Last year, when Rashid Saif al Ghurair, the UAE based chairman of Tagleef Industries, wanted to realise his vision of increasing the production of biaxially oriented polypropylene (BOPP) in his group companies to the 100,000 tonnes per annum (pa) mark, he trained his sights on the Sohar based Al Khaleej Polypropylene Products (AKPP). Tagleef Indus-tries (a part of the UAE based Al Ghurair group) had taken a 63 per cent stake in AKPP in November 2005 after a large part of the latter’s Sohar plant was destroyed in a fire.

Entrusted with the task, R Premchandran, general manager, AKPP, has been working overtime to translate this vision into reality. In October 2006, work began on a new production line which would add 38,000 tonnes pa capacity by the first quarter of 2008. The cost of this new line: RO13.48mn. The expansion will take up AKPP’s production to 60,000 tonnes pa. The remaining 40,000 tonnes will be contributed by Tagleef Industries�UAE plant, making the group the biggest producer of BOPP in the Middle East. It will also cement its position as a top ten player in the world.

If you thought AKPP was a one off example, a closer look reveals a similar process at work at scores of manufacturing companies in Oman (See table on page 38). Says Syed Mohommed Quadry, vice-president, business development, Amwal Investment, “During the last one year or so, companies in Oman have undertaken unprecedented capacity addition exercises. Earlier, it was only cement companies that used to scale up, but this time it has been across the board.�

The facilitators
The sudden spurt in infrastructure and cons-truction activity have given companies a new found confidence. With projects worth US$1.2tn in the pipeline in the GCC region, a number of players see this as a not-to-be missed opportunity. With the market in place, the decision to upgrade takes little convincing. For instance, Raysut Cement Company expects a large part of its new capacity to be absorbed by the US$20bn worth projects that are being undertaken in Oman. The company is installing a fourth production line which will increase its output from 2.2mn tonnes pa to three million tonnes pa by June 2007.

A related area has been the growth in demand for real estate. As more villas and multi-storeyed buildings dot the landscape, it translates into demand for more paint, glasses, ceramic tiles and water heaters. For companies like Al Anwar Ceramic Tiles (Al Shams), Majan Glass, Jotun Paints and a National Hea-ters (Hootex), this is akin to the proverbial manna from the heaven. “We have order boo-kings for the next two and a half years. This will absorb our current expansion and our planned expansion capacities,�says Ramesh Mani, general manager, Majan Glass.

High oil prices continue to be the driving factor behind the spurt in infrastructure. “Unlike the first oil boom which benefited Europe and the US more than the Middle East, this time around the surplus is being used within the region,�says P Kumar, general mana-ger, Al Jazeera Tube Mills.

Taking up one’s game
If it is all about harnessing a favourable external climate for some companies, for others it is a matter of enhancing their competitiveness in a cutthroat global market. Several manufacturing companies in the sultanate have grown in strength in the last few years and are looking at acquiring a regional foothold (in some cases a global one). Realising this aspiration makes it imperative for them to acquire a certain size. The reasons for this are two-fold: one, it gives them the muscle to service larger markets like Saudi Arabia or the UAE and two, with regional players raising the production stakes companies in Oman have no choice but to keep pace.

Oman Cables Industry (OCI), a Rusayl based company is amongst the top four players in the power cables market in the Middle East with competitors like Riyadh Cables, Ducab Cable and Saudi Cable Company. The power cables market in the region is a highly consolidated one with the top five players having an overwhe-lming 80 per cent market share in the US$2.4bn power cables market. In the US$40bn global power cables market the top five companies occupy a mere 20 per cent marketshare.

The Middle East market for cables has been growing at a scorching 18 per cent pa. “To be competitive in this market, a company needs to have a certain threshold size. Our capacity addition is an effort to strengthen our competitive positioning in the region,�says Hussain Salman al Lawati, vice chairman and managing director, OCI. The company commissioned a PVC compounding plant in April 2006 at the cost of RO5mn. It is the largest such plant in Asia and the fifth of its kind in the world.

Scaling up operations may not always be a linear process. There are times when companies scale up operations in products which may not be their mainstay ones or bestsellers. In such cases a buildup is used as a strategic tool for a variety of reasons �in anticipation of future demand from virgin markets, to divers-ify one’s product portfolio or even to escape impending competition.

A number of expansions in the sultanate have been undertaken from a strategic point. During 2006, OCI took a decision to strengthen its offerings in the building wires and housing wires segment compared to power cables. “We see building wires as a global product,�says P R Ramakrishnan, general manager, sales and marketing, OCI. The company is looking at tapping into this market, both in the GCC and in Europe. An increase in scale has gone hand in hand with marketing efforts like delivering the product at customer doorsteps in European countries.

Ali and Abdul Karim Trading Company (AATCO) is also looking at hitherto untapped markets. Says Khursheed Alam Khan, oper-ations manager, AATCO, “Our new capacities will be used to service markets in Africa and Europe.�It is installing a pre-mixed tank at its Sohar plant, which will increase production of its flagship Delicio (ketchup) by 25 per cent. As of now, production figures are 50,000-60,000 cases per day.

With China becoming the predominant manufacturer in the world across various categories, a number of companies are wary of taking the dragon head-on. With steel pipes from China selling at US$100 per tonne lower rates than the global prices, companies like Al Jazeera Tube Mills find it next to impossible to compete. Aware of this limitation, they are using expansion as a tactical manoeuvre.

