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For a business, expansion is an important strategy. There are different ways to expand with more than one objective. Backward integration is one of those strategies as integrating different phases of the supply chain has multiple benefits. Often, companies use integration to capture a portion of the supply chain, including a group of individuals, organisations, resources, activities, and technologies involved in the manufacturing and sale of a product. It starts with delivering the raw materials to a manufacturer by a supplier. In the Indian agrochemical industry, several large domestic formulators have backward integrated into technicals, enabling them some control over supply chain.
Backward integration takes place when a company expands its role to fulfill tasks formerly performed by businesses at the earlier stages up the supply chain. Backward integration often involves buying or merging with another company that supplies its products and companies who pursue backward integration do it with an aim to achieve improved efficiency and economies. We can say a business starts manufacturing products that is used to make their final products that they used to source from outside.
For example, costs can be significantly controlled right from production through to the distribution process and a company might improve profit margins by reducing transportation costs. It also enables the company to get a competitive edge over its competitors. Companies can also gain more control over their value chain, increasing efficiency, and gaining direct access to the materials that they need. Besides, they can keep competitors at bay by gaining access to certain markets and resources, including technology or patents.
Technicals vs Formulations in the Indian market
One of the biggest concerns of companies anywhere across the world is the cost of raw material, for an increase in this part of the production can adversely impact the entire business process. As a result, companies are keen to integrate backward in the supply chain to contain the cost of raw materials. Therefore, a tomato ketchup manufacturing company may find acquiring a tomato field more profitable way to source tomatoes than purchasing from the farmers. In the past few years, an increasing focus on domestic manufacturing has made the agrochemical companies in India take note of its potential to ramp up capacity.
Currently, the Indian market is one of the major sources for pesticide formulations, typically consisting of an active ingredient, and several inactive materials called adjuvant, additives or inert materials. This is the end product and most of the companies start working at the stages that come at the fag end of the production cycle. This makes them a profitable manufacturer but not a producer in the true sense of the term – the formulations are made of the pesticide chemicals known as technicals which serve as the base chemical of the end product. In the past, an Indian firm built its own plant to produce MPBD, a raw material to pesticide to meet its production needs as the decreased supply of raw materials hampered production. Today, apart from its own use, the company exports MPBD to international markets as well.
In 2017, India had 125 technical manufacturers and over 800 formulators, with 15-20 large players dominating the market. The Indian crop protection market is worth approx Rs 20,000 crore but is largely dominated by big multinationals. Most of the companies import technical pesticides, intermediaries and finished products of a total of nearly Rs 5,900 crore a year, around 55 per cent of which come from China. In view of the recent Coronavirus pandemic that originated in China, backward integration has emerged as a saviour for the Indian agrochemical companies. Most of the companies, buoyed by the Make in India initiative, invested heavily in backward integration. That has not only reduced their dependence on imports from China, but helped in enhancing their capability and project them as a serious player in the market, globally. In the transformation and upgrading process through backward integration, Indian enterprises are changing their status from a global formulation product supplier to a technical supplier, and will have a stronger influence in the international market.
(Views expressed in the article are author’s own)