Assessing The paper industry of India
Disclaimer: This work has been submitted by a student. This is not an example of the work written by our professional academic writers. You can view samples of our professional work here.
Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.
Published: Mon, 5 Dec 2016
The Indian paper industry has been growing at the rate of 8 per cent over the past few years. There is dramatic change in the Indian paper industry after it was completely de licensed on 17th July 1997. Now FDI up to 100 per cent is allowed in this industry. The aspect of competition is now important for the firms who are within the paper and paper related industry. Porter’s five forces model is one of the strategic models to assess the attractiveness of the industry as well as root causes of competition and profits irrespective of type of industry (service or manufacturing). According to this model the key five forces affect the profitability of an industry in a negative way. But according to Brandenburger and Nalebuff’s value net, these forces in fact enhance the profitability of an industry. But in this study we limit our exercise to Porter’s five forces only. These forces are: Rivalry among the existing firms, Threat of new entrants, Threat of substitutes, bargaining power of suppliers and bargaining power of buyers or customers. The paper industry of India consists of nearly 600 small and large firms producing different types of paper and paper products. The rivalry among the existing big firms has little effect on the attractiveness of the industry as demand for paper far exceeds supply. Also threat of new entrant has minimal effect on the industry. But bargaining power of the suppliers is found to be unfavorable to the Indian paper industry. Those who are already there in the industry need to increase capacity and productivity to meet excess demand and rising input cost. This can be achieved through better technology for capacity enhancement and implementation of TQM for cost reduction.
The paper industry in India is more than a century old with nearly 600 small and big mills manufacturing paper and paper products today. The largest paper mill in India is Ballarpur Industries Ltd (BILT). India is also top 15 producers of paper and paper board in the world. But India is not self sufficient in paper manufacturing. Nearly half of the newsprint consumed is imported as domestic capacity is insufficient to cater to demand. For this reason the players in the paper industry need to consider competitive positioning and repositioning strategically. The government of India is giving incentives to the paper industry to set up new and enhance existing plants. Due to this reason the number of players in this industry is very large touching nearly 600. Further in any industry the nature of competition is always a function of the structure of the market. In this regard the assessment of the attractiveness of Indian paper industry is essential and becomes necessity. Porter’s five forces framework has been widely used in analyzing the attractiveness of an industry and finding the root causes of profit and competition. Any firm which needs to compete competitively has to answer two fundamental questions; (i) what makes an industry attractive? (ii) What positions within an industry lead superior performance? This study discusses about the paper industry in India and how Porter’s five forces can be applied as a tool of analysis for profitability.
Paper industry in India
The Indian paper industry accounts for nearly 1.6% of the total global paper and paperboard production. The estimated turnover of the industry is close to USD 6 billion. Broadly the industry can be divided into two segments:
Paper and paperboard: Printing, writing, packaging and tissue. The writing and printing market can further be segmented into coated and uncoated.
Newsprint: Newspapers, flyers and other printed materials like books, magazines etc.
Paper finds applications in variety of purposes including but not limited to writing, packaging and printing. Paper can be categorized into newsprint, writing and printing, containerboard, carton board and others. India is fastest growing market for paper globally as the per capita consumption has risen from merely 7 kg to nearly 8.3kg in recent years. The paper production is growing at the rate of 8% per annum while the consumption is poised to grow at the rate of 9%. This imbalance in supply and demand has drawn attention from the foreign players. The high demand for paper can be attributed to robust economic growth which is currently 8%, followed by right to education bill 2010(Sarva Siksha Abhiyan 2001). The advent of new printing press has also added demand for paper. The per capita paper consumption is also the driver for demand outstripping supply. The paper industry was completely de licensed on 17th July 1997. Any firm wanting to set up a paper mill would required to file an Entrepreneur Memorandum with the secretariat to get industrial assistance in expansion of existing mill at the suitable location. Currently the paper industry is allowed 100% FDI and any firm operating on non conventional source of raw material gets special assistance from the government of India.