“Our business model needs to change to counter the threat posed by China. We are increasing our product range to get into segments which are not dominated by the Chinese,�says Kumar. Al Jazeera installed a new line with a production capacity of 150,000 tonnes in August 2006. A new line to be oper-ational by June 2007 will double this capacity.

These lines are being used to diversify the company’s offerings. So instead of producing commercial pipes (a segment dominated by the Chinese), these will churn out new products like EPI (engineering, procurement, instrumentation) pipes �used mainly in the oil and gas sectors, 18-inch pipes and merchant bars.

Catering to the growing needs of the local market remains a big pull for some. Cement remains a prime example, where the capacity additions are expected to be absorbed locally. “Oman will be driving consumption till 2010. We estimate that the local market will grow by 8-10 per cent in 2007-09,�says Mohammed al Dheeb, CEO, Raysut Cement.

Economics of scale
The benefits accruing from a scale up work at different levels. It helps companies to capture new markets and segments. It also brings in benefits at the backend of one’s business. Some argue that strengthening one’s backend oper-ations work out to be more salient as that helps competitiveness in the long run. Secondly, any savings made at the backend also go directly into the company’s bottomline.

As a company adds capacity, its bargaining clout with suppliers multiplies. Size may turn out to be a crucial determinant while sourcing commodities like copper and aluminium, which are sought after by companies globally across sectors.

“If you are too small, you lose your leverage with suppliers,�says Ramakrishnan. There have been instances when companies with smaller operations have been refused allocation by large suppliers. Scaling up not only ensures constant supplies but also brings in a number of efficiencies in its train.

Larger companies can strike a better deal with suppliers as the latter are wary about losing out on large clients. The same goes for banks, financial institutions and even shi-pping lines. “Enhanced capacity will help us save us up to five per cent of what we used to spend earlier,�says Kumar. The percentage of savings made may vary from company to company but there is no disputing the leverage that scale brings to the negotiation table.

Adding capacity also brings in operational efficiency in many ways. AKPP operates its 18,000 tonne pa line with 140 people. The company expects to hire only 40 extra wor-kers when its 38,000 tonne pa line becomes operational. The per person productivity will thus go up from the present 128 tonnes pa to 311 tonnes pa (total production divided by the number of people employed).

A similar correlation works for utilities like electricity, gas and water. As a company scales up operations its utility bills go up marginally. A back of the envelope calculation shows that if a manufacturing plant with a 150,000 tonne pa capacity spends RO100 per tonne per month on utility bills, when it doubles its production to 300,000 tonnes, the utility bill goes up to RO130-140 per tonne per month. This cuts down the cost of operating a plant. These are benefits which may not be apparent, but these efficiencies and savings can prove to be invaluable in a highly cost-competitive scenario.

Funding pattern
Looking at the amount of money being pumped into such expansions (from RO5mn-RO15mn), one would assume that most of these companies would have mammoth debts on their books with the interest payout eating into their profits for years to come. But quite a few companies like OCI, Majan Glass, Al Anwar Ceramic Tiles, National Heaters, Oman Cement and Raysut Cement are funding their expansion from their internal accruals.

Says A Shamsuddin, chief executive, Al Anwar Ceramic Tiles, “We will finance mostly from internal accruals because we have enough liquidity within the organisation.�

The newfound confidence stems from the fact that not only has the size of the market gone up in the last couple of years but their price realisations have also been good as a result of a spurt in commodity prices. Cement prices are up from RO13 per tonne in 2005 to RO27 per tonne in 2006. The jump in copper prices from RO1,550 per tonne to RO3,100 per tonne over the last two years has benefited the power cable companies. So it has been a double benefit for companies �growing markets and better realisations. Prudently, most companies have been reinvesting these proceeds in scaling up capacities.

Risk factors
While all this makes for great reading, there are risks lurking around that can ruin the party. The fluctuation in commodity prices has been a concern area for a number of companies. Steel prices, for instance, jumped from US$200 in 2003 to US$620 in 2006, a 300 per cent jump (it is currently trading at US$520). Such a wild spurt or drop in prices can make the best-laid plans go awry. “We are a convertor industry, making steel pipes out of hot rolled coils and billets, and any big drop in steel prices can impact us badly,�says Kumar.

Then there is the threat of competition. The pace at which manufacturing companies from China have been capturing market share worldwide has left little elbowroom for others to operate. This raises the threat levels of other factors. “Competition can come up with a new technology which can hit us badly,�says S Mohandas, senior general manager, National Heaters. Enhanced capacity also brings with it the burden of constantly exploring new markets. A lot of companies have done this successfully, but if they need to continue their winning streak, they will have to identify potential markets well in advance.

A strong comeback
The trend of scaling up operations also reflects the coming of age of manufacturing in Oman. A number of these companies started oper-ations in the 1990s. The industry subsequently went through a period of decline in 1998-2002 �a result of falling oil prices, shrinking markets and bad management.

But since then the manufacturing industry has got its act together. Companies like Majan Glass have gone in for a new management, AKPP has seen its ownership change hands. Export markets like Africa and Europe have been tapped and new efficiencies have been brought in.

With reams of newsprint being devoted to sunrise industries like retailing, telecom and tourism recently, manufacturing seems to have lost its pre-eminence as a prime mover. Says Mohandas, “Manufacturing is always fundamental, but since the base is large it looks small as compared to the other sectors. For others, the base is small so they appear bigger.�But as the economy booms, the dynamic marketplace will make sure that manufacturing is alive and flourishing.