Indian Sizzler

As he took the podium earlier this month, one foreign speaker at the conference held annually by the Mumbai-based magazine Chemical Weekly announced that he felt "good to be back in Mumbai, the [world] capital of the fine chemicals industry." This characterization of the role that India's main business center plays in the global fine chemicals industry conveyed well the sense of optimism prevailing among Indian firms.

Marginal players until recently, Indian fine chemicals and contract research firms have assumed a much more visible position in the past two years. Last October, Mumbai-based pharmaceuticals custom manufacturer Nicholas Piramal bought Avecia's pharmaceutical business. Last month, Chennai-based Shasun Chemicals & Drugs completed its acquisition of Rhodia's custom synthesis business. Also last month, Hyderabad-based Dr. Reddy's closed on its $570 million purchase of Betapharm, Germany's fourth-largest generic pharmaceutical company.

Indian companies have been growing at a vertiginous pace for a few years. Ajit A. Kamath, chairman and managing director of pharmaceutical ingredients supplier Arch Pharmalabs, says his firm has enjoyed growth in sales of 50% annually on average since 1999. At Jubilant Organosys, growth has averaged 29% in each of the past three years according to its corporate communications manager, Abhinav Rahul. The company is traditionally a producer of industrial chemicals but in recent years has been building up its pharmaceutical contract manufacturing business.

An obvious question is whether this seemingly sudden success is sustainable. There are indications that it may not be. The rise of India's fine chemicals and pharmaceutical services industry owes a lot to the lower salaries that Indians earn, but those costs are increasing rapidly on the back of the industry's rise.

R. Sankara Subramanian, chief executive officer and managing director of Chennai-based pharmaceutical contract research and manufacturing firm Proventus Life Sciences, says India will soon "lose the cost advantage." He says a chemist holding a master's degree costs three times more to employ now than three years ago. He expects that it will take India just three years to lose the attractiveness that low costs have provided.

Siddharth Kothari, a director of Ahmedabad-based pharmaceutical intermediates distributor Oscar Chemicals, says it's not just chemists' salaries that are surging. "It's not necessarily difficult to find chemists or chemical engineers," he says. "But we also need marketing people and technicians, and we're competing against the telecommunications, banking, and information technology sectors for human resources."

But Goutam Das, president of Bangalore-based pharmaceutical contract research firm Syngene, says it will take at least seven or eight years for Indian salaries to rise to a level comparable with those in Western countries. And he doubts it will be even that soon, given that Indian universities still graduate "lots of scientists."

Even if Indian scientists cost the same as those in the West, he says, the "attitude" of Indian researchers makes a big difference. "You can't get a French scientist to come to work on Saturday," he cites as an example. Most Indian businesses operate on Saturdays. Das, however, notes that Indian chemists are not good at everything. They are particularly strong in synthetic organic chemistry but rather weak in medicinal chemistry, he says.

Other than rising salaries, Indian fine chemicals producers and contract research companies are hampered by the developing nation's infrastructure. Indian managers also must spend a debilitating amount of time navigating the Indian bureaucracies in order to obtain approvals or get shipments released from customs.

Nonetheless, S. N. Singh, Jubilant's executive director in charge of chemicals and a business leader who sits on numerous industry-government committees, expects that India will be able to sustain its momentum. As far as human resources are concerned, he says, the recent rise in salaries has led to fewer Indian professionals moving abroad. "Human resources will not be an issue," he says. Echoing Das, he adds that India has a "very large number of universities."

As for infrastructure and bureaucracy, Singh can only foresee improvements. He explains that Delhi has given preliminary approval to the setting up of some 150 special economic zones (SEZs), a concept inspired by China, where such schemes have apparently contributed significantly to the country's economic rise.

In India, SEZs will be managed by private companies. Operating almost like separate countries within India, SEZs will provide their own services, such as electricity generation or waste management. In the SEZ, the complex structure of Indian bureaucracy will be replaced by a "single window" with staff empowered to handle most requests.

A few weeks ago, Jubilant received government approvals to set up two such SEZs, Singh says. The company will set up a fine chemicals SEZ in the northeast state of Gujarat and a SEZ servicing the biotechnology industry near Bangalore in the south. Singh expects the zones to be operating within three years. Jubilant itself will take up between one-quarter and one-third of the more than 500 acres of land available at each site to set up new plants, Singh says.

Other reforms will help improve India's business climate, Singh adds. He says the country's manufacturing sector is still subject to a "1940s labor law" that all but forbids companies to shut down plants employing more than 100 workers. The law will likely be changed, though it's not clear when. "The government is trying to be a better service provider," he says.

Chemical Weekly is profiting from the growth of India's fine chemicals industry. It was a co-organizer of the ChemSpec India trade show held in Mumbai after the conference. Editor-in-Chief Ravi Raghavan notes that this year, the second year the fair has been held in India, there were 293 exhibitors, more than 70 exhibitors over last year. Many of the newcomers were foreign companies keen to sell to the Indian market, he says.

Raghavan says the optimism prevailing in India's fine chemicals and pharmaceutical sectors is not overdone. But he notices a "crowding up of the space," as a large number of Indian companies are being set up to cash in on the industry's growth, something that may lead to excessive competition.

For some Indian producers of pharmaceutical ingredients, a more immediate danger lies in their prospects in Europe, he says. He notes that the Active Pharmaceutical Ingredients Committee (APIC) of the European Chemical Industry Council (CEFIC) is lobbying European authorities to set up an agency similar to the U.S. Food & Drug Administration that would be responsible for inspecting pharmaceutical ingredients plants in India and other countries that supply European pharmaceutical companies. Some Indian API producers export to Europe without their manufacturing facilities being inspected and may not be able to meet the yet-to-be-defined new European standards, he expects.

At Dishman Pharmaceuticals & Chemicals, however, Christian Dowdeswell, technical marketing director, is proud of the company he works for. "Our facility in India is as good as anything in Europe," he says. Manchester-based Dowdeswell joined Dishman when his previous employer, the British contract research firm Synprotec, was bought by Dishman. At Dishman's main facilities in Ahmedabad, Dowdeswell says, the company employs a European to manage quality. "India is low-cost compared to Europe, but we're not cheap," he says. "We offer high-quality products at a very attractive price."