The paper mills use variety of raw materials including wood, bamboo, wheat straw, rice husk, recycled fibre, bagasse, pulp and waste paper. Pulp and waste paper are the two most important raw materials which have seen their prices gone up in the national and international markets. Approximately 35% of the mills are based on chemical pulp, 44% on recycled fibre and 21% on agro residues.
Fig 1: Paper and Paperboard Industry – Key Drivers
Market definition of an industry is required to know the root causes for profits of a firm, competition and industries attractiveness. In this study we will analyze the Indian paper industry to ascertain its attractiveness, profitability and competition in the industry. We will make use of Porter’s Five Forces to analyze the Indian paper industry.
Porter’s Five Forces Framework (PFFF)
E Michael Porter in his path breaking work suggested some driving forces which could help to analyze the attractiveness of an industry and its competitive positioning. These forces are commonly known as Porter’s Five Forces. He says in any business whether it is service or manufacturing, there are always some competitive forces which affect the profitability of an industry. The framework that models an industry which is influenced by five forces is provided in the figure below.
Fig. 2: Porter’s Five Forces Model
Source: Porter, Michael E, How Competitive Forces Shape Strategy
Degree of Rivalry
The intensity of rivalry is determined by industry concentration. The concentration ratio (CR) tells that the industry is concentrated if large market share is held by big firms. The market is closer to monopoly if a large chunk of market share is held by few firms and is less competitive. If none of the players is having large market share and is evenly distributed, the industry is said to be fiercely competitive. The degree or intensity of rivalry can be cut throat, intense, moderate or weak.
The following factors cause the internal rivalry in the industry:
Large number of firms
Slow market growth
High fixed cost
Type of products
Low switching cost
Homogeneous products or services
High exit barriers
Threat of Substitutes
Substitute or complement products refer to products in other industry. A threat of substitute exists when the demand of that product is affected by the price of the substitute product. The threat of substitute depends on the buyer’s propensity to substitute and relative price of the substitutes.
Buyers Bargaining Power
The demand and price of the product can be easily affected if the buyer is strong. It depends on the size of the buyers. Less the buyers more the buyers power, more the buyers less the bargaining power and vice versa.
The factors which affect buyer’s bargaining power are
Buyer concentration versus industry concentration
Buyer switching cost
Brand identity of the buyer
Price sensitivity of the buyer
Price of total purchase of the buyer
Suppliers Bargaining Power
The bargaining power of suppliers includes raw material suppliers, labor, land, capital. The higher the suppliers power the higher the input cost for the firms. The following factors that affect the firms are:
Access to labor
Access to capital
Threat of integration
Presence of substitute inputs
Threat of New Entrants/ Barrier to Entry
The firms do not face competition from the existing firms only; the new entrants also pose a threat to the industry. Similarly if the profit margin is high in the industry, then many firms would come and drive down the profit. For a healthy profit margin an entry barrier is essential for sustainability. The economies of scale, working capital requirement, brand identity, access to distribution channels and absolute cost advantage play a crucial role in determining threat of new entrant and barriers to entry.
Mapping the Paper Industry of India within PFFF: Is it attractive?
It is essential to map the PFFF model to the paper industry of India and make an assessment about the attractiveness of the industry.
The Indian paper industry includes paper, newsprint, writing and printing, containerboard and carton board paper products. There are around 600 small and big players in the paper and paper product segments in which JK paper Ltd dominates the industry with sales of ` 1310.56 cr during quarter ended Sep 2010. It is followed by Tamilnadu Newsprint and Paper Ltd (TNPL) and BILT. Most of the mills are in existence for long time and hence the technology used by them falls in a range of oldest to most advanced technologies.
If we examine the porters five forces, we see that the Indian paper industry meets criteria for intense internal rivalry as the market concentration is high due to large number of big players having considerable market share. The production costs vary across mills and are dependent on the technology used by them. To meet the increasing demand for paper from the academic, corporate, industrial and retail segments, paper mills have lined up major expansion plans. According to CMIE CapEx, there is large expansion of capacity in the coming year. During fiscal year 2008-09, 312000 tones of incremental capacity were added and during 2009-10, 395900 tones of capacity is supposed to be added by the firms. It is estimated that by 2011 the total capacity of the industry is estimated to touch 82.9 lakh tones. The demand for paper is expected to rise steeply from the academic, corporate, industrial and retail segments.
