Great synergies for Lankan ceramic corporates in India for global export

- Lanka Walltiles PLC Managing Director/ CEO Mahendra Jayasekera


He was responding to a question as to whether there lay opportunities for such opportunities in Sri Lanka where Indian investors come here in the light of External Affairs Minister Prof. G.L. Peiris recent calling for increase of intra- regional trade within SAARC.

He also said that anti-dumping legislation for the ceramic industry has been in the pipe line for many years but unfortunately no government has taken serious consideration in enacting it.

Here, he is in conversation with the Island Financial Review.

Q: What is the current status of the sales in the local tile industry in the local market? ( a) Your company and (b) the entire industry ?

A: The first three months of the year 2012 generated strong sales. However, since April it has not been encouraging for the entire tile industry. In fact we have experienced a sharp decline in sales across the country. As a result we are seeing a rapid build up of inventories among the local tile manufacturers.

Q: You have often complained to the government that the market is being flooded with imported tiles of varying quality. What is the position there?

A: Yes, we have complained and continue to do so as a matter of urgency to save the industry as well as the consumer. However, it is my duty to mention that the SLSI is doing a thankless job in trying to enforce SLS standards on imported tiles. As a result we have seen a reduction in low quality imports. Please get me right here, we are not at all against the importation of high quality tiles, which even we ourselves do.

Q: Are you expecting any relief from the government in the 2013 Budget on this important issue?

A: Yes, perhaps even earlier.

Q: Do you believe that there is dumping of below- cost and below- quality tiles?

A: Yes.

Q: So, have you proposed to the government of bringing in anti-dumping legislation?

A: Yes, it has been in the pipe line for many years but unfortunately no government has taken serious consideration in enacting it.

Q: Now, what percentage is the production costs are the energy costs?

A: 40%

Q: Have you thought of using subsidized fuel such as furnace oil?

A: No, we have never relied on subsidized fuel as a primary source of energy. As a matter of fact we have been relying of LPG, a cleaner fuel, even when we have options to use subsidized fuel. This is because as a responsible group we didn’t want to convert government subsidies into corporate profits. In this context it is also pertinent to mention that we purchase LPG not at government administered LPG cylinder prices but at world market prices.

Q: How competitive are your products in the export markets Vis-a-Vis competition from India, China and Vietnam?

A: In export markets where there are Anti dumping legislation our products are very price and quality competitive. This is one reason why we have been able to retain and grow in sophisticated markets such as Australia, Canada, USA, Japan and Europe. Further the quality of our products, the superior designs, our image as a reliable supplier, after sales service and the strong brand image have helped us to sustain these valuable markets.

Q: There has been some import duties imposed by the European Union on Chinese tiles. How will that influence Sri Lankan exports and exporters?

A: We will have less price competition which augurs well for all Sri Lankan exporters. However on the downside, the construction industry has been dealt a severe blow in the current recession in Europe. New construction is virtually at a standstill. This has resulted in a drastic reduction in the overall usage of tiles all over Europe in the past few years.

With the restriction on the imports of Chinese tiles to Europe, Chinese exporters are now more aggressive in other Export markets. So, this aggressive behavior by Chinese exporters in other markets poses a big challenge to other exporting countries. In this context, I must take pride in saying that Sri Lanka is the only country that increased ceramic exports to Australia in 2011.

Q: Do you see a similar duty being imposed for Sri Lankan exports as well?

A: No. We do not foresee such a thing.

Q: Do you have problems in sourcing your raw materials in the light of ball clay which is one of the major ones which is extracted by digging paddy fields and also in the context of legal implications regarding digging abandoned paddy fields ?

A: Yes. Ball clay is found in low lying areas used for paddy cultivation. The industry has been sourcing the requirements of clay from abandoned paddy fields. After mining they are re-claimed by filling with suitable soil and after some years the land will be suitable for paddy or other crop cultivation. We need clear and consistent policy on the mining of ball clay in such fields, so that the industry can progress.

The existing legislation vis-à-vis ball clay mining is not conducive to the development of the mining industry. I feel that the ball clay mining is over regulated. When there is over regulation undue exploitation of resource occurs. We have made repeated representations over the last ten years or so to revisit this piece of legislation, sadly it has not happened so far. This I would say is the single biggest obstacle to the growth of the industry.

Q Any plans for expansions?

A: Not in the near future considering that we had expansions and modernization in late 2011 and early 2012 at both our factories in Meepe and Jalthara at a combined cost of Rs.2 billion. Now the task ahead of us is to sell this expanded capacity in a profitable manner.

Q: Why did you close down your Balangoda factory last year?

A: This was a very old plant using outdated technology. It was very labour intensive and at the current rates of wages not competitive. The productivity was low and we also had difficulties in retaining qualified technical staff in Balangoda due to the remote location. Practically all the raw materials and fuel had to be transported a long distance and the entire stocks of finished goods had to be transported back to Colombo for distribution. This involved in a high transport bill. With the restricted technology we could only produce relatively small sized tiles in the Balangoda factory with the largest size being 8" x 8". The demand for these sizes especially in the domestic market saw a rapid decline with the introduction of larger formats of wall tiles. In the later years nearly 80% of the production was exported mainly to North America and Europe. However, with the start of the recession in these markets in 2008, the construction sector took a severe beating and we were very badly affected. Production in that plant had to be curtailed and even with that we built up nearly eight months of production in stock. The future in these markets in the short to medium term looked bleak. Upgrading the technology required that practically the entire factory had to be replaced with new machinery and equipment. This was not viable at the time. Hence the painful and very difficult decision was made to wind up the factory. I must also say that in winding up the factory we laid off 600 employees and paid a very generous VRS. It was a very smooth and cordial winding up. I must say "a text book example and a good case study".

