Veena Vohra, Animesh Bahadur and Vishwanath Lele
Introduction
Trident Chemicals Limited, engaged in the manufacture of heavy organic and inorganic chemicals, was a multiproduct company in India with a diversified product portfolio and product presence in over ten nations. In 2008, in the small industrial town of Shahabad in a neighbouring Indian state, it acquired Noble Chemicals’ manufacturing facility consisting of three separate production units – Unit I, II and III – in a strategic move. The workers were yet to accept this acquisition when various economic factors in 2009 required a reorganization of the Shahabad plant. The Trident management decided to transfer the workers of Unit III to Units I and II. This move prompted the Unit III workers to oppose the transfer plan since their wage revisions and incentive plans would be jeopardized. Trident’s newly appointed Vice President of human resources (HR) was given the task of ensuring that the workers would be transferred smoothly without any untoward incidents. The VP (HR) wondered how to solve this dilemma and how to convince the workers to accept the transfer plan.
Chemical industry in India
With the legacy of the industrial development and regulation of the Second Plan[1], the chemicals industry in India had come to be progressively defined by the predominance of the public sector, on the one hand. On the other, courtesy of the small and medium-sized enterprises (SME) policy pursued in the 1980s[2], there was a preponderance of mostly SMEs in the private sector. The industry as per the classification proposed by Indian Central Statistical Organization, produced basic and heavy inorganic/organic chemicals, fertilizers and pesticides, paints and varnishes, dyestuffs, drugs and medicines, perfumes and allied products, turpentine, plastics and matches, explosives and other chemicals.
The emergence of liberalization in India after 1991, however, brought new challenges for the sector and a major restructuring came about. Following 1991, the chemical industry was increasingly exposed to international competition[3], and, with 100 per cent foreign direct investment being made permissible, the industry, which was hitherto fragmented into small units (often catering to larger public sector units), saw some level of consolidation with investment coming forward from major national and international players. With the lowering of tariff barriers in the 1990s, the industry, which, till then, was working on almost assured returns, saw the emergence of competition. The 1990s also marked a move up the value chain with the rise of more specialized production. However, the growth and investment was largely fuelled by advances in petrochemical and pharmaceutical output and the inorganic and other sectors remained more or less outside of the radar of investment, although it was still faced with import competition.
Given the robust domestic demand, the chemical industry did not have to rely on exports, but the imports did force the largely fragmented and small-scale-dominated private industry to rationalize operations and improve productivity. Between 2001-2002 and 2007, the industry saw a compound annual growth rate of 3.7 per cent, despite some rough patches including the downturn in chemical production of 2006-2007. The industry saw steady long-term growth with the non-alkaline inorganic chemicals and dyestuffs being among the best performing chemical sectors[4]. In the midst of the global and domestic change, the industry’s focus shifted to innovations, and it increasingly invested in research and development. This became a greater imperative with the shift to product patents after 2005[5].
Region-wise, the distribution of the chemical industry was somewhat skewed toward western India with its legacy of petrochemical production and its proximity to ports. Almost half of all the production came from the western Indian state of Gujarat alone.
Trident Chemicals Limited
Trident Chemicals Limited – the flagship company of the Trident Group of Companies had been engaged in the manufacture of heavy organic and inorganic chemicals besides specialty chemicals since the 1970s (Company records, 2011). A multiproduct company with a diversified product portfolio and with product presence in over ten nations, Trident Chemicals Limited had six manufacturing facilities at different locations in the western states of Gujarat and Maharashtra. The inorganic chemicals were produced at one of the facilities in Gujarat while the organic and fine and specialty chemicals were produced at the other facilities.
Since its inception, the company had grown and diversified, both organically, as well as through acquisitions for strategic alignment, and, in the process, it had gradually achieved a significant vertical integration (Organization chart, 2011). It placed an important focus on research and development (R&D) activities, with a dedicated R&D Center at Kalyan. The R&D centre had the approval of the central government’s Ministry of Science and Technology, and it was instrumental in Trident Chemicals’ shift to customized product development, as well as fuelling its development of new products, improved processes and the development of new technologies. The company also received assistance from other research institutions in India. Given the environmental safety demands put on the chemical industry, Trident Chemicals focused on reducing its generation of liquid/gaseous waste via a policy of continuous improvement.
The R&D focus at Trident was coupled with a professional approach to management. The company endeavoured to build effective systems of management in its plants and gave due recognition to talent[6].
