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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
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180
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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181
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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182
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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183
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
EGP furniture 69.03 30.97 100
RSKD furniture 68.98 31.02 100
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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184
Sectors chemicals
from producer
chemicals
from trader Total
RSKD 10 90 100
EGP 20.01 79.99 100
EGP furniture 20.03 79.97 100
RSKD furniture 20.08 79.92 100
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
Linkages and Governance
185
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.
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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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187
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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188
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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189
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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190
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.
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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
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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
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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
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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.
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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
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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
Linkages and Governance
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
Linkages and Governance
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.
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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
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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
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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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202
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
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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
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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
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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
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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
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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
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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
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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
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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
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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.)
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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.
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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
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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.
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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
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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
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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.