Q: How would you comment on the financial performance of the company?

A: The financial year 2011/2012 was the best year in terms of performance and profitability for both Lanka Walltiles PLC and Lanka Floortiles PLC. It is too early to comment with regard to the current financial year.

Q: This government rode to power on (inter- alia) a pledge and a mandate to protect local industries, but now we find that the government projects are using the imported tiles for same. Aren’t you even protesting?

A: Yes we have, and we hope very much that we will receive a positive response.

Q: How would you comment on export markets in the light of recession in the US and European Union?

A: It is very tough. Europe was the cradle of the ceramic tile industry until quite recently. Italy and Spain were the largest tile producing countries until China came along and overtook them. Today so many factories in Italy and Spain have closed due to the recession as well as the competition from cheap imports.

The US market has also been badly affected with the recession. The start of the downtown in the USA was the collapse in the property market in 2008. Therefore, the construction industry was the first to take a beating and is, in fact yet to recover. Lanka Walltiles had a good market in Europe and USA, which practically dried up in this environment. However, we have developed new high value products with a view to re-entering these markets, especially the niche markets where the price competition is less. We have to keep our strong brand image afloat so that when these markets turn around it will be easier to re-establish ourselves, without having to start all over again from the basics, as it were.

Furthermore, we are constantly pursuing new opportunities in other markets, especially in Australia, Canada, India, Middle-East etc, for both companies.

Q: What are the consumer trends in tiles – wall and floor in export markets? Do they change as the apparel industry where fashions last only a year or so?

A: No, I would not say that the consumer trends change as quickly as it does in the Apparel industry. Tiles too are a fashion item unlike in the past when it was a utility item, where one used a simple tile in a bathroom or kitchen, mainly to maintain hygiene. Today there are so many colours, textures, designs, sizes and types of tiles. Tiles follow or are associated with the trends in fabric colours to complement curtaining, upholstery, linen etc. so that they can be coordinated in a house.

The tiles sizes have been getting larger and larger with the currently popular wall tiles being in 30cm x 60 cm (12" x 24") and floortiles being ever larger, going up to 90 cm x 270 cm (36" x 108"). There are many reasons for this. Machinery manufacturers are constantly upgrading the technology to produce large sized tiles, the higher cost of laying small sized tiles, less grouting gaps with large tiles making it easier to clean and maintain. You may not know that, especially in western countries the labour cost to lay a square meter of tiles is about three to four times the cost of the tile itself.

Q: Are you mulling new export markets? What about the BRIC nations?

A: Yes, we are actively pursuing new export markets. We are in the process of re-entering the European and North American markets. Our participation in the COVERINGS 2012 exhibition in Orlando, Florida, USA in April brought good results. The COVERINGS is the largest exhibition in North America for the Ceramic Tiles industry.

Brazil is a very distant market and therefore the freight is very high. Brazil also has a large tile manufacturing industry. China is the largest manufacturer of ceramic tiles and the price competition is severe. Therefore, it is difficult for us to operate in these markets.

However, we were quite successful in India upto a few years ago; having taken advantage of the opportunities that arose with the Indo-Sri Lanka Free Trade Agreement. There was a sharp decline in demand for tiles in India about three years ago, but things are turning around now and we are hoping to re-enter the Indian market shortly. We have had no success in the Russian market either.

Q: Given the recent clarion calls of External Affairs Minister Prof. G.L. Perris of the need to boost intra- regional trade, do you see synergies and joint ventures with India to be located here for export to discerning western markets?

A: No, I didn’t see synergies for joint ventures to be set up in Sri Lanka in our industry. To be honest it is vice versa. I see greater opportunities for Sri Lankan Companies to set up such industry in India considering the wider availability of resources, a lower cost structure, vast market and more importantly the consistent protection accorded to the local industries.

Q: How do you see the financial performance top line and bottom line growth of your company?

A: You will see from our financial results that both companies have had consistent and impressive top and bottom lines. Although challenges are many in the current year I am optimistic that we can sustain this momentum.

Q: Finally, transparency facilitates accountability and creates the conditions for engendering trust. What measures does Lanka Tiles implement in boardroom process for greater disclosure? In your opinion does this facilitate or hinder desired changes in boardroom behavior?

A: No, I believe that it is accountability that facilitates transparency, because if one is not accountable he or she will resist transparency. It applies to corporates too.

As far as Lanka Walltiles PLC and Lanka Floortiles PLC are concerned, I must say that we abide by best practices in corporate disclosure. Honestly, this is largely dictated by the quality and demands of the shareholders and the Directors of the Companies. The fact that we work with the three leading Audit firms in the country has helped us to draw from resources and ideas of an experienced pool. This ensures a holistic approach to disseminating corporate information to our stakeholders. Lanka Tiles Board’s attitude is that we should be open companies. What it means is that we have a healthy dialogue with all stakeholders. So it is not limited to measures but the whole attitude of the board and the management. This in turn translates to a healthy and trustworthy relationship between the shareholders, the Board of Directors and the Management of the Companies.

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