Moving Forward with Backward Integration

By Dan Jacobs
Senior Editor

Disruptive events of the past few years (COVID-19, Russia and Ukraine conflict, and before those, China’s environmental crackdown and double control policy) have proven how fragile the supply chain can be — and therefore availability of key ingredients. Many Indian companies have employed backward integration to avoid those disruptions and become a more attractive alternative to Chinese suppliers.

“During the COVID-19 pandemic time, self-reliance became need of the hour,” says Narayanan P. Nair, Vice President – International Marketing and Sales, Gharda Chemicals Ltd.

“So, Indian manufacturers were pushed toward backward integration as a matter of fact. Besides this, multi-national corporations and larger global companies started looking at a ‘China+1’ model, which brought in the impetus for the Indian companies.”

Like many business strategies, there’s a difference between planning and executing a backward integration strategy.

“Backward integration is always a long-term cost competitiveness and sustainability project that depends on availability of key resources and technology,” said Amit Talesra, Assistant Vice President, Meghmani Organics Limited. “Meghmani is fully backward integrated for all of its key products and is still in process of backward integration of some new molecules recently launched. Since inception, Meghmani has always kept backward and forward integration in mind while selecting a product in its basket. It constantly indulges in process and product development which allows it to deliver a cost effective and better product with enhanced technical capacities.”

Part of the challenge is managing the process for multiple products. It’s an ongoing process.

“There is a particular intermediate for which Meghmani is the only manufacturer currently outside China. It has invested substantially in backward integration to the core and is even integrated for some basic chemicals like caustic and chlorine,” Talesra said.

ADVANTAGES

The main benefit of backward integration (or at least the main motivation) is access to and reliability of key ingredients. But that’s certainly not the only advantage.

“This varies from product to product,” said Atul Churiwal, Owner, Krishi Rasayan. “But more than the cost, more important is, we are not dependent on someone else, uncertainty is reduced a lot, and in many cases backward integration have financial benefit, too.”

Meghmani’s Talesra agreed.

“Backward integration basically helps in being competitive in your prices and helps in assuring better quality and timely supplies,” he said. “Cost is one part, but it helps in long-term sustainability of the project. All our products that are backward integrated are very much in line with global competitiveness. Backward integration has been a boon for us, and it has made us a preferred choice for contract manufacturing for multinationals and key players of the industry.”

The approach has implications that go beyond individual companies.

“Indian manufacturers would become more competitive, reliable, and not dependent on others/competitors for RM,” says Abhijit Bose, Chief Marketing Officer, Tagros.

“It has been noticed that even by importing key intermediates from China and making the technical active ingredients (AI) in India, the cost of AI becomes more competitive. So, from both cost positioning and reliability fronts, the customers/buyers feel more confident to deal with Indian manufacturers.”

CHALLENGES

Obviously, a company making itself less reliable on outside resources can better ensure access to the materials it needs and limit disruptions. But that doesn’t mean there aren’t hurdles to overcome. In some cases, it might simply not be possible to implement backward integration for every needed ingredient.

“Every chemistry and reactions has its own challenge,” Churiwal said. “Environmental norms are becoming more and more stringent every day besides other statutory compliances, which are also being tightened by the government. All the required natural resources are not enough available in India, and we need to depend on others for certain basic raw materials. Examples include solvents, yellow phosphorous, etc.”

MAKING IT WORK

“For any company, selection of a partner depends on multiple factors,” said Talesra. “One is the molecule and basic requirements in process of manufacturing. Second is cost and availability, and third and most important in today’s times is synergy in goals and practices. Environment Health and Safety (EHS) is another key factor that we assess before finalizing a partner. Backward integration helps one be self-reliant and thereby reducing inadequacies and dependencies.”  •

Photos: 
AddMeshCube -Adobestock.com

Photo of Abhijit Bose courtesy of Tagros Chemicals India Pvt Ltd

Photo of Atul Churiwal courtesy of Krishi Rasayan Exports Pvt. Ltd

Photo of Narayanan Nair courtesy of GHARDA CHEMICALS LTD.