Mergers & Acquisitions: India’s Crop Protection Space

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By C S Liew
Managing Director, Pacific Agriscience

In 2022, which recorded an all-time high of exports of generic pesticides coming out of China and India, the two countries exported $11 billion and $5.4 billion respectively.

The world was just emerging from the COVID-19 pandemic. The disruptions in logistics arising from the pandemic in 2021, followed by the war in Ukraine at the beginning of 2022, drove panic buying of crop inputs.

Over the pandemic years, there were also massive amounts of food grain imported by China for stockpiling, further driving farm demand for crop inputs in grain exporting countries in a non-sustainable way.

Then, the perfect storm of winter 2022/2023 kicked in—the follow-through panic buying, both within China and globally, did not materialize, leading to a crash in prices at the manufacturers’ level. The over-capacity issue started to rear its head.

The market-positive events for 2020-2022 mentioned above, masked the issue of over-capacity of technical (tech) grade pesticide products in both China and India. Massive and rapid capacity installation has been going on in China over the past two decades but has only been building up in India during the past decade. The number of tech grade manufacturers in India is now about 125, when ten years ago, it was about half today’s number. In the case of China, the number of manufacturers has been kept constant or reduced by the government in order to contain pollution. However, the massive increase in capacity of existing plants, as well as new licenses granted for more molecules to be manufactured has contributed to over-capacity.

About half of installed capacity is unutilized and more plants are being planned and built, in both chemicals and biosolutions sectors in India. Over-capacity can be attributed to these five reasons.

1. Many new players and formulators becoming tech producers

Many new manufacturing licenses have been issued by the Indian authorities. By 2020, there was a total of 2,403 companies issued with licenses. Many formulators have the ambition of being tech grade manufacturers as well, and some of them have done it. More players are desiring to head in this direction.

2. Biologicals’ lower barrier to entry

In the biological solutions sector, the growth in the number of innovators and manufacturers is driven by global demand, lower level of investments needed, and the Indian government’s push to lessen the nation’s chemical footprint.

In reality though, the growth in demand at the farm level in India is not moving in tandem with supply. The country’s relatively small farm sizes do not make it easy at all to promote these biological solutions which require a lot more detailing at the farm and dealership levels.

Furthermore, the soils are inherently in need of priming for the introduction of biologicals to function and thrive. Unlike in Brazil, where soil conditions and massive farm sizes lend themselves to 40% CAGR over the recent 4-5 years.

3. Modi government’s Make-in-India mantra

The Modi government’s push for more industrialization, innovation, and manufacturing in India to make it a $5 trillion dollar economy by 2025 (currently at $3.7 trillion) gave encouragement and momentum to the growth.

4. China +One desire of foreign buyers

During the past decade, there has been a strong desire of international buyers of generic pesticides to diversify from sourcing out of China. From time to time, production and supplies from China have been erratic due to a variety of reasons such as sudden shortage of energy, leading to regulation or allocation of supplies, anti-pollution measures leading to plant shutdowns, and opportunistic trading behavior causing price instability. The pandemic, which caused supplies and logistic disruptions, also brought home the point of having to attain more resilience in the supply chain.

Of late, the geopolitical rivalries between China and U.S. and Europe, as well as between China and India, have also given momentum to the desire to buy more from India and to be less reliant on China.

Will a day come soon for some Chinese manufacturers to carry out some last-step manufacturing in India to over-come the high tariffs imposed on Chinese goods by the U.S.? Given that India has the pesticide manufacturing expertise and the ecosystem, this is indeed probable but of course the Indian government has to allow this to happen. Over the past two or three years, one can see that China has allowed Indian pesticide players to attend the two large Chinese crop inputs expositions but Chinese players are not issued with visas to enter India to do business.

5. Some successes in backward integration

The China +One will gain momentum as Indian manufacturers make more technological innovations and are able to demonstrate convincingly backward integration to reduce reliance on China for intermediates. Over the past two or three years, some more financially and technologically capable Indian manufacturers have achieved a degree of success in this direction.

Over-capacity and lagging growth in demand call for the need for consolidation within India. These four points illustrate why.