The Company grew to have a basket of over 20 inorganic, organic intermediates and fine and specialty chemical products, most of which were the result of in-house R&D development. By 2007-2008, the company earned a profit after tax (PAT) of over INR70 million on a total income of over INR4,000 million, mostly fuelled by a 21 per cent rise in domestic demand (Annual Report of the company, 2009). Trident’s export growth was relatively modest at 3 per cent. Much of this domestic, as well as export, growth was a result of the fall in production in China in the wake of stringent norms being applied for pollution control. However, by the middle of 2008, Trident Chemicals, like other companies, faced recession and had to curtail its production. It soon shifted its short-term focus from expansion to cost rationalization.
Noble chemicals
Founded in the early 1980s in Shahabad by Mr Shyam Reddy and two other partners, Noble Chemicals was a partnership firm that was converted into a private limited company seven years after its founding. The company focused on a single specialty chemical used
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as a brightening agent. Noble Chemicals worked on the principles of efficiency, good team practices and innovation to give itself a competitive edge. The company introduced many steps to ensure complete transparency towards both internal and external stakeholders. The steps in this direction included opening up the account books of the company for anyone’s inspection.
The management (including the Managing Director) was accessible to all workers. Due to the proximity of the corporate office to the plants, the Managing Director, Mr Reddy, developed a close acquaintanceship with the 200-strong permanent workforce. The workers had a high level of veneration for Mr Reddy, who was treated like a father figure.
It was perhaps due to the combined impact of participative management and the personality of Mr Reddy that, when the worker’s union was formed in the late 1980s, there was no symbolic representation of the union at the work premises. No formal designations were given to employees of Noble Chemicals. The company was built on faith and a sense of security. Mr Reddy would address the workers at least three times a year including on May Day.
The proximity between the plants and the corporate office (in the same city of Shahabad) led to faster decision-making. The presence of the owner ensured fewer incidences of indiscipline, and those that there were, he dealt with an “iron hand.” The company encouraged participative management systems, including suggestion schemes, where the workers could drop their ideas for improvement into a suggestion box and these were considered at least once a year. There was a high focus on skills improvement, with workers being sent to Germany for training.
The introduction of business process reengineering (BPR) led to the organizing of workers into Units I, II and III to respond to particular customers. The performance management system also included additions to or deductions from salaries based on the BPR role played by workers. All the initiatives were based on agreement with the workforce.
The management of Noble Chemicals focused on family and social issues related to the workers and efforts in this direction included quality of work life programs, personnel surveys, training for families, special initiatives to promote workers’ children’s education and AIDS awareness campaigns (when three workers were detected to be HIV positive). The support for children’s education, which included scholarships, played an important role in building trust between the management and the workers (Company Documents, 2009).
Agreements about wage and work conditions were settled separately for each unit every third year. Emoluments were a major component of the wages and could form as much as 60-70 per cent of the gross salary. Production incentives could be as much as INR3,000 to 4,000 per month. Noble Chemicals management believed that the workers should share in the profits of the company in these ways.
The company had many innovations to its credit. There was a shift to air oxidation and a sodium sulphate recovery plant was also established, which led to the generation of wealth from waste. Mr Reddy was responsible for developing the common effluent treatment plant at the JM industrial area. The Japanese total quality management technique, Kaizen, was also put in place.
Given the business environment, the effort of the company was to make sure that there was no competition in the product line, which was achieved by a combination of good work practices and good customer relationship management. Customer feedback was constantly taken, and price rise was affected only in consultation with the customers.
Although the company enjoyed the support and admiration of the stakeholders, the industry had some doubts about the company’s commitment to developing professional systems and procedures. The perception was that the company was based on a personality cult
and that it relied on getting labour from a particular caste group. Also, there was a feeling that the systems and processes were developed arbitrarily.
Acquisition of noble chemicals
Despite the leadership position achieved by Noble Chemicals because of its enlightened work practices, the company was impacted by the import of Chinese chemicals and needed to cut costs. It initiated steps to optimize the production process, which included taking steps for the better recovery of the chemical products. By 2006, however, the company was witnessing a downturn in the sector and was soon approached by Trident Chemicals for acquisition. Trident Chemicals was a raw material supplier to Noble Chemicals and also a company known for its professionalism and commitment to good employment practices. Mr Reddy knew that with Trident he could be assured about the well-being of Noble’s employees, as well as the institution he had built over a period of two decades. He was quite satisfied that the company would be going to the right management if he sold to Trident.
