Industrial gases business heads for a shake-out

The worst hit are the makers of oxygen, nitrogen and argon, which are called air gases as they are taken directly from the atmosphere. However, special gases like nitrogen-argon, used by lamp-makers, are not that much affected by the slump. They are used for very specific purposes as in the chemical and pharmaceutical industries and chip-making. Manufacturers of dissolved acetylene (DA), used in welding and metal-cutting, are also adversely affected with many welders opting out for the liquid petroleum gas.

Ashok Chandra of Superior Air Products feels that the biggest problem the industrial gases industry is facing today is regarding "power and the high rate of power." Power breakdowns play havoc with the operations as the production cycle is disturbed. A breakdown causes four hours’ delay.

Says G J Girdhar of the Muzaffarnagar-based Mahalaxmi Gases Pvt. Ltd., "In our industry, every power cut means reprocessing which leads to idle running of the plant and unnecessary consumption of electricity to bring it back to the production stage."

As a last resort, Girdhar did away with supplies from the Uttar Pradesh Electricity Board and now relies only on captive generation. Needless to say, it has meant additional financial burden on his company.

Another company with a plant in UP, the Ghaziabad-based Goel Gases is also facing acute power problems. Says Tulsi Das of Goel Gases, "Electricity tariff is hiked from a back date and we are asked to pay arrears as well. But we had charged our customers according to the then prevalent tariff. The customers can’t be asked to pay more. We have paid arrears of Rs 77 lakh in the last six months."

Besides these general problems, what is really chafing the small and medium industrial gas makers is the entry of multinationals. Says Govind Ram, managing director of Baroda Industrial Gas Pvt. Ltd., "Multinationals will overtake us. I don’t think we would be able to survive for long in this industry."

Not all in the industry, however, share Ram’s pessimistic view; they feel that it’s not a MNCs vs small industry issue. They feel that small units can’t be run viably as they lose on the economies of scale in a sector which is becoming more and more capital-intensive. It’ll become increasingly difficult for the SMEs in the industrial gases industry to compete with MNCs which can boast of financial muscle, technological prowess, and managerial excellence.

On the one hand, manufacturers are mourning the decreasing profit margins; on the other, dealers have their litany of woes. What they hate most is direct selling which a number of manufacturers are indulging in. A dealer alleged that his manufacturer "stole" four of his customers.

The dealers don’t attribute the decline in business to the imbalance in demand and supply. "In fact, the consumption of gases is increasing," says Kailash Kapur of Kailash Gases. "It is not the manufacturer but the dealer who is bearing the brunt of the slump."

Competition is so stiff in the market that manufacturers are even offering discounts. "Today, there is surplus capacity, which is a far cry from the market scenario till three years back when the capacity was half that of the demand," says Singh. Manufacturers are under pressure to clear their stocks even if profits are negligible; direct selling is a result of the manufacturers’ desperation. The dealers are not amused.

"The manufacturer is short-sighted," says Sunil Mehta of Shree Durga Sales Corporation. "He ignores the fact that even today most of the sales are through the dealer. He can’t survive without the dealer; for, the customer can always rely on the dealer. If his requirements are fulfilled by the product range of one company, he can get the gas cylinder of another company."

The dealers of carbon dioxide and argon are at the receiving end, adds Mehta. "About 60 per cent of industrial carbon dioxide is used by the beverages industry and 30 per cent goes for welding purposes. This makes direct selling easy as the consumers are big units. But the use of oxygen is not so much concentrated because the individual users require low volumes and they are mostly scattered."

Many other, often unrelated, developments have also adversely affected the industrial gases business. For instance, as Marutis became popular at the expense of Fiats and Ambassadors, the demand for gas welding came down. The reason is that in the denting and painting jobs of old-fashioned cars a lot of welding is involved; not so with the Maruti. "Earlier, a mechanic would use one cylinder in a day. Now, he takes as much as one and a half months," says Kapur.

Today, nobody in the industrial gases business would advise an entrepreneur to enter this field. At least, not at this point of time. Even later, only those who have reasonably good financial resources at their disposal, says Kapur.

In the manufacturing sector, says Singh, the entrepreneur has to be "very keen on technology. Plants with old technology won’t be viable." Only units with modern technology, in which power consumption is less, sufficient finance, and managerial acumen can survive.