Tyre 1,3,16,32

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INDUSTRY OVERVIEW

Ever since the first Indian tyre company, Dunlop Rubber Company (India)was incorporated in 1926, the tyre industry has grown rapidly and today it isa Rs. 19,000 crore industry. India has 2.61 lakh villages, connected by 6.23lakh kms of metalled roads and 9.81 lakh kms of unmetalled roads. Thesevillages are linked to small towns and cities. There is a daily traffic of over

4.12 lakh trucks, 1.27 lakh buses, 7.23 lakh cars, and thousands of taxis,two-wheelers, three-wheelers, tractors and animal -drawn vehicles on Indianroads. There exists a vast potential for the tyre industry in India. The fortuneof the tyre industry depends on the agricultural and industrial performanceof the economy, the transportation needs and the production of vehicles.Hence, this is a very sensitive industry, which has to adapt itself to a highlyvolatile environment. The size of Indian tyre industry is estimated at aboutRs.19000 crore comprising 43 players with an aggregate installed capacityof over 850 lacks tyre. The10 large tyre companies account for over 95% of the total production.

In Indian tyre industry, capacities are concentrated in the hands of a fewlarge players with top four tyre companies accounting for over 74 per centof industry market share. The industry is raw material intensive with rawmaterial constituting over 62 per cent of the sales turnover and 70 per centof production cost, of which rubber accounts for the major share of thematerial cost. The main inputs natural rubber smoked sheets and technicallyspecified natural rubber (TSNR) account for 52 per cent of raw material costof tyres.

The major demand comes from the replacement market accounting for around 50 per cent. It is followed by 40 per cent from the OriginalEquipment manufacturers (OEM) and 10 per cent from the exports. In the

past the replacement demand has been the major growth driver of theindustry. But the sustained GDP growth of more than 8 per cent has alsoincreased the demand for the OEMs. CAGR is 11% in 2008.

The demand and growth for the tyre industry depends on primary factorslike overall GDP growth, agricultural as well as industrial production andgrowth in vehicle-demand. It also depends on the on secondary factors likeinfrastructure development and prevailing interest rates. In India the primaryfactors have sustained in the last three years helping the sector to emerge as

S.P.C.E./ MBA DEPARTMENT-Visnagar Batch 2007-2009 1

CHAPTER-1

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a winner. Even the secondary factors have helped a lot; the only concerns

are raising interest rates on the automobile segment and increased rubber prices.The origin of the Indian Tyre Industry dates back to 1926 when DunlopRubber Limited set up the first tyre company in West Bengal. MRFfollowed suit in 1946. Since then, the Indian tyre industry has grownrapidly.

Transportation industry and tyre industry go hand in hand as the two are

interdependent. Transportation industry has experienced 10% growth rateyear after year with an absolute level of 870 billion ton freight. With anextensive road network of 3.2 million km, road accounts for over 85% of allfreight movement in India.

1.1 Contribution in Auto Industry

Tyres and tubes, the strategic rubber products and basic supplements to theautomotive vehicles are of utmost importance to the country's economy. Thetyre industry sector is providing direct employment to over 40,000 peopleand indirect employment to lakhs of people. This industry sector is now

being considered as a core industry sector.

The manufacturing of automobile tyres as an essential ancillary for thedevelopment of automobile sector came into being in India during the1930's when the Dunlop India Ltd., the first tyre manufacturingtransnational company started its operation in 1935 at Sahaganj in WestBengal. During the early period the overseas tyre manufacturing companieswere having major equity participation in the Indian manufacturingcompanies. After 1970's there was a change in the policy of Government

and it decided not to sanction any foreign equity. The setting up of jointsector projects with multiple foreign collaboration was considered feasible.

At present 11 large companies with 15 factories and 9 medium-scalecompanies scattered all over India are manufacturing tyres and tubes for automotive vehicles including aero tyres and tyres for defense services. Asestimated, their total production during 1987 was 128 lakh tyres against thetotal installed capacity of 179.44 lakhs tyres.