From Trident’s perspective, the Shahabad specialty chemical division meant forward integration in a chemicals sector which had a limited production base in India. With this acquisition in 2007, Trident had the potential to become one of the leaders in this specialty chemical category in the world and the premier producer in India. In all, Trident Chemicals acquired Noble’s three production units (called Unit I, II and III) and its corporate office.
Post-acquisition changes
Though the acquisition process was smooth, it came as a blow to many workers at Noble Chemicals. They were unable to understand the rationale behind the move. The workers approached Mr Reddy to ask why this step was warranted. There were fears that rationalization would bring about changes in employment conditions and fears about the loss of perks and jobs (especially for the contract labourers). Mr Reddy and the new management dealt with these concerns as a matter of priority. They clarified that the employment conditions and terms of service would be protected for all the permanent workers; however, there would be some adjustments in the cases of contract labourers for the larger good of the organization.
After the acquisition, the erstwhile corporate office of Noble Chemicals functioned without any change for a month. The senior managers from the corporate office in the city were reluctant to go to the units, as many had family issues including houses near the city-based corporate office. To convince these managers, senior functionaries from Trident assured them that transportation would be provided to and from the units. With this assurance, the managers and executives shifted their base to the units. However, the management could not keep its promise of providing transportation. In due course, several members of the erstwhile Noble team resigned and only the marketing and purchasing functions continued with the same teams from their Noble Chemicals days.
Structural changes
The reporting of all functions at Shahabad became dual, with location-based reporting to the GM (Productions) at Shahabad and functional reporting to the respective heads at Trident headquarters in another state. There were several structural shifts in the post-acquisition scenario, including in the formulation of policies and the assignment of roles, and there were shifts in the roles of the existing managers at the Shahabad units. The policies related to production, HR and other issues now emanated from the Trident corporate office and the proximity enjoyed by the employees of the units with their management was lost. This brought about the need for better coordination, which was often found to be lacking. Time and again, fresh production orders were received by the units at short notice from the Trident corporate office, and were difficult for the units to cope with. The downturn, coupled with the aggressive marketing strategy of Trident, caused orders to
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vary even on a monthly basis. Sudden and unplanned orders gave rise to stress for managers and workers alike.
In the context of roles, one major shift was the reallocation of the HR, administration (including maintenance and housekeeping) and security roles (previously with the head of production). The head of HR at the units, previously reported to the MD, but this role was assigned to report to the corporate head of HR, located at the Trident headquarters. Another major shift was in the roles and responsibilities of the Unit Heads, who were made responsible for all production-related issues. The senior managers felt extremely pressurized as a result of these shifts.
The reassignments and role changes impacted the operations at the three units. In the past, the MD, with his towering presence and proximity, was always available for clarification and direction and played a crucial role in issues related to discipline. Under the new scheme, however, ambiguity increased due to the distance between the local operations and the corporate office. The decisions at all functional levels began to be delayed as the decision-making power was distributed hierarchically, as well as geographically. With the shift of responsibility to the unit heads, a sense of lowered accountability was felt amongst workers and some managers alike, which also led to disciplinary issues.
Impact on the production process
The production process at the units continued to be largely manual. Although the production improved over time, Trident realized the need for more changes in operations to increase production. The improvement efforts were supplemented with initiatives from Trident’s strong R&D resources. This ensured greater efficiency and productivity in the process. Managers at the units could see the reduction in the time cycle and welcomed Trident’s decision to introduce new products.
Greater and continuous formal monitoring of the production process at the units was instituted with weekly, as well as monthly, reports being generated for continuous review (Company Documents, 2009). This, in turn, assisted the planning and monitoring process.
The main challenge following the acquisition, however, was the incentive policy and uniformity of facilities available to the units’ employees. There were some apprehensions when the ownership was being transferred, but given the small size of the group and the relatively larger size of Trident, people accepted this transition, as the continuity of previous benefits was assured. Moreover, the management of Trident had assured the retention of the employees at the units, and the continuance of benefits for the workers. The incentive scheme was retained in its original form (see Exhibit 3 for the details of the incentive scheme).
The transition was accepted overall as a mixed bag. The distance in the relationship between management and employees increased, decision-making seemed to take longer and there were delays in making payments to the suppliers owing to the changes made in the accounting systems.
