Plastic Products export:Opportunities for SMEs

Introduction

Plastics are the 6th largest traded products, globally.  Indian plastic exports are estimated to be around $ 7.6 billion[1] (Rs. 45,000 crores), accounting for around 3 per cent of our total exports. Top destinations for Indian plastics include USA, China, UAE and United Kingdom. There are over 2300 exporters[2] in India, largely located in Maharashtra and Gujarat. The exporters include both large manufacturers such as Garware-Wall Ropes Ltd, Supreme industries Limited and a number of small and medium enterprises.

Figure 1: Plastic exports-product wise and country wise breakup

Source : Plastics Export Promotion Council

[1] In FY 16

[2] There are around 2300 exporters registered with the Plastics Export Promotion Council

Raw materials (polymers) account for around 30 per cent of our plastics export and value added products for the remaining 70 per cent. Among value added products, plastic sheets, woven sacks, table and kitchenware are the key products.  The exports of these products have increased at a CAGR of around 12-20 per in the past decade (Table 1)

Table 1.  Growth in key categories  of Plastics (INR crs.)
HS codeItem2006-072016-17CAGR (%)
39269099Miscellaneous plastic products315.822,093.4120.82
39232990Plastic sacks bags439.731,964.3116.15
39269080PP articles such as woven sacks226.711,191.7318.05
39239090Plastic articles for conveyance and packaging such as crates160.16615.8114.42
39219099Plastic sheets, films, foils strips, plates, etc.30.33575.6934.22
39241090Tableware Kitchenware55.58505.7824.71
39219096Laminated Flexible packaging items (plates, sheets, films, foils, strips. Etc.)58.93393.8420.92
3917Tube , Pipes and Hoses and fittings284.99947.1912.76
39241010Plastic insulated Tableware Kitchenware89.81386.2415.71
Source : Directorate General of Foreign trade

How To Tap The Export Market

Entering the foreign requires a lot of preparation towards market research and product development, as the products have to meet the requirements of new customers, who may have different standards of quality, design and product packaging.  Also, diversifying into exports entails extensive documentation of company’s processes related to quality, purchase and sales, thus requiring a few dedicated resources. As such, venturing into export market comprises following steps:

Select The Market

Markets can be selected based on size of the opportunity, ease of entry and company’s competitiveness vis a vis other suppliers. The below given graph highlights key markets for various plastic products.

Table 2. Top  export markets  for key Plastics products
HS codeItemCountryCountry’s share in Indian plastics  exports
39269099Miscellaneous plastic productsU. S.21%
Canada6%
UAE4%
39232990Plastic sacks & bagsU.K13%
U.S.A8%
Canada6%
39239090Plastic articles for conveyance and packaging such as plastic cratesU K12%
U A E10%
U S A9%
39269080PP articlesU S A61%
Spain5%
Brazil5%
Source : Directorate General of Foreign trade

As can be seen, the key markets are different for each category of product, for example in FY16, UK accounted for the highest share in exports for plastic bags and sacks, whereas USA was the largest buyer for polypropylene (PP) products.  One can do a detailed market analysis to understand the key consumer countries as well as other suppliers that are supplying to the same market and the competitiveness of your goods vis a vis other suppliers.The competitiveness of the product also gets impacted by the trade and non-trade barriers as explained below.

Trade Barriers

These refers to custom related tariffs, anti-dumping duties that are imposed on the imported products by the countries so as to protect their domestic industry. For example, recently Govt of USA announced its plans to levy a tariff of 25% on imported steel and a 10% of Tariff on imported Aluminium products from a number of countries except Canada, Mexico.

However, the import tariffs are typically lower among trading partners who are party to different agreements such as Free Trade agreements (FTA), Comprehensive Economic Agreement (CEA) etc.   For example, India has trade agreementswith a number of countries including ASEAN, whereby the tariff on a number of products among the ASEAN countries is gradually being brought down to zero. Many of ASEAN members are importers of plastics (HS code 39) and India currently has very limited share in these markets (see Table 4), thereby presenting an opportunity.

Table 3. Plastic imports by ASEAN countries , 2016
CountryCountry wise Plastic imports from the world ($ mn)Country wise plastics imports from India ($ mn)Share of India  in plastic  imports
Indonesia6999.8096.801.40%
Malaysia6827.6032.100.50%
Myanmar582.608.301.40%
Philippines3061.6014.000.50%
Singapore6687.3049.300.70%
Thailand8034.2081.001.00%
Vietnam9614.6087.800.90%
Source : Strengthening ASEAN-India Partnerships: Trends and Future prospects, a report by Export-Import bank of India
Non Trade Barriers

These refers to legislations/other technical requirements that make it very expensive for Indian products to access a particular market. For example the cost of certifications of food grade plastics products in US and Europe are high at around $ 4000-5000 per product per year[1], thus making it very difficult for Indian SMEs to target these markets.

As such it may be easier for a new exporters to start with Asian markets, where the customers’ preferences are similar to India. However a detailed analysis of market size and competitiveness of our products vis a vis other suppliers is a must.

Market Entry Strategy

Having selected the market, a company can choose to enter the market by directly contacting the buyer, selling to a local distributor or participating in a joint venture with a local partner.The trade fairsand buyer’s sellers meet are commonly used by SMEs to identify the buyers as well as test market their products. Some of the trade fairs related to plastics industry include National Plastics Exhibition (NPE), USA, Chinaplas (a plastics and rubber trade fare in China) and Plastindia (Plastic trade fare in India).

The ministry of MSME offers a number of schemes to exporters for market development assistance including exposure visits to foreign markets and concessions in stall charges and air fare to participate in exhibition. These schemes are administrated by Plastics Export Promotion Council (PLEXCONCIL) or Federation of Indian exporters (FIEO), who also organise trade fares in India and facilitate meeting with international buyers.

