All opinions are my own.

Friday, March 27, 2009

Nano and Paradigm shift

Nano car, when conceived was the joke of the night shows and most of the news broadcasters. Earlier this week reporters wanted to touch and feel “Oh my God” no radio, no air-conditioning and it is a tin can. May be it is. It might be bottom of the rug but it illustrates what is feasible. We have a new point to go forward from.

It is a HUGE paradigm shift not only for the automobile industry but also for every manufacturing industry. Gives 55 miles per gallon and gets you from point A to point B. Yes, it has its deficiencies but still we all talk about it over a drink.

Nano shows us that “Element Human Hu” can do unique things. It can go to point “x” which is out there, beyond our imagination, if we put our mind to it. Is it new iPod of the manufacturing industry? May be.

At the turn of the twentieth century, the four-wheel gasoline buggy fascinated us. Did we ever think in nineteen eighties that we will have laptop that can launch a missile? Most of us will say NO. We have driven film photography to a Technology Museum.

We are now looking at the next generation of adventure. Human creativity is beyond control and Nano is a rendition of possibilities of manufacturing and technology innovation. It should be celebrated. Hats off to the Human element.

Can we do anything? Yes we can!

Thursday, March 26, 2009

Pharmaceuticals and Return on Investment (ROI)

Every reader is an investor. Investors know that there has to be a good return on their investment irrespective of the place of investment.

We have all been taught that different risks necessitate different ROI. For “low risk investments,” ROI of 10-24% is suggested, 24% being in Pharmaceuticals. The ROI range for “average risk” is about 15-40%. Again, 40% is for pharmaceuticals. ROI for high-risk investments should be 24-56% with 56% for Pharmaceuticals (1).

In the past few weeks, three major pharmaceutical mergers have been announced. Total investment is about $156 billion U.S. dollars. If the total investment is equally distributed between the three companies and each would like to have a “Five years ROI”, then [due to high risk] one should expect “before tax” return of about $20 billion dollars per year per deal. Another way to look at earning $20 billion/year is that the each company will have to have 10-20 blockbuster drugs on the market beginning in 2010. Based on each company’s pipeline, I just do not see such a gusher. Unless the acquiring players know something we do not know, I believe these are risky investments considering that less than 5% of drugs become blockbusters and past acquisitions and their assimilation have not been stellar.

I would like the readers to opine on the recent pharmaceutical investments, share their thoughts and what they think are the short and long-term options for pharmaceutical companies?

(1) J. Frank Valle-Riestra, Project evaluation in the chemical process industries, McGraw Hill 1983 p 433.

Thursday, March 5, 2009

Global Fine/Specialty Chemical industry and its challenges:

Current situation:

Global chemical industry is going through multiple transformations under the current economic environment is not helping either. It needs to address the following.

1. How to react to the current slow down?

2. What are their long-term prospects?

Companies in Europe and US innovated and developed many unique molecules that have improved our quality of life and life style. Products include pharmaceuticals, polymers, additives, flavors and fragrances, fertilizers and list goes on.

Some of the old giants have disappeared. Recent re-factoring of the European companies to rationalize their businesses has caused more turmoil than solved as the companies are still loosing money. Some are trying to find themselves and some have given themselves new names after reorganization. Some of the new entities have not found equilibrium.

Lack of growth (i.e. growth equal to GDP growth is no growth) has been a challenge [some segments have had higher than GDP growth but many are lower]. On the other hand growth better than plan has been exhilarating. These have impacted their profitability.

As the world grapples with the current slow down, more so in the developed countries than the developing countries, the future looks murky. To conserve profits companies have selectively shuttered their plants. This might be prudent for the short-term but mothballing plants might not solve the long-term ills.

Impact of expiration of the pharmaceutical patents and lack of new drugs in the pipeline will reposition the global fine chemical industry. We will begin to see a sea change in the second half of 2010.

What is the recourse for the future?

Current markets for the chemical products can be categorized as follows.

• Slow or no growth [growth equal to or less than GDP]

• Growth [growth greater than GDP]

In the current economic down turn, the human and social impact of shutting down and/or moving R&D and manufacturing from the slow and/no growth countries to the growth countries can have significant negative connotations. However, such moves might be necessary for the multinational companies. In the slowing global economy, due to political sensitivity moving from developed countries and investing in growth markets is a going to take longer than normal time and effort. Lack of rapid decision-making might further complicate strategy development.

Until few years ago growth in the under-developed countries was slow and these markets could be supplied from the developed countries. However, with much higher growth in these under-developed countries, it has become necessary for the multinationals to fulfill the market needs either by opening R&D and manufacturing sites or collaborate with local partners. This poses an interesting dilemma for the multinationals. Should they consolidate their plants and supply the needs of the developed countries, if possible, from the plants in the developing countries and shutter their operations is the developed countries? This option has its own challenges. How to explain to its shareholders including its employees of such moves and how to blend in the local culture and nuances.

Multinationals face another challenge in the developing countries. It comes from the local enterprises that have served the local and global markets. These enterprises might not be technologically strong but is a matter of time when they could become fierce competitors.

More than 50 percent of the global population lives outside the developed countries. In the next few years, growth is going to come from these markets. They might not require the technologies currently used in the developed countries. Technologies to suit the local market preferences and environment might have to be developed. A joint collaboration between the local companies and multinationals can be a fast track option. Go alone could be an option also. However, it would require understanding of the local markets. In addition, multinational companies will have to invest in technologies and capacities that are economic and can meet the market needs from fewer plants. This could be a challenge but is necessary for the survival.

Manufacturing of commodity (slow or no growth) products will move to the lowest wage countries. India and China could benefit from such moves. Only offset to such moves is the development of better manufacturing technologies for commodity products e.g. plastic additives, flame-retardants, corrosion inhibitors, rubber chemicals to name a few. They have to be such that they offset the lower labor cost advantage offered by low cost countries.

The newest technology (growth better than GDP) products will be developed in the labs in the developed countries and could be manufactured anywhere to serve their respective needs.

World is changing faster than we can strategize and implement.