Analysis

Assumption:

Introduction of new plant (at Indore) would have lead to probable change in cost/unit for domestic sale in the case of seaboard plants as well, as the regional demand satisfied by these plants would differ from previous year conditions The cost/unit for a domestic sale has increased from 0.0833 to 0.1(Rs.cr/MT) for all seaboard plants. The cost/unit for an export sale is identical at 0.1. In comparison Indores cost/unit for a domestic sale happens to be 0.0833 (Indore did not indulge in exports) .Thus their profitability would be adversely impacted in comparison to Indore which is located in a sweet spot. The constant raw material costs and processing costs imply that this difference in cost structure between seaboard and Indore plants could only be because of increased distribution and transportation costs. Thus the Source of Disgruntlement here seems to be the Loss of proximate (and more profitable) demand to the newly setup Indore plant. Given capacity constraints and fixed price regime, all the plants are looking at similar incentives when their revenues are used as a metric. However in the case of additional incentives (based on profitability) the Indore plant seems to have an unfair advantage.

Plan Of Action - Short Term

Providing a means to seaboard plants to pass on the cost pressure through exports at a higher price so that they would not be unfairly disadvantaged by prevailing incentive mechanism The profitability metric analysed for additional incentives should consider only plant operational efficiency and should be independent of domestic demand distribution, resultant transportation cost variability etc. for which an individual plant is not responsible

Plan Of Action - Long Term

There are two key issues that need to be addressed over the long term viz., the inter plant issues with regard to incentivization and the threat of the German competitor. Expanding Capacity of Existing plants vs. New plant construction According to relative fixed cost involved, there is a need to choose between the two options so that there is no foothold for the German competitor Barriers To Entry Seizing distribution channels Cost Minimization Strengthening Monopoly Power Sales would be driven largely by influencers such as builders, contractors and other construction industry players. Strengthening existing relationship with these players would enhance monopoly power Raw Material Access to the captive raw material base is only available up till 2015. Thus there is need to secure an agreement for raw material supply within 7 years especially to satisfy probable new plants or capacity expansion of existing plants.