The three production units
The production processes shaped the nature of the three production units acquired by Trident Chemicals. The specialty chemical produced by the hydrocarbon-based compound underwent sulphonation, which was followed by the oxidation of the product of sulphonation, which was, subsequently, reduced to form the final specialty chemical. Unit
I was the oldest of the three units to be set up and catered to the whole process until Unit
II was created just for the purpose of the oxidation stage (as oxidation played a major role in the quality of the final product). Unit III was created to take care of the rising demand and, like Unit I, was meant for sulphonation and reduction. At the operational level, the product of sulphonation from both Units I and III had to be sent to Unit II for the oxidation process.
In response to environmental concerns, as well as for better results, Unit II shifted to forced air oxidation, which also enabled the better recovery of the final product as well as the rescue of by-products.
Units I and III depended on Unit II for the completion of the whole production process. Unit II, in turn, had to ensure speedy and efficient oxidation so that the other two units could complete the production. Hence, the role of Unit II, with its strength of 86 employees, was crucial. The workers in the unit clearly realized this significance and were not willing to share the operational skills they had acquired with anyone. The process of sulphonation and reduction in both the other units was, by and large, manual. After the acquisition, the Trident management made several efforts to improve the process through its R&D initiatives.
The employees in the various units displayed different attitudes. While the 61 Unit I employees, being the oldest, belonged to a higher age group, the 43 workers in Unit III were relatively younger (See Exhibit 2 for details of the employees in various units).
Each unit had its own union, with its own general secretary. However, the three units had a common president, Mr Poojary, who was a widely respected leftist union leader in the area. He was instrumental in reassuring the employees during the transfer of ownership and had spearheaded all the wage-related negotiations along with the concerned general secretaries. The union leadership had balanced the workers’ interest with the interests of the management. The aim of the union had been to enable the achievement of the objectives of the management so as to ensure maximum, as well as sustained, benefits for the workers.
The new market environment and consequent challenges
The chemical industry globally, as well as in India, encountered the challenge of recession in 2009. There was a fall in the requirement for specialty chemicals in the wake of the downturn. The emergence of China in the chemicals sector indicated that cost-competitiveness had become a significant imperative. However, the magnitude of the fall in demand strongly impacted even the price-competitive Chinese producers. A number of Chinese factories producing specialty chemicals similar to Trident either shut down fully or reduced production drastically. As the demand lowered, the prices came down to almost half of what they had previously been.
Like other companies, Trident also grappled with the issues of stockpiling and the high costs of production. Hence, it was important to reduce variable costs, including the cost of contract labour, which had been employed in large numbers. While studying the production process and the unit cost of production at Shahabad, it was realized that, with the falling demand and the already underutilized capacity of Unit I, it was not feasible to run two separate units for the same kind of work. Thus, the then VP – Operations suggested the transfer of workers from Unit III to Units I and II in a phased manner.
Soon after, a decision was reached at the senior management level that to reduce costs, the workers of Unit III would be transferred to Units I and II, and the production output target of Unit I would be 600 MT per month. Unit III would be used for the development and commercialization of new products being developed by Trident.
To implement this decision of merging Unit III workers into Units I and II, the CEO and the General Manager (Operations) visited the three units and explained to the workers the economic situation, and spoke to them about the concepts of elasticity of demand and depression.
The workers of Unit III however were apprehensive. They were due for a wage agreement shortly and this shifting would have worked against them accruing benefits ahead of the scheduled negotiations. They had also not been paid any incentives in the previous two months.
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Workers in other units also had their concerns. Because there were different unions with different agreements and settlement periods in each unit, the idea of merging the units and related transfers raised issues of identity. There were concerns about whether the union of Unit III would be retained. There was also the larger concern about the impact of the transfers on benefits paid. The incentive scheme, which rewarded the workers beyond break-even levels, constituted a substantial amount of payments, coming close to 40 per cent of the wages received (See Exhibit 3 for the details of the incentive system in the various units).
The workers of Unit III were not in favour of the proposed transfer, as they perceived that they would lose their incentives. The removal of the contract workers was also not going to be easy for the management owing to the union’s interests at the plant.
In the meanwhile, the units were making a loss, and the Trident Corporate Office attributed this to worker-related issues. The corporate view was that the losses would continue till the rationalization of the operations was effected. For them, this necessitated the transfer of Unit III workers and the reduction in the numbers of contract labourers.