Meet The Technical Requirements

The exporters need to comply with the technical requirements of the destination country and obtain relevant product certifications. These certifications can be broadly divided into two parts: certifications related to process and safety such as ISO and product related certifications.In general, product certifications required for US and Europe markets are more stringent than those needed for Asian, African and other markets. A summary of important certifications across plastic products is provided below.

Table 4. Technical Certifications  for plastics products
CountryCertifications
Injection moulded productsISO  and product certification based on applications
Pipes and fittingsWater Regulation Advisory Scheme (WARS) for UK, NSF for USA, DVGW for Germany
Food grade plasticsUS FDA guidelines, European Commission (EC ) guidelines
ToysConsumer product safety improvement act (CPSIA) in USA,  EU Toy Safety Directive in Europe
Woven sacksLabour data certificate for FIBC (Flexible intermediate bulk container)
Source : Discussion with NSF officials  and FineTrain research

Estimate The Capital Investment And Profitability Of Export Market

The costs can be divided into two categories:  fixed cost and variable costs. The fixed cost or capital investment required for the export market would depend on the product adaptations/customisations, certification costs and working capital requirements.The working capital cycle can be up to 3 months including the time realised in getting the payment from the buyers as well as for claiming refunds/incentives from the government.

The price of the product in foreign markets should factor the costs such as   commercial costs (shipping, packaging, and duties, insurance), marketing costs over and above the product cost.The marketing expenses such as cost of catalog, samples and visits to the destination country can add up to a significant chunk.

Some of the common costs that are incurred by the exporters include transport cost from factory to port of departure, import duty and taxes, custom clearance, ground transportation from port to customer’s warehouse and marketing agent’s commission.

As such the exporter needs to factor in both fixed and variable before quoting the price and also estimate the minimum volumes they need to sell to recover their costs.

Secure The Order And Finalise Trade Terms

Once the buyer is interested in your product, the next steps would be to finalise the trade terms also known as Incoterms. These typically define the responsibilities of buyers and sellers and costs and risks undertaken by each party.  Some of the commonly used terms include EXW (pricing is ex-factory and buyer is responsible for the transport/insurance), FOB (Free on Board, pricing includes cost of transport till the port of origin) and CIF (Cost insurance and freight, the pricing includes the freight costs and insurance required for transporting the goods to destination).

How Can We Help?

If you are interested in exporting your plastics products, we can assist you in the following

  • Identifying potential markets for your products
  • Viability study for entering a particular market
  • Assistance in generating a list of potential buyers and in scheduling meetings

[1] Based on discussions with NSF International’s office in India

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How to decide if you should stay put in your business

You have built a successful business and are looking for growth opportunities.  You can either invest in your existing business or consider new ventures. The following five parameters may help you decide if your business is attractive enough for you to put in additional resources.

 Capture4

Market size:  If you want to grow fast, the market has to be big enough for you to sell your goods to large volume of customers.  Sometimes, you may discover that your market is too small to be worth pursuing.

Say you are providing an online platform to hire domestic help in a particular city. The city has 10 lakh households, of which 10% or 1 lakh households are your target customers. If you can convert 10% of that eventually, you can get 10,000 customers.  Assuming you earn a commission of Rs. 1000 per customer, your revenue could be at best Rs.1 crore and profit perhaps 10 lakh.  That may be too small, but if you are able to replicate the same model in other cities, the business may be worth pursuing.

Customer acquisition cost and customer life time value: Customer acquisition cost refers to costs incurred in obtaining new clients. These include salaries of marketing staff, advertising spend and discounts offered.

Say, to attract 1000 customers, you spend Rs. 50,000 in advertising, deploy one sales manager at a monthly salary of Rs. 30,000 and offer discounts worth Rs. 10,000. Your customer acquisition expense then is 90,000 or Rs. 900 per customer.  Your revenue per customer should be at least 4-5 times the acquisition cost for your business to be profitable. However, revenue can be spread over 5-10 years of your engagement with the customers and need not be from just one transaction. So, the more repeat customers you have, the customer life time value would be higher and so would be your profitability.

Fixed versus variable costs: Businesses have two types of costs: fixed costs and variable costs. While fixed costs such as rents, salaries, and interest do not change with the increase or decrease in sales volumes, variable costs such as raw material, transport charges vary with the number of units produced or sold.

Higher fixed costs implies that it would take you a long time before you can start making profits, but profits would grow sharply once you achieve critical mass (breakeven point).

Get to know your fixed and variable costs and breakeven point. If you have already achieved the critical mass, it’s time to stay put and enjoy better profitability.

Operating profits: Refers to profits that remain after meeting all operating costs (i.e., all above mentioned costs except interest, depreciation). If your operating profitability is declining, you would need to conduct a thorough diagnostic assessment of your business.

Return on capital employed: Operating profit alone is not enough; return has to be analysed in the context of the capital that is deployed in your business.  For instance, if your average annual operating profit is around Rs. 25 lakh and the total capital deployed in the business is Rs. 5 crore, then your return on the capital is only 5%. This kind of return can also be generated by simply putting your money in a fixed deposit.

How can we help?

FineTrain enables entrepreneurs to assess and understand new business opportunities. Our services include market research, business feasibility studies and business diagnostics. We can help you assess your market, determine customer acquisition and lifetime value costs, your operating profits and return on capital, and recommend ways to improve profitability or expand your business.

You Can Reach us:

Call us @ 800 888 4932,

Write to us- bchhatre@finetrain.com

Visit us- www.finetrain.com

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