Besides, like all manufacturers of ceramic tiles, we have had to keep between three to six months' stocks as mining is highly seasonal.
Motwani: Are you two suggesting that the time has come to revisit our premise of testing the waters by investing in a small capacity and targeting a niche market?
Khopkar: As I see it, in our present position we should simply manage our costs better. But then there are limits to which we can do that without operations fraying. I am managing an all-India sales network with barely 20 people. As we push for greater coverage, the manning levels will simply become inadequate.
Padgaonkar: I agree. At our present manning levels at the factory, I think 125 people is rather high, in spite of the fact that Rapid Double Firing process involves a little more labour.
Khopkar: At a realistic level, I think we have been able to deliver results. We spent close to Rs 2 crore on building the Sonora brand name last year. But ever since the downturn, when our margins were under pressure, we cut off all advertising. Now I can't see how we can milk that equity any longer. After all, unless we can pull in customers to the outlet with our discernibly better designs and gloss, the chances are that we will be completely at the mercy of the trade.
Also, once the trade realises that we depend entirely on dealer push, margins and credit terms which are already ballooning, will only get worse. Dealers are demanding longer credit terms. Being a smaller player, we are being forced to offer anything between 70-100 days. The larger players don't give more than 45 days.
Already, reports suggest that players like Kajaria, Nitco, Pedder and Madhusudan are putting money into new capacities, taking the whole industry capacity up by 34 per cent. Pedder's upping capacity by 22,000 tonnes by 1998, and Kajaria by another 60,000 tonnes. This is bound to make them more cost-competitive and also give them the handle to bludgeon us in the marketplace.
Ismail: The flood of new entrants has also placed tremendous pressure on dealers to stock up different brands. They don't have the space to stock up on tiles, especially as stocks are not moving as fast as we want them to. And obviously, the dealers cannot push more than two brands at a time. I actually don't blame the dealer for this situation.
Motwani: If I remember, the pre-launch qualitative research done in October '95 threw up some interesting insights. To the customer, three qualities were important in a ceramic tile "� gloss/matt finish, design and colour. Only when competing brands were equal in these three aspects, the customer turned the tile around to check the brand name.
So our key task was to get our brand name into the customer's consideration set. And then allow our designs and gloss to do the rest. What was even more interesting was that both professionals and customers were craving for bigger tiles and the latest in designs and colours.
Khopkar:: Our marketing and sales teams' efforts during the initial days paid off. After being in the field for 20 days in each month, begging, cajoling and pleading dealers to stock up on Sonora Wall Tiles, and Rs 2 crore worth of advertising later, we now have 7 per cent of the wal tile market.
Ismail: So far, we've been able to appoint 120 dealers across the country stocking Sonora, and have launched over a 100 new designs. Our biggest competitors have just about 40 designs. But I do notice that because of the pressure on space at the dealer point, our strategy of more and better designs is becoming difficult to execute. Dealers tend to display just three or four of the latest designs.
But the good thing is that in my initial chats with dealers, they have expressed considerable interest in Sonora floor tiles. That I think augurs well once we are ready to launch floor tiles.
Motwani: By all accounts, our soft launch in the trade in Mumbai with the larger sized 12" x 12" and 8" x 8" floor tiles was well received.
Khopkar: But I think we will have to realign our pricing strategy for the floor tiles foray. Margins aren't as good as it is in wall tiles and I'm not sure whether our original strategy of driving the market with better designs will work because the consumer involvement with floor tiles is not as high as it is with wall tiles.
Padgaonkar: I think our new Karjat plant will be operational by next year to manufacture floor tiles.
Khopkar: I feel we have no option but to make pre-emptive capacity hikes. Mind you, this feverish bout of upping capacity has its merits. For one, upping capacity in a downturn is perhaps less expensive. Two, the excise duty today has come down to 25 per cent for tiles from 55 per cent. On other ceramic products it is 15 per cent. So I am willing to bet that the excise duty on tiles will also come down to the
same level.
Motwani: But investing in fresh capacity is not without risk, particularly when there is over capacity in the market. How do you propose we up capacity and yet find ways to sell what we make?
Khopkar: I've done some homework. After talking to some dealers across the country, I detect a latent demand for more value added products. One clear area of interest is the vitrified tiles, where the design and gloss is even better. Interior designers say that one major area of dissatisfaction with floor tiles is that they tend to be slippery. Vitrified tiles tend to more water-proof and therefore less slippery. I'm told other players like Kajaria and Pedder are also getting into it. We should move ahead as quickly as we can.
Motwani: Yes, I think our Karjat plant can be used to manufacture vitrified tiles. The Karjat plant has better infrastructure, and its proximity to Mumbai is useful, no doubt.
Khopkar: Also, we must get close to the southern market.
Motwani: We have some basic infrastructure in place down south, some land in Gummidipundi near Madras.
Padgaonkar: I think a factory down south will make eminent sense. If we can shave off a fraction of our freight costs it is bound to yield better margins. We can easily save about Rs 100 per tonne. Besides, Kajaria is not very strong in the South. But there are four other players "� Bell, Murudeshwar, Parry and Spartek. Incidentally Parry is the only wall tile manufacturer in the south at present.
Khopkar: I do share Mr Motwani's optimism. Right now, the ceramic industry is going through a downturn. But it could be transitory. The industry outlook isn't all that bad. Everyone is expecting better results in 1998-99 and therefore, jumped into the capacity expansion bandwagon in anticipation of this boom.
Motwani: Yes. In fact, the silver lining could be a real drop in excise duties. As I see it, if the excise duty comes down to
15 per cent from the existing 25 per cent, there is likely to be a
sizeable swing from mosaic to tiles. Even a one per cent share of the mosaic market will amount to Rs 130 crore. Right now, ceramic tiles between Rs 20 to Rs 40 per sq ft, is placed neatly between the lower-end mosaic tiles costing between Rs 10 to Rs 15 per sq ft, and marble and granite at
Rs 60 per sq ft onwards at the higher end.
Khopkar: This means ceramic tiles can lay siege to the huge mosaic tiles market.
Motwani: Besides, the industry has a history of such cyclical trends. I sense the glut will disappear once the market takes off again, despite the pre-emptive capacity hikes.
Ismail: There's one more issue. So far, we've been marginal players in the institutional segment, largely piggybacking on the strength of our sister companies in the boiler and asbestos roofing business. I think in the future we ought to invest in developing the institutional business. It forms 65 per cent of the total industry output of 6,44,800 tonnes. You only have to look at the construction activity that is planned in Navi Mumbai by CIDCO.
Even if we are to assume that 5 per cent of the projects actually
materialise, the market potential is huge.n
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Kit
The future of DTH.
Seemingly out of nowhere, direct-to-home television (DTH) has emerged as a strong competitor to cable TV. In a recent article in The McKinsey Quarterly, authors Scott Beardsley, Alan Miles and John S Rose say that for success in the DTH industry, players need to have special assets and skills which will be difficult to possess by a single
company.
The DTH business requires, among others, the rights to software content, access to satellite transponders, ability to sell, distribute and service satellite dishes as well as set-top boxes. Which necessitates the need to spread risk, considering the large-scale economics of this business, characterised by high fixed costs. This is the reason DTH providers have to band together as a consortium. Variables that players in this business will face is, whom to be a partner with, which markets to enter and how will technology evolve/change.
It will remain a game of survival of the fittest. Those with deep pockets, who also move swiftly and offer unbeatable entertainment value content can emerge unscathed.