The new team
While things were being redefined and rationalized at Shahabad, trident’s corporate office was also witness to major changes. Apart from the entry of a new CEO, Mr Raj, a new vice president for HR also joined trident. They had been at the organization for six months when the decision to transfer unit III’s workers was made. The task of implementing this decision was given to the new VP (HR).
The VP (HR) was asked to get the workers to agree to the transfer immediately as the company was facing a loss every day. In the context of the complexities involved, he took a fresh look at these problems and formed a team for the Shahabad location with the new GM (Operations) and the senior manager (HR). The new GM (Operations) was able to speak the local language and could bond with the workers on that basis. The newly joined senior manager (HR) also gave assurances concerning employment protection.
The team quickly sought legal opinions on its options to resolve the issue and worked extensively on understanding the culture and background of the acquisition, as well as the subsequent transfer plans. The team recognized that retrenching the adamant workers was not an option, as it could give rise to the spectre of a strike, which was anathema to the management of Trident Chemicals. Additionally, the strike would be widely supported by the local industry workers, as the union president enjoyed huge support.
The only option left for the team was to convince the workers to transfer from unit III to units I and II. This was easier said than done as the workers were eagerly waiting to hear about how their incentives would be structured. Moreover Unit I had a more attractive incentive scheme, so even if the workers agreed to the transfer, the issue of allocating workers fairly from Unit III to either I or II would have to be resolved.
It was late evening and the VP-HR and his team members were due to meet with the workers and the union president the next morning with a convincing plan.
Notes
1. In the flush of socialism that followed independence, Indian leaders adopted a planned process for development which gave an increased role in the economy to the public sector and reduced the role for private entrepreneurs in industrial development. Indian Governments enabled this shift via Five Year Plans which were initiated in 1950. A major milestone for the policy of development via the public sector was achieved in the Second Five Year Plan (1956-1961) which was followed by Industrial Policy Resolution, 1956. It left very few sectors of industry open to the private sector. The socialist experimentation also included major concessions being made to small and medium-sized enterprises (SMEs). These ensured that production of some products/sectors, hitherto open to the whole private sector was reserved for SMEs.
2. Under the Industrial Policy of 1980, SMEs were given several financial concessions that led to the emergence of several chemical units in the sector.
3. Only three chemical categories viz. hydrocyanic acid, phosgene and isocynates/di-isocynates and their derivatives are now under licensing.
4. Ministry of Chemicals and Fertilizers (2009), Annual Report 2008-2009, p. 10.
5. Till the 1990s, the Indian industry was used to process patents that enabled reverse engineering and production of the same or similar product. But having agreed to the WTO commitments, the nation had to shift to product patenting, and the Indian Patents Act 1970 was amended accordingly with effect from January 1, 2005.
6. Source: Annual Reports of the company.
References
Company records (2011), accessed in 2011. Organization chart (2011), accessed in 2011.
Exhibit 1
Table EI Production in the dyes and dyestuffs categories during 2003-2004 to 2007-2008
Exhibit 3
Note on incentive scheme
The major differences in the incentive schemes related to several factors. First, eligibility itself differed with respect to the achievement of incentives. For Units I and III, the incentives were based on additions made to the capacity. Here too, while the incentives
were given to the workers on achievements of around 70 per cent capacity in Unit III, the eligibility in Unit I kicked in at the achievement of at least 75 per cent of the installed capacity. Additionally, the amount of incentive (the bandwidth for which changed at each additional 10 MT), was also different. Unit I was paid INR300 for each 10 MT addition to production and was guaranteed at least an additional INR350 at the first addition of 10 MT, and this was increased progressively. The scheme in place at Unit III was hence far more beneficial from the workers’ perspective. At Unit II, the eligibility was based on larger processing targets, given that it received material from both Units I and III for oxidation. Eligibility for incentives in Unit II was based on the achievement of at least an addition of 100 MT to capacity. If the capacity achieved went beyond a point, the workers were entitled for incentives on a per-ton basis. In other words, the incentive could be very high if the capacity was utilized well (which depended on the processing ability of the other two units), but it was low in case of lower capacity utilization. In cases when the capacity of processing went down in the other two units, the incentive rates for Unit II could come down drastically vis-à-vis the other two units.
Source: Company records (2009).