Despite these factors, the internal rivalry in the current scenario is intense. The quality of paper varies among mills. For printing purposes, a good quality paper is expected by the consumer. That means price is not important to most of the corporate consumers. Consumers appeared to be loyal to particular paper. The price insensitive consumers limited the incentive for the paper industry to use price as a strategic weapon. As a result, most firms passed the cost burden on consumers and enjoyed healthy price cost margin. The demand for printing and writing paper is expected to increase on the back of increasing literacy levels because of government thrust on primary education. Increase urbanization and a sound growth expected in industrial production is expected to increase the demand for industrial and packaging paper like Kraft paper, corrugated boards and duplex boards.
During 2001, the government initiated Sarva Siksha Abhiyan to provide free and compulsory elementary education to all children below 14 years of age irrespective of location and income. This triggered huge requirements of notebooks and text books. Further, government gave incentives in the form of financial inducements to firms which supplied printed papers for this program. By steering government printing firms to the lowest priced paper firms, the price elasticity of demand increased. The Sarva Siksha Abhiyan acted as a catalyst to internal rivalry. This intensified the pressure on firms to lower prices to win contract without considering future price rivalry.
Another factor that contributed to internal rivalry is the rise in price of raw materials. The raw material expenses grew by 23.7 per cent compared to income. This increase in raw material expense is due to sharp 50.7 per cent rise in pulp price. And because the pulp is mostly imported, the growth in profits narrowed down to 8.1 per cent during the June 2010 quarter. The industry net margin stood at low 3.3 per cent due to rise in tax provisions and increase in depreciation charges. The low margin contributed to modernization of the existing plants and increase in the productivity and utilization of the mills.
Fig.3 (Values in Tonnes)
The paper industry is highly capital intensive and characterized by high fixed cost. This drives down sound margins and profitability. Also the exit barrier is high in this industry and consequently the firms try to remain in the market which drives intense competition among the existing firms. This is explained by huge investments of the order of ` 7293.84 Cr in new projects during the fiscal year 2009-2010. We can also see that the products in this market are nearly same or homogeneous as most of the firms produce same type of paper products. The intense rivalry is boosted by the low switching cost of the products.
Barriers to Entry
The industry can install barriers for entry and oppress internal rivalry. If the profit margins are high, it will attract new players and as a result intensify the rivalry. Inversely if the profit margins are kept low, it can act as an entry barrier to new entrants. According to CMIE, the Indian paper industry profit margin is very low. The PAT margin of paper and newsprint companies has come down from 4.14% in Jan 2005 to 2.08% in Jan 2010 while the paper products companies are suffering from negative margin, -12.76% in Jan 2005 and -11.90% in Jan 2010. This can be attributed to huge capital investments by the existing firms in the last five years. The huge expansion by the incumbents deter new entrant from getting entry into the industry. The price of chromo paper (Kolkata market) has remain same during the period 2005 and 2010 and stood at `55.75/kg while the price of Maplitho paper has slightly increased from `45.88/kg to `52.08/kg during 2005 and 2010 respectively. These incumbents are operating on economies of scale and keeping the new entrants at bay. Also the demand side economies of scale discourage entry by limiting the willingness of customers to buy from debutants. The paper mills are capital intensive and employ heavy machineries and the resale value of these machineries are high, the entry barrier is low in terms of capital requirements as any credit lenders can lend money seeing the higher resale value of these plants.
Fig.4: Paper and newsprint production
Indian Market, 2005-2010
(Figures in Tonnes)
Source: CMIE 2010
The incumbents have advantage of good brand value, best technology and have preferential access to best raw materials, and thereby they have cost and/or quality advantage. Also the shelves in the stores are occupied by the branded papers, the debutant has to seek new distribution channel incurring huge sales and advertising cost that could deter the new comers. The Indian government is in fact minimizing the entry barriers by giving incentives to those firms which operate on non conventional source. But it is creating high entry barriers to those who plan to use conventional source of raw materials like wood pulp.
