Increasing Product development costs and decreasing length of Product Life Cycle

A major problem in chemical industry has been that product development costs are going up whereas the product life cycle is getting shortened. Especially in this industry which is heavily based on research, it is of a big concern.

Product development costs have gone up for reasons such as:
1. Increasing Research and Development costs. Chemical Industry is a research-based business. It requires massive investment for research and development. Specialty chemicals business in particular needs highly skilled labor and that requires paying higher than average salaries to maintain innovation and quality.
2. Increasing energy costs. Chemical industry is the largest consumer of energy
3. Increasing raw material costs. Commodity chemicals businesses rely heavily on oil and gas. Oil prices have fluctuated a lot in the recent past and is expected to do so in the future.
4. Increasing disposal and clean-up costs.
5. Increasing costs to oblige with regulations and comply with Safety, Health and Environmental (SHE) issues.

On the other hand, the product life cycle has got shortened for reasons such as:
1. Changing specifications for the end industries. For e.g. the changing requirements in sectors such as automotive, construction, packaging, paints, etc.
2. Increasing competition from other products introduced by competitors
3. Changes in product processing methods with changes in regulations

As a cyclical effect, when the product life cycle gets shorter the product costs further go up. This is because products that have shorter life-cycle have high R&D expenses, high marketing expenses, require high new product sales, high costs, high prices and a low degree of vertical integration.

It is all the more important now to be able to introduce new products at low costs and/or extend the product life cycle of existing products. Food Industries have extended the product life cycle by introducing frozen foods. Pharmaceutical companies are extending their products by getting into generics and collaborating with low-cost production facilities. Some ways to extend the product life cycle, generate more revenues and/or decrease costs are:
1. Making early promotions about the product
2. Releasing products with minor modifications through each stage of the product life cycle
3. Making substitute products in the maturity stage
4. Discovering processes to turn wastes into some other form of useful products (e.g. turn some organic wastes into fuel)
5. Developing low-cost waste disposal options
6. Collaborating with other players to share the costs and resources
7. Continuously monitoring customer needs and plan well-ahead about future products
8. Developing a product development process which will require no or very less modifications when external factors such as regulations change
9. Introducing existing products in new markets or for new purposes
10. Increasing automation of product manufacturing

REALIZING GROWTH IN INDIAN CHEMICAL INDUSTRY

Indian Chemical Industry is the 13th largest chemical industry in the world. As of 2008, its size is approximately $35b which is 3% of Indian GDP (Source: http://chemicals.nic.in/chem1.htm). The industry employs about 1million people. KPMG in its report released in the year 2002 assessed that under optimistic and realistic conditions the industry by 2010 can reach a size of $100b and $60b respectively. However, as of 2008, the industry size has only reached about $35b, just a $7b increase from the year 2002.

Here are a few thoughts on what could be done to improve the size of this industry. Please post your thoughts too in this blog.

1. CONSOLIDATION: The industry is highly fragmented with as many as 1900 companies. Consolidation will help to increase efficiency and reduce costs. Further it will also help in pooling money to invest in Research and Development which is a need for this industry.

2. EXPANSION TO GLOBAL MARKETS: Huge Domestic market size has helped Indian companies in the past and is continuing to do so in the current global scenario. However, this narrow focus will not allow increasing revenues in the long run. Aggressive expansion to global markets will be required to increase revenues. Further, it will also help to increase quality, efficiency and performance. Government on its part should not try to protect the industry. Free passage of goods should aid in strengthening quality and efficiency.

3. INVEST HEAVILY IN GENERIC DRUGS: Companies such as Ranbaxy, Dr.Reddy’s Labs are already holding patents for generic drugs manufacturing processes. The healthcare market is bound to increase all across the globe. Population is aging faster in western countries and at the same time the healthcare costs are increasing exponentially in those countries. Drugs should be affordable to cater to this market. Big global pharmaceutical companies will try to establish plants or get into joint venture agreement to manufacture generic medicines with Indian companies. Pfizer recently entered into Joint venture agreement with Wockhardt. Mylan Pharmaceuticals, the world’s 3rd largest generics drug manufacturer entered into agreement with Biocon. India has huge revenue growth potential in this business. Big pharmaceuticals have drugs whose patents are expiring in a few years. Establishing plants or collaborating with Indian companies will aid them in making revenue from these patent-expired drugs at a minimum cost.

4. FOCUS ON EXPLORING BIOFUELS: Indian government is spending on Jatropha research to exploit it as an alternative source of feedstock for ethanol. Jatropha is a toxic plant which grows in marginal lands in India and whose oil can be processed to bio-ethanol. Unlike other oils like corn oil, soybean oil, etc, the oil from Jatropha plant is not edible. So this will not compete with the edible oils’ resources. India right now is spending a huge amount on importing crude oil from Gulf countries. Exploring on Jatropha has benefits such as making India a front-runner in the world in biofuels, reducing costs on importing oil, realizing huge export and revenue opportunities & so on. Challenges do exist in this study but this should not lead to stepping back from this effort. So far about 500,000 to 600,000 hectare of land have been used to grow Jatropha. Government right now to encourage Jatropha research has increased import tariffs to 28% for vegetable oils, a feedstock for manufacturing bioethanol (not sure if this would work as it is again trying to protect this industry). Incentive programs need to be put in place to encourage farmers to grow Jatropha.