1. India is somewhat mirroring the Chinese over-capacity issue

Though the over-capacity issue in India is not as acute as that in China, one needs to recognize that the ability to build huge plants and produce huge quantities of any molecule in China is their strength to make themselves more competitive vis-à-vis Indian manufacturers. Having said that, the issue in India does mirror the over-capacity issue in China.

If mergers and acquisitions or consolidation of weaker and smaller pesticide players in India doesn’t take place soon, there will be ghost ag chem plants, like there are ghost malls now in India. These smaller players are fighting with their Chinese and larger Indian competitors for international market access, and this is a formidable undertaking.

2. Biosolutions sector needs serious injection of capital for market development and promotion

As mentioned earlier, the small farm sizes make it a formidable challenge to reach out to the farmers. Hence, this increases the cost of marketing and promotion. In general, I often said that for a biosolutions player, investing $2-3 million in innovation and production calls for multiples of such amounts in market development and promotion. One can see that the success stories of biosolutions providers globally have one common thread—almost all are invested heavily by private equity and sovereign funds.

3. Reasons for being in the Indian crop protection market

Foreign companies that need market access into the growing Indian crop protection market as well as Indian technologies in development of biosolutions will be welcome by Indian players as equity partners. Greater adoption of biosolutions in agriculture is strongly endorsed by the government. The biosolutions market, estimated at about $1 billion consisting of $300 million worth of biostimulants and $80 million in biopesticides, the balance being organic fertilizers, is still relatively small. Though the biopesticide sector is already crowded with about 1,000 products registered, with a greater push for more exports of agricultural commodities in which chemical residue is not tolerated, the demand will continue to grow.

The Indian crop protection market is currently worth well over $7 billion (inclusive of exports).

It is the fourth largest in the world and growing at 8% CAGR compared to the world average of only 2-3%. The consumption per hectare of pesticides in India is very low, at 0.6kg/Ha while the corresponding consumption in China is 13 kg/ha. So, there is a lot of room for market growth.

Those who can bring a global sales network, financial investments, good technologies and products that complement the Indian partners will have the best fit. It could also be an opportunity for the foreign investors to bolster their own in-house capabilities by being an equity partner with the Indians. This applies to both the biosolution and the chemical sectors.

4. Debt and collection issues in the supply-chain leading to more financial strains

The smaller Indian players are also facing hurdles domestically in that debt and revenue collection issues prevail in the Indian market. So, if chasing after the overseas market is tough, chasing after the domestic market is equally tough—a case of being placed between a rock and a hard place.

The need for acquisitions overseas to gain market access

Of course, only the stronger and financially sound plants or players can engage in acquisitions, and it must be done. UPL pioneered this a couple of decades ago.

Buying into good overseas distributors is one way to go. Distributors all over the world are not short of products in their portfolio. So, merely knocking on their doors with pure and undifferentiated generics will get them nowhere.

Investing in overseas product registrations to bolster the product portfolio of partner companies overseas helps. This gives a better value proposition when approaching and knocking on the doors of importers. To gain a foothold selling under one’s own registrations and brands need some leverage. Providing some proprietary formulations and even novel application technologies will bring the needed differentiation to compete better. This means between a pure generic ag chem player and one with agchem+biologicals, the latter wins. The pure chemical players will need to acquire players, whether from within India or overseas, with the desired products and technologies.

India’s Mergers & Acquisitions State

The Indian crop protection products manufacturing industry has grown significantly over the past decade leading to over-capacity. Coupled with lagging growth in demand, there is a need for consolidation or mergers and acquisitions, both domestically and overseas.

Domestically, the smaller and weaker players may not survive and may need to be taken over by stronger players. Overseas, the ones that can, need to make acquisitions of good distributors to gain market access. There is also a need to make acquisitions to bolster offerings of novel products and technologies to create the needed differentiation to succeed. There are also good reasons for foreign companies to participate in the growing Indian market through acquisitions. So, mergers and acquisitions in the Indian crop protection landscape flow in both directions. •

CS Liew, Managing Director of Singapore-based Pacific Agriscience. Over the past 8 years, CS has been very active in mergers and acquisitions – putting together deals in the agricultural inputs space through his own agchem trading and marketing company, Pacific Agriscience, opened in 1999.