Substitutes and Complements
The presence of substitutes and complements has little impact on the Indian paper industry. The substitute for writing paper can be Microsoft Office and other electronic writing devices but these substitutes can pose little or no threats to the writing paper. Similarly, for packaging plastics can act as a substitute. But plastics can never pose threat to the packing paper as the introduction of plastics and polyethylene has been widely discouraged by the government and is supposed to be banned wholly due to its harmful effect on the nature and environment. The prices of plastics and electronic writing and mailing devices have little impact on the demand of paper and packing paper. Similarly internet news, ipad, television news, radios have no negative effect on the demand for news papers. This is because most of the Indian citizens do not have access to internet and these electronic devices. Also people prefer to refer books, magazines, articles rather than online contents. The writing paper can be termed as a threat free unless the whole population has access to internet broadband. Similarly packing papers, cardboards, cartons do not face any serious challenge from plastic and jute. Overall the substitutes have less impact on the Indian paper industry.
Powerful suppliers extract more of the value for themselves by charging higher price, limiting quantity or quality. In Indian paper industry the suppliers are more powerful as the raw materials for paper are low in quantity. The domestic suppliers are not able to meet the demand of these paper mills and nearly half of the raw material for writing paper is imported. Also the raw material pulp is scarce in quantity; the suppliers are more powerful in this industry. They dictate the prices of the raw materials and pass the burden to paper mills. This can be seen from the CMIE report that the unit cost of newsprint import has risen sharply from `20.86/kg in Jan 2005 to `38.12/kg in Jan 2010. The newsprint market is heavily dependent on imports as 976005.96 tonnes of newsprint were imported till Jan 2010 as compared to 772040.96 tonnes in Jan 2005.
Fig.5: Production and Consumption of Paper and Newsprint, 2005-2010(Figures in Tonnes)
Source: CMIE 2010
The price of the pulp, a major raw material, has risen sharply over few quarters since June 2009 with demand growing faster than the supply. The February 2010 earthquake in Chile and March 2010 strikes by dock workers in Finland has already disturbed the demand supply balance sending pulp prices over $1000 per tonne. Chile and Finland are the crucial suppliers of pulp as they account for nearly 10 per cent of the total pulp supply in the world.
The Indian paper industry does not have the firm grip on the suppliers as they have varied markets to cater to. The sugarcane waste is also one of the sources of raw material but that is mostly dictated by the government. Sugarcane is also dependent on weather so it is not possible for Indian paper industry to have a grip on the suppliers.
Powerful buyers can extract more value by forcing down prices or demanding better services thereby increasing cost of the producers. But in the Indian paper industry scenario, the buyers are not powerful as demand far exceeds supply. This can be justified as the production is growing at the rate of 8% while the demand is growing at the rate of 9%. The total production of paper in Jan 2005 was 5556017.00 tonnes but total consumption was 5559179.42 tonnes while the consumption touches 6646218.90 tonnes in Jan 2010 whereas production was only 6542839.00 tonnes. The institutional buyers have a major say in the total demand of paper in the industry. The other buyers are the consumers who buy for their personal consumption. The biggest buyers are those publishing houses like Tata McGraw Hills, newspaper press and the government who buys for its flagship program Sarva Siksha Abhiyan. The medium buyers are universities, printing press etc.
The institutional buyers also include packers and movers, department of post, packaging industries, parcel services and others. The demand for papers increases in times of economic downturn as people invest more in education that time rather investing in financial markets. Also there are few substitutes for this industry; the buyers have little power on the paper industry.
The following table summarizes the five forces of Indian paper industry. The key to better profitability of Indian paper industry lies on investment on modern technology and better utilization of the mills followed by investment on R&D on non conventional sources of paper. It can be inferred that supplier’s power is high in the Indian paper industry while buyer’s power is low. The threat of new entrant and threat of substitutes is low but the internal rivalry is high due to evenly distribution of the market share by big firms.
Five Forces Analysis of the Indian Paper Industry
Medium to High
Threat of New Entrant
Threat of Substitutes/Complements
Bargaining Power of Buyers
Bargaining Power of Suppliers
Cite This Work
To export a reference to this article please select a referencing stye below: