LINKAGES AND GOVERNANCE - Shodhgangashodhganga.inflibnet.ac.in/bitstream/10603/22505/16/16_chapter6.pdf · study has 28 ancillary units for producing furniture. Materials are supplied

Chapter 6

LINKAGES AND GOVERNANCE

Contents

6.1. Linkages in the Rubber Wood Industry

6.1.1 Linkages of SPRWP Sector

6.1.1.I Backward Linkages in SPRWP

6.1.1.1.2 Technological and Financial Linkages

6.1.1.2 Forward Linkages

6..1.2 Linkages of Plywood

6.1.2.1 Backward Linkages

6.1.2.1.1 Technological Linkages

6.1.2.2 Forward Linkages

6.2 Linkages of Plywood and SPRWP- a Comparison 6.3 Governance and Role of Institutions

6.3.1 Governance Structure 6.3.2 Role of Institutions and Linkages

6.3.2.1 SPRWP 6.3.2.2 Plywood

6.3.3 Upgrading

6.4 Problems and Challenges

Linkages and Governance

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LINKAGES AND GOVERNANCE

The discussion on the performance of manufacturers in the value

chain analysis of rubber wood industry in the previous chapter revealed

that the linkages between the nodes in the value chain are very crucial. It is

important to understand how manufacturers are linked (both backward and

forward) with other nodes in a value chain frame work, and also to find out

who plays the major role in controlling the market by way of determining

aspects such as prices, quality, design, brand etc. An enquiry in this

direction would throw light upon two major aspects, viz-linkages and

governance. This chapter takes up these two aspects, starting with the

analysis of linkages.

6.1. Linkages in the Rubber Wood Industry

The rubber wood industry is linked to the wood industry, other

industries and to the rest of the economy. The wood industry depends on

rubber wood for cheap environment-friendly input. The furniture,

furnishing, construction and other industrial sectors get a major share of the

surplus generated in the rubber wood sector. In the construction sector,

treated and seasoned rubber wood products are widely used in kitchen

furnishing, furniture, door, and window frames and shutters. Since this

study focuses on SPRWP, in comparison with plywood sector, the

forthcoming analysis has to begin with the linkage of SPRWP, followed by

linkages of plywood.


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6. 1.1. Linkages of SPRWP Sector

It has been pointed out that the natural rubber production sector in

Kerala has made commendable achievements. However, it is interesting to

note that in spite of these achievements no significant linkages were so far

put into effect in the state. Forward linkage of natural rubber sector is

confined to the primary processing industry (George, 2005). In the case of

rubber wood based industries, on the other hand, 85 per cent of the SPRWP

units in the country are located in Kerala. The linkages of the rubber wood

industry, both backward and forward, are estimated in this study in terms

of percentage. The backward linkages are taken up in the following section.

6.1.1.1. Backward Linkages of SPRWP

Backward linkage is based on the sources of inputs purchased by the

manufacturing units. The inputs of rubber wood industry are rubber wood

logs, rubber wood as sawn sizes, machinery, chemicals (including

polishing items) etc. The details of machinery are discussed separately

under the section titled technological linkages.

Rubber wood is bought by SPRWP sector both in log form and as

sawn sizes. Sixty nine percent of the total purchase of rubber wood is in

log form and 31 per cent as sawn sizes. Seventy six percent of the units

have bought rubber wood logs from traders and brokers, while 24 per cent

firms have purchased directly from farmers and also from traders/ brokers.

Sawn sizes are bought from saw mills or from distributors. The annual


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average utilisation of rubber wood logs by a SPRWP unit increased from

1378 tonnes in 2001 to 3134 tonnes in 2005-06. The annual average

utilization of sawn sizes increased from 6162 cubic feet in 2001 to 22995.4

cubic feet in 2005-06. The annual average increase in the case of logs was

47.17 per cent and that of sawn sizes 90.17 per cent between 2001 and

2006. This high increase in utilization was due to the large scale operation

of six units that started operation after 2001. The purchase of rubber wood

logs by these six units was 43,724 tonnes (41% of the total in 2005-06) and

that of sawn sizes was 384943 cubic feet (54%). The backward linkages of

SPRWP units in respect of rubber wood is shown in table 6.1

Table 6.1 Backward Linkage of SPRWP to Rubber Wood (%)

Rubber wood

directly from farmer

Rubber wood

from trader Total

RSKD 9.95 90.05 100

EGP 10.05 89.95 100

EGP furniture 9.8 90.2 100

RSKD furniture 9.99 90.01 100

SPRWP 9.91 90.09 100

Source: Survey Data

As seen in the table 6.1, only less than 10 per cent of rubber wood is

purchased directly from farmers. The backward linkage of the industry is

very high with farmers and traders as 91 per cent of the input cost of the

RSKD is rubber wood. It is to be noted that RSKD furniture units, EGP

units and EGP furniture units are all linked with RSKD units because they

purchase RSKD from this sector. It has already been observed in the


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previous chapter that EGP furniture units are running under losses whereas

EGP units are making profits. One of the possible reasons of this loss could

be that EGP furniture units do not purchase EGP from EGP board

manufacturing units as they themselves are manufacturing EGP boards,

perhaps at a high production cost. It can, however, be determined only after

a detailed investigation.

The backward linkages of SPRWP to rubber wood -log and sawn

sizes - are shown in table 6.2

Table 6.2 Backward Linkages of SPRWP to Rubber Wood (%)

Sectors

Rubber wood as

log

from farmers or

traders

Rubber wood as

sawn sizes

from saw mill

Total

RSKD 80.26 19.74 100

EGP 60.04 39.96 100



SPRWP 69.45 30.55 100

Source: Survey Data

Table 6.2 establishes that EGP sector has the highest backward

linkage to saw mill industry as it purchases 39.96 per cent of the rubber

wood as sawn sizes. RSKD sector has the lowest linkage with saw mill

industry with 19.74 per cent. The SPRWP sector has backward linkage

with chemical factories which is shown in table 6.3

Table 6.3 Backward Linkage of SPRWP to Chemicals(%)


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Sectors chemicals

from producer

chemicals

from trader Total

RSKD 10 90 100

EGP 20.01 79.99 100



SPRWP 18.11 81.89 100

Source: Survey Data

In secondary processing, the EGP sector, EGP furniture sector and

RSKD furniture sector purchase 20 per cent of the chemicals from the

producers directly and the remaining 80 per cent through traders. The

RSKD units have the lowest backward direct linkage with the chemical

industry. The regional linkage of the SPRWP units with respect to rubber

wood and chemicals is given in table 6.4

Table 6.4 Regional Linkage to Rubber Wood and Chemicals (%)

Sectors Within the state Outside the state

RW Chemicals RW Chemicals

RSKD 99 30 01 70.00

EGP 98 29.99 02 79.01

EGP furniture 97 35.02 03 64.98

RSKD furniture 97 32.08 03 67.92

SPRWP 97.59 31.84 2.41 68.16

Source: Survey Data.

It can be observed from table 6.4 that rubber wood has the highest

regional linkage in all the sectors. The regional linkage of EGP furniture to

chemicals is worked out to be 35 per cent and that of RSKD furniture is 32


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per cent. Apart from rubber wood and chemicals, another backward

linkage of the industry is with machinery. It is discussed as technological

linkage in the next section. The financial linkages are also discussed along

with the technological linkages.

6.1.1.1.2. Technological and Financial Linkages

The technological linkage takes place mainly by way of

investment in plant and machinery and also through vertical

collaboration with other units. The major item of fixed investment of all

the units is plant and machinery and it covers around 50 to 65 per cent

of the total investment.

Around 60 per cent of the units have purchased the machinery

from both domestic and foreign countries, whereas 40 per cent units

have purchased solely from within the country. Two units have imported

all the machinery from European and Asian countries and one of them

has technical support from Malaysia. The total investment of secondary

processing units on plant and machinery was Rs 7950 lakh. Most of the

units have purchased seasoning kiln and boiler from within the country

but have imported plainer, finger jointing line, moulders etc from

abroad.

Twenty percent of the units have received technical consultancy

services from foreign countries while others have received the same

mainly from the firms within the country which supplied the machinery.


186

All the EGP Board making units seek technical consultancy services

from the Rubber Board of India and they also depend on Rubber Board

for periodic testing of the quality of the EGP board. Rubber Board has a

research department for all the aspects of rubber wood treatment,

seasoning and production and offer support for all units. The backward

linkage to finance is evident from the fact that the amount of gross

capital comes to 15676 lakh, out of which 61.41per cent is financed by

financial institutions.

It has been noticed that there is ancillarisation in the sector as 34

ancillary units have been newly set up which are producing products for

larger firms. Nineteen per cent of the SPRWP units have their own

ancillary units for manufacturing component parts. One of the units under

study has 28 ancillary units for producing furniture. Materials are supplied

by the parent firm but carpentry, assembling and polishing work are done

by the ancillary units on a piece rate. From all the ancillary units the

finished pieces reach the parent unit where they are assembled and

branded.

Finally, the linkage of the industry to labour market also needs

analysis. The backward linkage to labourers is very high in the state as 90

per cent of the labourers in SPRWP are local. The SPRWP sector has high

employment per unit (98).

6.1.1. 2. Forward Linkages


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The forward linkages of the industry is given in table 6.5

Table 6.5 Forward Linkages of SPRWP (%)

Sub sectors Construction Other

industries Trader Export Total

S OS S OS S OS

RSKD 4.61 8.21 42.31 1.76 0 0 23.11 100

EGP 6.7 6.89 2.98 2.74 10.86 43.29 6.63 100

EGP FURNITURE

7.2 8.8 0.79 .97 32.0 39.14 11.04 100

RSKD FURNITURE

3.2 8.9 0.67 1.2 8.35 47.3 30.38 100

Source: Survey Data; S= within the state, OS= outside state

The table 6.5 makes it clear that 77 per cent of RSKD goes to

construction sector and other industries for further processing and

production. Nearly 34 per cent of the EGP output goes to the

construction sector and another six per cent goes to other industries

directly. More than 71 per cent of EGP furniture goes to traders. Fifty

four percent of EGP is sold to traders who retail it either to final

consumers or to other producing sectors. Only a small percentage of

EGP furniture and RSKD furniture goes directly to construction

sector/industrial sector (17%, 14% respectively). Fifty six percent of

RSKD furniture is sold to traders and 30.38 per cent is exported. In

short, to a large extent RSKD and EGP are linked to the productive

sectors.

The region- wise forward linkage is given in table 6.6


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Table 6.6 Region –wise Forward Linkage of SPRWP (%)

Sub sectors Inside State Outside state Export Total

RSKD 46.92 29.97 23.11 100

EGP 20.56 72.81 6.63 100

EGP FURNITURE 40.01 48.95 11.04 100

RSKD FIRNITURE 12.22 57.4 30.38 100

Source: Survey Data

It can be observed from table 6.6 that RSKD has the highest linkage

within the state as 47 per cent of the output is sold here. EGP furniture

stands second with 40 per cent, and plywood stands third in regional

linkage with 25 per cent. Seventy three percent of EGP, 57.45 per cent of

EGP furniture, and 57.52 per cent of plywood are sold outside the state.

RSKD furniture has the lowest (though reasonable) forward regional

linkage within the state as 30.38 per cent is exported and 57.4 per cent sold

outside the state. It is evident from the table that the highest exported item

is RSKD furniture and its components. The export of EGP is only 6.63 per

cent and EGP furniture 11.04 per cent. It would be beneficial to the sector

if the scope for widening exports is further explored.

The other evidences showing the forward production linkages of the

sector are the following.

a. An important proof for the forward production linkage of the sector

is the significant increase in number of furniture making units in

Kerala during recent years (7824 in the registered SSI in 2001 to


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9894 in 2006). The furniture units which have been using rose wood

and teak wood now use RSKD rubber wood for interior parts of

furniture. The average cost of RSKD rubber wood is only Rs 500

per cubic feet while for teak wood and rose wood the price comes

between Rs 1500 and 2500. Now many furniture units supply

furniture using only rubber wood.

b. Another evidence for the forward production linkage is the setting

up of retail shops/ showrooms/franchise centres throughout India

and abroad. Sixteen per cent of the secondary processing units have

their own showrooms at present. Another 30 per cent units have

appointed franchisees or stockists for selling their products.

Multinational companies like IKEA(Sweden), B and Q (U.K), Wal-

Mart etc. which sell furniture internationally through their retail

networks purchase furniture components from the surveyed SPRWP

units in Kerala. They sell the products under their brand names at a

price which is 2 to10 times higher compared to the value of its

export from Kerala. Three units have their own showrooms in

foreign countries.

c. Yet another important evidence for the forward linkage is that EGP

board and S4S are widely used in the building and construction,

flooring, interior designing, toys, textiles, tools manufacturing units

etc. In addition to the direct inter-industry flow of EGP, the traders

also sell EGP boards to the above mentioned sectors. Most of the


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showrooms are furnished either with plywood or EGP board and

RSKD. The construction cost of flats/buildings depends to a great

extent on the cost of wood. The availability of treated and seasoned

rubber wood, stained in teak or rosewood colour, has attracted many

firms.

From the above analysis it can be concluded that RSKD has the

highest forward linkage to productive sectors and to local regions, whereas

EGP board manufacturing units have strong linkage only to productive

sectors.

6.1.2. Linkages of Plywood

In the case of plywood industry as well there are both forward and

backward production linkages, which are discussed in the following

sections.

6.1.2.1. Backward Linkages

The backward linkage always begins from the source from where

raw materials are bought. The raw materials of the plywood industry are

rubber wood, chemicals and face veneer. Around 85 per cent of the

plywood units in Perumbavoor use rubber wood as core veneer, both in

commercial plywood and superior varieties of plywood. Even the

remaining15 per cent of plywood units, which claim to use jungle wood,

make use of 15 to 30 per cent of rubber wood as core raw material. In

marine plywood, the rubber wood core is chemically treated. Rubber wood

is also used as raw material for manufacturing block board and flush door.


191

The left over solid pieces of rubber wood after peeling the core veneer,

(that are normally used as firewood), are mainly used for the production of

block bard and flush door. The details of backward linkages to the inputs

are given in table 6.7

Table 6.7 Backward Linkages of Plywood to Inputs(%)

Type of linkage Directly from

Producer Trader Total

Rubber wood 3.99 96.14 100

Chemicals/paint/polish from producer 70.00 30.00 100

Face veneer from producer 40.04 59.96 100

Source: Survey Data

It is clear from table 6.7 that a major chunk of rubber wood is

purchased from traders in Kerala. Around 70 per cent of chemicals are

bought from producers within the state. Only 30 per cent are bought from

traders who either purchase it locally or from other states. Face veneer is

mainly purchased from traders.

The sources of rubber wood log and veneer are given in table 6.8

Table 6.8 The Sources of Rubber Wood Log and Veneer (%)

Type of linkage Percentage

Rubber wood in log form directly from farmer and trader 3.08

Rubber wood in log form through traders 74.06

Rubber wood as core veneer from other veneer units 22.86

Total input cost on rubber wood 100.00

Source: Survey Data


192

It is evident from table 6.8 that 23 per cent of rubber wood is

procured in processed form (core veneer) from other veneer units in the

locality, and 77 per cent is processed by the units themselves. This implies

that since many plywood units procure core veneer locally, a conducive

atmosphere has been created for ancillarisation. It has been noted that 56

per cent of units have ancillary veneer units.

Face veneer is another processed material required for the

production of plywood. Around 80 per cent of face veneer is made from an

imported wood named Gurgan (Dipterocarpus alatus) and 90 per cent of

this is purchased from other units. Fifty six per cent of the units purchase

face veneer from units outside Kerala, 20 per cent purchase from both local

and outside Kerala, while 14 per cent purchase from local areas. Ten per

cent of units have their own face veneer manufacturing units. The

Perumbavoor Plywood Manufacturers’ Consortium started their own face

veneer making unit in 2003 which became operational in 2006. The

consortium is able to meet only 10 per cent of the demand of its 23

members.

Certain chemicals are also used as raw materials of which 90 per

cent is purchased from other units and 10 per cent is produced by their own

ancillary units. Ninety percent of the plywood units purchase the chemicals

locally while the rest purchase it from outside the state. Three units have

started their own resin manufacturing unit in Perumbavoor in 2005 mainly


193

for meeting their requirements. The demand for chemicals and glue by the

veneer, plywood, and SPRWP units resulted in the setting up of seven glue

manufacturing units in Kerala, four in Ernakulam district, two in Kannur

and one in Kozhikkode.

The region- wise linkage of the plywood industry is shown in table 6.9

Table 6.9 Region- wise Linkage to Raw materials (%)

Input Local District rest of

the state Out side state Total

Rubber wood 15 60 25 0 100

Chemicals 70 17.08 2.0 10.02 100

Face veneer 10.00 16.06 3.0 70.04 100

Source: Survey Data

It can be observed from table 6.9 that rubber wood has the highest

regional linkage. For chemicals the regional linkage to the state is 90 per

cent, whereas 70 per cent of face veneer is purchased from outside the

state. Another backward linkage of the industry is to machinery, which is

discussed under the heading technological linkages.

6.1.2.1.1. Technological Linkages

Technological linkages occur mainly by way of investment in plant

and machinery and also in vertical collaboration. In plywood, only five per

cent of the machinery is imported and 85 per cent is procured from outside

the state. Only 10 per cent of the machinery is bought from within the state.

Ninety six percent of the units have their own peeling facility while four

per cent buy veneer from local peeling units. All the units have hot press


194

and boiler. Seventy three percent units have one hot press, 17 per cent has

two hot presses, while 10 per cent have three. Sixty percent have driers, 23

per cent have kiln, 10 per cent use sun drying, and seven per cent seek the

help of other units for drying. Thirteen percent have vacuum pressure

impregnation plant for chemical treatment. The total investment of

plywood units on plant and machinery is Rs.1422 lakh. The technical

assistance is mainly provided by the companies which install the

machinery.

The other evidences for the backward production linkage are the following.

a. The share of farmers and traders in the sale of rubber wood

increased over the years. Moreover, since the annual trading of

rubber wood in Kerala comes to 300 loads per day or 0.9 lakh loads

(approximately 13.5 lakh tonnes) per annum, loading and unloading

workers, transport vehicle staff and owners, weigh bridges,

government etc are benefited..

b. The backward financial linkage is evident from the fact that the total

amount of capital of plywood units comes to Rs.2791 lakh. Around

28 per cent of this is financed by banks and other financial

institutions.

c. Another major evidence for backward linkage is to heavy vehicles

which are used for transporting veneer, plywood etc. to their

destinations and also for bringing raw materials, chemicals and other

inputs.


195

d. The veneer/ plywood supply to industrial units and the supply of

finished products to wholesalers and retailers inside and outside

Kerala provide indirect employment to a large number of workers in

the loading and unloading sector. The growth in the plywood sector

also creates indirect demand for fuel, hotels and restaurants, lodging

etc.

6.1.2.2. Forward linkages

The plywood industry has forward linkages with the construction

sector, other industries and traders who purchase the products. The forward

linkages of the industry is given in table 6.10

Table 6.10 Forward Linkages of Plywood (%)

Sub sectors Construction Other

industries Trader Export Total

Within the state 2.8 1.55 20.65 - -

Outside state 3.76 1.94 51.82 - -

Total 6.56 3.49 72.47 17.48 100

Source: Survey Data

Table 6.10 makes it clear that the highest sale is to traders. Nearly 58

per cent of plywood is sold outside the state, and 17.48 per cent is exported

to the Middle East and Sri Lanka. The region- wise forward linkage is

shown in diagram 6.1


196

inside kerala,

25

outside kerala,

57.5

export, 17.5

0

10

20

30

40

50

60

inside kerala outside kerala export

Diagram 6.1 Region -wise Forward Linkage of Plywood (%)

Source: Survey Data

As shown in diagram 6.1, the forward linkage within the state is

poor as only 25 per cent of output is sold here. There is forward

consumption linkage of the plywood industry within the state as they

supply final consumer goods like plywood block board, flush door, film

faced plywood etc.

From the above analysis it can be concluded that the plywood

sector has very high backward linkage to rubber wood and chemicals.

As a result there is a lot of ancillarisation with respect to core veneer,

face veneer and chemicals. Though only 25 per cent of plywood is sold

within the state, the other forward linkages of the sector to hotels and

lodges, transport companies, insurance, contract labour market, petrol

pumps, weigh bridges, hospitals, educational institutions etc are

substantial.

Perc

enta

ge


197

6.2. Linkages of Plywood and SPRWP - A Comparison

The region- wise backward linkages to rubber wood are very high

because 100 per cent of rubber wood used for plywood, and 97 per cent of

rubber wood used by SPRWP units are procured from the state itself. In the

SPRWP sector around 10 per cent of rubber wood is directly purchased

from farmers and the remaining 90 per cent through traders or brokers. In

Plywood sector only four percent is directly purchased from the farmers. In

SPRWP around 30 percent of rubber wood is bought as sawn sizes from

other saw mills in the state. In plywood sector, 23 per cent of rubber wood

is bought in veneer form from other veneer units in the state.

In plywood sector the backward linkages to chemicals are very high

as 90 per cent of chemicals are purchased from within the state. In SPRWP

the regional linkages to chemicals are around 32 per cent. In plywood

sector 93 per cent of the units purchased the machinery from domestic

market while majority of SPRWP units (60%) purchased from both

domestic and foreign markets. The technological linkages of SPRWP are

very high compared to plywood as evident from the investment in plant

and machinery (plywood Rs. 1124 lakh, and SPRWP Rs. 8300 lakh).

Compared to the plywood sector, the SPRWP sector has high

financial linkages to financial institutions as 61.41 per cent of the capital is

financed by them. The demand for consumer durables, construction

materials, and other services in Perumbavoor increased tremendously due


198

to the growth of plywood units in Perumbavoor. New hotels, lodges,

transport companies, vehicles, shops, petrol pumps, weigh bridges etc have

come up.

The inter-industry sale of plywood is only ten per cent while that of

EGP is 39.31 per cent. For RSKD, the forward linkage to the state is high

as 47 per cent of it is sold within the state while for plywood it is only 25

per cent. Both plywood and SPRWP sectors have direct linkages to trade

and commerce. Sixteen per cent of SPRWP units have their own

showrooms while only one plywood unit has its own showroom. Both the

sectors have linkages to transporting companies and loading-unloading

workers. The industry has linkages to other sectors of the economy like

education, health, hotels, insurance etc.

The situation prevalent in the industry leads one to assume that there

exists a co-ordinated behaviour among the SPRWP units with others. An

analysis of the governance structure and role of institutions is essential to

find this out.

6.3. Governance Structure and Role of Institutions

The discussion about the value chain of any product will be

complete only when it touches upon the aspects of governance structure

and the role of institutions along with input-output structure as explained

with the help of various actors and their relative contribution.


199

Some of the actors in the rubber wood industry have a coordinated

behaviour. The external crisis plays a crucial role in getting firms look

beyond individual interests towards value chain co-operation. Firms see

networking as a viable alternative to exploit the positive market

environment. Collectively accessing the ear of government plays an

important part in generating and sustaining interest in value chain co-

operation.

Institutional support is very essential in popularizing the products,

creating demand and promoting research and development. The uncertainty

about the quality of the product is solved through trust. To ensure industrial

cooperation and quality control, instrument based inspection certification

and testing is conducted by the Rubber Board. Long term relationship

among agents, retailers and manufacturers is established via brand name of

the products. Each of these aspects requires analysis, and the issue of

governance structure is taken up next.

6.3.1 Governance Structure

The industry has very thin form of governance. The general nature

found is that the industry is producer driven because they have the highest

share in value addition and they co-ordinate the different activities in the

chain. This finding is crucial since it was pointed out in literature review

that the furniture value chain is buyer driven (Kaplinsky, 2003). However,

in the rubber wood value chain in Kerala, producers have the highest share


200

in value addition. In 80 per cent units the producers design the product, co-

ordinate activities between different actors, and determine quality

standards. The finding is similar to the finding of Patrick (2003) about the

food processing value chain in Kerala.

The influence of buyer in quality, design and branding was found

only in three export units. In other export units, buyers’ role is limited to

process and product specifications. It has already been mentioned that in

majority of units, price is determined through mutual bargaining. The

producers exercise control in determining the terms of trade since 2004 as a

result of the rising demand for veneer and plywood. However, in plywood

exporting unit the buyer in the Middle East takes the lead role. The study

reveals that in the SPRWP sector the price is determined through mutual

bargaining and the influence of buyer in price and quality was found to be

strong only in two export units. The remaining units are producer driven in

determining the price and quality of the product. While only three units are

selling the products to retail chains in America and Europe, one unit has

undertaken upgrading at the insistence of a foreign buyer. Sixteen percent

of units received help from other firms in the country for setting up the

units.

In this context, it is crucial to determine who is more powerful in

determining the price: producer or buyer. The opinion of producers


201

regarding price determination and quality has been collected. The

perspective of SPRWP units about price is shown in diagram 6.2

54.83

9.67

35.5 Producer

Buyer

Both

Diagram 6.2 Opinion of SPRWP Units about Price Determination Process (%)

Source: Survey Data

As evident from diagram 6.2, around 55 per cent of the SPRWP

units are of the opinion that the price is determined by the producers, and

only around 10 per cent units stated that the buyers determine the price.

The perspective of SPRWP units about quality is shown in diagram 6.3

58.06

16.13

25.81

Producer

Buyer

Both

Source: Survey Data

Diagram 6.3 Opinion of SPRWP Units about Quality Determination Process (%)

9.67%

35.5%

54.83%

16.13%

25.81%

58.06%


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Diagram 6.3 shows that majority of the units opined that the quality

of the product is determined by the producers. It is therefore concluded that

the SPRWP sector is mainly producer driven. As already mentioned

plywood has a producers market since 2004 due to the ban imposed by the

Supreme Court. The high demand for veneer and plywood has given

control to producers in determining the terms of trade. But before 2004 the

buyers outside Kerala determined the price and quality and the producers

were forced to sell the products at their terms. In the case of plywood the

producers too shared this view.

For a comparison with plywood industry, the perspective of plywood

producers is given in table 6.11.

Table 6.11 Perspective of Plywood Firms Regarding Determination of Price and Quality (%)

Actor Determination of price Determination

of quality

Producer 33.33 46.66

Buyer 6.66 23.33

Both producer and buyer 46.66 30.01

Association of plywood manufacturers

13.33 00.00

Total 100.00 100.00

Source: Survey Data

As seen in table 6.11 around 47 per cent of the producers are of the

opinion that the producers and buyers have an equal role in the

determination of the price of the product. Similarly, 30 per cent of the units


203

are of the opinion that the quality of plywood is determined by both

producers and buyers. Both in price and quality determination the producer

still has a decisive role. It can be concluded that the plywood sector is also

mainly producer driven. To sum up, both SPRWP and plywood sectors are

largely producer driven.

6.3.2. Role of Institutions and Linkages

Various institutions and agencies offer legal, technical and financial

help to the units and influence the functioning of these firms. The role of

institutions in the SPRWP is discussed first followed by the discussion on

plywood.

6.3.2.1. SPRWP

In SPRWP sector various government agencies, Rubber Board and

Indian Rubber Wood Task Force (IRTF) play an active role. The role

played by each of these institutions is analysed separately.

a) The government is providing subsidy for setting up SSI units and

26 per cent units availed themselves of the facility under this

scheme. The exporting units enjoy duty benefits under the DEPB

scheme. Despite these benefits, all the firms complained against the

taxation policy of the Central Government which imposes 16.3 per

cent excise duty on furniture and eight per cent duty on door items.

In Kerala the units have to pay 12.5 per cent VAT, and if sold

outside Kerala four per cent CST is levied. It was reported that

three units that functioned successfully were forced to close down


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due to tax disputes with the excise department. The taxation policy

seems to be too severe on the units as rubber wood is not a

densified wood and hence it is not taxable as per the judgment

given by the CESTAT7.1. Another major discrepancy in the

implementation of the policy is that the firms with all accounted

transactions cannot compete with local furniture units who do not

maintain proper accounts and sell without excise tax. This is a

serious threat to the rubber wood furniture units in Kerala. It has

been argued by the surveyed units that only with the complete

withdrawal of excise tax can the units be able to offer a competitive

price for their products. The firms find it a great relief that in 2004-

05 recognizing the importance of rubber wood in the economy, the

state government has exempted rubber wood processing and value

addition from the purview of purchase tax.

b) Rubber Board is also playing similar roles in this sector. It is found

that 38.71 percent of the units availed subsidy from Rubber Board.

Twenty six percent of the units received assistance from the Rubber

Board in the form of technical advice, consultancy and periodic

testing of products to ensure quality. The total subsidy given by

Rubber Board under the modernization scheme was Rs 62.1 lakh,

and under machinery demonstration scheme Rs 10 lakh during

7 Customs, Excise and Service Tax Appellate Tribunal


205

2004-06. Rubber Board has been promoting rubber wood

processing and value addition through the creation of processing

activities, testing facility and creating awareness campaigns.

Rubber Board has set up a laboratory at Kottayam exclusively for

the testing and quality control of processed rubber wood and to

achieve increased acceptance. The laboratory makes testing

facilities available for processors and customers. It facilitates

identification of species, physical properties like density, specific

gravity, moisture content, swelling and shrinkage, mechanical

properties like bending, compression, hardness, tension, durability

tests, quantitative and qualitative estimation of chemicals in treated

wood and preservatives, gluing properties, strength of joints of

EGP etc. The Board also has the unique facility to test factory

made door. All these tests are done as per Indian Standard (IS)

specification. By the collective efforts of Rubber Board and IRTF,

in 2001 the Bureau of Indian Standards brought out the IS for

processing Indian rubber wood.

Rubber Board has been promoting the industry at the national and

international levels by allowing the units to participate in

exhibitions and fairs. It has promoted two companies for the

processing of rubber wood. They are, Meenachil Rubber Wood

Limited (Metro Wood) and Rubber Wood India Private limited

(India Wood). Metro Wood is a joint venture of the Rubber Board


206

and rubber producers’ societies in Meenachil Thaluk. India Wood

is promoted by the Rubber Board and KSIDC who jointly own 98

per cent of its share and two per cent by the growers of rubber

wood. The company produces EGP board and doors. To

demonstrate the effectiveness of rubber wood in various

applications, the Board has been promoting its use in its own

offices, and various schools, government offices, hospitals etc.

Despite these positive initiatives, Rubber Board has not taken a

proper marketing strategy to introduce the innovative product

concept of ‘finger jointed solid wood boards’ (EGP board) to the

customers in and outside Kerala. A massive advertisement

campaign is required to familiarize the product concept to the

customers.

c) Another agency that has been taking active interest in the

promotion of rubber wood is the apex association of plantations,

namely United Planters Association of Southern India (UPASI).

They have constituted Indian Rubber Wood Task Force (IRTF) for

the promotion of rubber wood industry in the country. Seventy one

per cent of SPRWP units are members of IRTF and they get legal

and technical advice from the organization. Recently the IRTF has

submitted a proposal to start a cluster to help all the member firms

in technical and marketing fields. The details of institutional

support for SPRWP units is given in table 6.12


207

Table 6.12 Institutional Support to SPRWP Units

Nature of help Number Percentage of

units*

State Subsidy for SSI units 8 26

Subsidy from rubber board 12 38.71

Technical and other assistance from rubber board other than subsidy 8 25.81

Export subsidy 11 35.48

Legal and moral support from IRTF 22 70.97

Quality testing by rubber board 12 38.71

Training to entrepreneurs through workshops 12 38.71

Source: Survey Data.

*The total percentage exceeds 100 because the units received help from more than one institution

It is clear from table 6.12 that 70.97 per cent of the SPRWP units got

legal support from IRTF. Only 38.71 per cent units got subsidy from the

Rubber Board

6.3.2.2. Plywood

The plywood sector is influenced by institutions like government,

Saw Mill Owners Association, Plywood Manufacturers Association, and

the Plywood Cluster.

a) The Government: Five units got export subsidy under DEPB (Duty

Exemption Pass Book) scheme and 15 units got subsidy for SSI

registration. The present taxation policy that imposes 16 per cent

excise tax and two per cent surcharge on the plywood manufacturers

(if production exceeds rupees one crore), the VAT at 12.5 per cent


208

within the state and CST at four per cent outside the state have an

adverse impact on the wood based industrial sector. The Central

budget for 2007-08 has brought down the excise tax to eight per cent

and it is a boost to big manufacturers, and reduces the tendency for

tax evasion. The excise exemption given to units having production

less than one crore was raised to 1.5 crore is yet another relief to the

small producers.

b) The Plywood Manufactures Association in Kerala provides legal,

technical and marketing assistance to all the member firms. The

Association takes active initiation in solving the disputes with the

government and also helps member firms against the exploitation by

North Indian buyers. From time to time, the Association also fixes the

minimum price for each variety of plywood. The association bargains

with trade unions on wage tariff. Sixty per cent units reported that

they meet occasionally to discuss their problems.

c) The Saw Mill Owners Association in Perumbavoor runs weigh

bridges for helping the marketing of rubber wood, veneer and

plywood.

d) The Perumbavoor Plywood Cluster started in 2003, with the

assistance from UNIDO and central government provides a common

facility service centre for getting face veneer peeled so that the input

cost of buying the same from outside the state can be brought down.

Transport cost and 16.5 per cent excise duty can be avoided if these


209

are produced within the cluster. Moreover, bulk import of wood logs

for face veneer by the cluster will further bring down the cost. The

cluster also plans to start a common resin manufacturing unit, high

density plywood press and common testing centre. At present 22 units

are members of this cluster.

6.3.3. Upgrading

The upgrading in the rubber wood industry is not ‘hierarchical’

(enterprises vertically integrated) or captive network (lead firms set the

parameters under which others operate-‘quasi-hierarchical’) but a balanced

network where enterprises cooperate and have complementary

competencies but no control over each other.

Both process upgrading and product upgrading are found in the

rubber wood industry sector. The study reveals that 26 per cent units have

adopted process upgrading i.e. from RSKD/S4S to EGP board. Ten per

cent units have adopted product upgrading from component manufacturing

to original equipment manufacturing like furniture and door. These units

which were earlier producing only RSKD and S4S have turned to the

production of furniture.

Nineteen per cent of SPRWP units have upgraded with the support

from buyers. The buyers can support suppliers for upgrading in different

ways.

a) Providing clear product and process specifications


210

b) Providing training and technical expertise

c) Working directly with the suppliers to upgrade their performance

d) Helping suppliers with their own supply chain

The various types of upgrading that have taken place in SPRWP

sector is shown in table 6.13

Table.6.13 Type of Upgrading in SPRWP Units

Type Number Percentage

Process upgrading 8 25.80

Product upgrading 3 9.68

Original brand manufacturing 5 16.13

Buyer providing clear product and process specification

5 16.13

Buyer providing training , technical expertise, and financial assistance

1 3.23

No upgrading 9 29.03

Total 31 100

Source: Survey Data

It is clear from table 6.13 that 25.8 per cent of the units had process

upgrading. Five units have upgraded to original brand manufacturing

(16.13%). But the sequential pattern in upgrading from OEM to ODM and

to OBM is not visible.

Buyers like Wal Mart, IKEA and B&Q have supported five SPRWP

units (16.12%) in upgrading by giving product and process specifications.

One unit had technical collaboration with Long Huat, Malaysia and still


211

maintains export contract with them. The third and fourth type of

upgrading is not found in rubber wood industry in Kerala. But in furniture

value chain of other countries, especially in the studies of Kaplinsky and

Smitz all the four types of upgrading are found. Thus, it can be concluded

that the foreign buyers’ role in upgrading is very low.

Domestic institutions like the Rubber Board provide technical know-

how and subsidy for the upgrading of the units. By adopting a cluster based

approach, the Rubber Board and IRTF are helping the units in upgradation.

In the plywood sector, three units which produced plywood and block

board have upgraded to produce EGP board also.

The analysis about the aspects of linkage and governance leads to

the conclusion that among the various nodes in the chain, the role of

manufacturers is very strong because of its good linkage with other nodes,

particularly to farmers and traders. The governance structure also reveals

that the value chain of rubber wood is producer driven. As the producers

are in a commanding position and the focus of the study being SPRWP

sector, an attempt is also made to see the main problems and challenges

faced by SPRWP sector in comparison with plywood sector.

6.4. Problems and Challenges

The secondary data revealed the fact that the number of registered

working SPRWP units in India has come down from 50 in 1997 to 42 in

2002.As per the latest report, it is now reported as 45; still the number is


212

less than that of the same in 1997.In Kerala the number of units was 38 in

2002 but in field survey it is found that the number of working units is 31

in 2006. Owing to a number of difficulties, the existing units are either

getting diversified or closing down particularly in the SPRWP sector. The

loss making units are not able to make their positions better. This is mainly

attributed to the reasons cited below.

The perspective of the processing units about the problems of the

industry is presented in table 6.14 and this is compared with the general

problems of the SSI units in Kerala (identified in the census study in 2003-04)

Table 6.14 Problems of the Industry in Comparison to the Problems of the SSI Sector ( %)

Reasons SPRWP

units

Plywood

units

SSI units in

Kerala

Lack of demand 36 0 74.32

Shortage of raw material 48 53.33 13.14

Shortage of working capital 27.5 6.67 50.19

Marketing problems 40 16.67 37.65

Labour problems/shortage of workers 17.24 46.67 3.73

Shortage of power 10.3 6.67 9.37

Management problems 13.7 0 4.06

Equipment problems 17.24 0 8.32

High taxes 13.7 0 -

Mismatch between kiln capacity and treatment plant

17.24 - -

No problems 0 20 -

Source: Survey Data and State Level Report on 3rd all- India Census of SSI 2003-04.

(The total percentage exceeds 100 because the same units have stated more

than one problem.)


213

It is evident from table 6.14 that the most important problem of the

SPRWP sector is the shortage of raw material and its high price. For the

entire SSI sector in the state only 13.4 per cent units raised this problem,

while in rubber wood processing sector 48 per cent pointed this problem.

At the state level 74.32 per cent units raised the lack of demand while in

SPRWP of rubber wood only 36 per cent stated this problem. Shortage of

working capital is the problem of 50.19 per cent of SSI units but in the

SPRWP sector it is 27.5 per cent. Another problem stated by the units is

the mismatch between the kiln capacity and treatment plant.

In the plywood sector there is no dearth for demand. Twenty per cent

units stated that there are no problems at all .They have also stated that the rise

in price of rubber wood is not a problem because they simultaneously raise the

price of plywood. One major problem stated by around 47 per cent units is the

shortage of workers. The workers from outside state are provided by

contractors and the workers frequently shift the job from one unit to the other.

The other problems located in the industry are the following:

a. Majority of the units pointed out that high cost of capital and high cost

of power are the major hurdles for the entry as well as smooth operation.

Fifty five percent of SPRWP units pointed out this as a major hurdle. In

the plywood sector 60 percent of the units cited this as a hurdle.

b. Under utilization of capacity in the SPRWP units is another problem of

this sector. It has already been stated in section 5.2.7.


214

c. Competition and availability of cheaper substitutes is another problem

faced by SPRWP sector. Forty per cent of units stated that it is the

competition from other firms, especially foreign firms that compel the

firms to sell the product at the same price even when the price of rubber

wood is going up. Competition from substitute products like Medium

Density Fiber board (MDF), particle Board, Panel boards (made from

saw dust), plastic, metal, reed, cane etc. is another problem

d. Lack of proper value addition is yet another problem of the industry. In

Malaysia and Sri Lanka even small sized logs and branches are reported

to be used for the manufacture of panel products such as chipboard,

wood cement board and MDF. But in India 40 per cent of the rubber

wood is used as firewood. Hence, the value addition can be increased by

adopting modern technology in wood processing i.e. the establishment

of appropriate panel products manufacturing units to absorb the wastes

and branch wood. Research and development efforts for technological

upgradation of the downstream manufacturing are very slow.

e. Another problem of the industry is that 86 per cent of the workers in the

plywood sector are from outside the state and they do not get ESI, PF

and other benefits. They are staying in factory premises. This, however,

is not a problem in SPRWP sector as majority of the workers are from

within the state. The workers contribute in various activities like the

production of rubber wood, felling, loading, unloading, processing,

transporting, marketing etc. The role of workers is substantial in three


215

activities viz. felling, processing of products and loading and unloading.

The workers in felling, loading and unloading sectors complained that

they do not get benefit under the state government welfare fund.

f. The high cost of labour and taxes have prompted some units to shift their

operation from Kerala to Tamil Nadu or to start additional units in Tamil

Nadu. The State government must seriously look into the issue and

should adopt necessary steps to rectify this.

g. Lack of vision, lack of technical and commercial feasibility study and

lack of proper planning are some additional reasons that led to the

accumulated loss of five units.

h. The export potential is not properly exploited as evident from the fact

that 86 per cent of the sales are on the domestic front. While the Indian

export of rubber wood products was less than US $ 4 million, the

Malaysian rubber wood export was nearly U.S $ 1850 million in 2005.

i. Some families living near the factories of plywood units complained that

they have developed allergy and asthma due to the excessive presence of

dust particles/ chemicals in the air and that they do not keep their

windows and doors open. The complaint of the neighbors regarding air

pollution has compelled the factory owners to raise the length of the air

pipe. The use of toxic chemicals by some units to prevent borer and

fungus attack badly affects the workers and also people in the

neighborhood.


216

j. Marketing is identified as another problem, particularly in the EGP

board sector. The concept of EGP board is still not marketed

properly. Majority of the public are still unaware of its physical

properties and its advantages compared to MDF board, particle board,

plywood, block board etc.

k. Competition from domestic furniture units which evade taxes is a threat

to organized furniture units with proper accounting procedures. Due to

this the units in the unorganized sector can offer a price which is 29 per

cent less when compared to the price offered by organized firms.

Though the cost of rubber wood compared to other varieties is lower, the

industry has not properly exploited it. The comparison of rubber wood to

other sawn timber is given in table 6.15

Table.6.15 Comparison of Rubber Wood RSKD with other Sawn Timber ( May 2006)

Name of sawn sizes of

wood

Price range per

cft ( Rs)

Average

price ( Rs)

Advantage of

rubber wood ( %)

Rubber wood (RSKD) 400 – 600 500

Teak wood private plantation

1400 – 2000 1700 240

Mahogany 800 -1100 950 90

Jack wood 700 – 1000 850 80

Anjili 600-900 750 50

Imported teak (pinkoda) 800 – 1050 925 80

Malaysian jack wood 550-750 650 30

Eucalyptus 325-425 375 -25

Source: Survey Data


217

It is clear in table 6.15 that the cost advantage is worked out to be 30

to 240 per cent for RSKD compared to other varieties except Eucalyptus.

The cost advantage of rubber wood furniture with organized furniture

sector is depicted in table 6.16

Table 6.16 Furniture MRP*– a Comparison (Ernakulam, September, 2006)

Type

Rubber

wood with

EGP board

(stained)

Teak Rose

wood

MDF using

rubber wood

(imported

from Sree

Lanka )

Advantage of

rubber

wood(EGP)

compared to teak

in %

cot 3’x6.25’ 7680 9950 11980 7810 27.21

cot 5’x6.25’ 11680 16500 18500 11800 41.26

dining table 3’x6’oval 7800 10100 12300 8000 29.48

Source: Survey Data. *price in rupees including tax, after discount

It is evident from table 6.16 that the cost advantage is worked out to

be 27 to 1 per cent for rubber wood furniture when compared to teak wood

furniture (cot). Compared to rose wood the cost advantage is 56 to 58 per

cent. But compared to imported Sri Lankan furniture (made from rubber

wood compressed MDF Boards) the cost advantage is less than two per

cent. The cost advantage of rubber wood furniture of the same design with

Malaysian furniture is given in table 6.17

Table 6.17 Comparison of Indian Rubber Wood Furniture Price* with Malaysian Furniture (September, 2006)

Type

Indian rubber

wood furniture

(EGP stained)

Imported

Furniture (Malaysian

wood)

Advantage of

rubber wood

( %)

Cot 5’x6.25 11000’ 14845 34.95 Dining table 6’

with 6 chairs 20700 26500 28.01

Source: Survey Data. *price in rupees including tax but after discount


218

It is clear from table 6.17 that compared to Malaysian furniture the

cost advantage of rubber wood furniture is worked out to be 28 to 34 per

cent.

The opinion gathered from the SPRWP units about the future

prospects of the sector revealed that 60 per cent have a positive outlook and

that they expect a rise in sales and profit and foresee a scope for

diversification. However, 20 per cent of the units have a negative opinion.

Another 20 per cent are uncertain regarding the prospects of the sector, and

refused to comment categorically.

Conclusion

From the above discussion it is inferred that RSKD and EGP boards

and EGP furniture have the highest total linkage. It is further noted that the

industry has very thin form of governance. Producers have the highest

share in value addition. They design the product, co-ordinate activities and

determine quality standards. Therefore, the industry is mainly producer

driven. The institutions that support the SPRWP sector are government,

rubber board and IRTF. With regard to upgrading, the sequential pattern

from OEM to ODM and to OBM is not visible here. Despite these features,

the industry suffers from certain problems like shortage of raw materials,

marketing problems, lack of sufficient demand in the case of SPRWP,

competition, higher price for rubber wood etc. The cost advantage of

rubber wood and rubber wood products is not properly exploited.

LINKAGES AND GOVERNANCE - Shodhgangashodhganga.inflibnet.ac.in/bitstream/10603/22505/16/16_chapter6.pdf · study has 28 ancillary units for producing furniture. Materials are supplied

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