The interesting feature of the tyre industry in India is that starting from itsinception to the present day its progress has been influenced by repeated


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import of technical collaborations. There is an urgent need to build up

indigenous capabilities for tyre technology including the tyre machinery. Inview of this, it was thought desirable to undertake the review of presentstatus of this industry and to identify and analyze the critical inputs requiredfor absorption and up gradation of imported technology.

The technology absorption & adaptation scheme (TAAS) of DSIR seeks toencourage the role by providing optimum inputs for an acceleratedabsorption and up gradation of imported technology. The scheme wasformulated to fill inter-alias, the following specific objectives:

To reduce the necessity to further import of technology even after having it in use over a reasonably long period.

To upgrade technology imported incorporating improvementsidentified in the use of technology.

To promote the diffusion or export of the imported technologywhich have been assimilated or adapted.

To strengthen the base for selecting and negotiating appropriate andcompetitive technology where import of technology is considereddesirable.

The Department of Scientific & Industrial Research (DSIR)

organized a workshop on 'Technology in Indian Tyre Industry" on25-11-1987 in collaboration with Automotive Tyre ManufacturersAssociation (ATMA). The then Secretary & Director GeneralTechnical Development (DGTD) inaugurated the workshop whichhad participation of various tyre units, concerned organizations andinstitutions, besides experts from foreign tyre companies andSmithers, USA, a reputed testing research evaluation organization.This report has been finalized after the discussion of its draft in theabove workshop and has taken into account the various inputsreceived from the workshop.

1.2 Industry structure:

The tyre industry has witnessed a CAGR of 8.3% over the last decademainly fuelled by the strong growth in the domestic auto industry andcurrent CAGR is 11% though the replacement market has driven theindustry growth for long time, the OEM market has seen a robust growthover the last couple of years.

• The industry is highly capital intensive, as it requires around Rs 4bn

to setup a radial tyre plant with a capacity of 1.5mn tyres and around


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Rs 1.5-2bn for a crossply tyre plant of a capacity to manufacture

1.5mn tyres.• The profitability of the industry has high correlation with the prices

of key raw materials such as rubber and crude oil as they account for more than 70% of the total costs. The raw material to sales ratio inthe industry is around 65%.

• The industry has high entry barriers because of its capital intensive

nature and low operating margins. With demand increasing at asteady pace, the industry is expected to go through a consolidation

phase.

• The industry is dominated by four players viz MRF, Apollo Tyres,

JK Industries and Ceat and enjoys 74% of the total market share.• The fortunes of the industry are linked to the trend in the domestic

auto industry, retreading, trend in road transportation and spendingon road infrastructure.

• The companies have lined up further expansion plans to meet the

increasing demand.

1.3 Market Profile :

While the tyre industry is mainly dominated by the organised sector, theunorganised sector holds sway in bicycle tyres. The major players in theorganised tyre segment consist of MRF, Apollo Tyres, Ceat and JK Industries, which account for 74 per cent of the organised tyre market. Theother key players include Modi Rubber, Kesoram Industries and Goodyear,Dunlop, Falcon, Tyre Corporation of India Limited (TCIL), TVS-Srichakra,Metro Tyres and Balkrishna Tyres are some of the other players in theindustry captured remaining market share. MRF, the largest tyremanufacturer in the country, has strong brand equity. While it rules supremein the industry, other players have created niche markets of their own

The Indian tyre industry is two tiered; Tier-I players (top 4 tyre companies),account for over 74% of industry turnover and have a well diversified

product-mix and presence in all three major segments, i.e., replacementmarket, original equipment manufacturers (OEM's) and exports. Tier-IIcompanies are small in size, mainly concentrating on production of smalltyres (for two/ three-wheelers, etc.), tubes & flaps and the replacementmarket.

1.4 Sector specifics:

The tyre industry is a major consumer of the domestic rubber production. Natural rubber constitutes 80 per cent of the material content in Indian tyres.Synthetic rubber constitutes only 20 per cent of the rubber content of a tyre


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in India. World wide, the ratio of natural rubber to synthetic rubber is 30:70.

Apart from natural and synthetic rubber, rubber chemicals are also widelyused in tyres. Most of the RSS-4 grade natural rubber required by the Indiantyre industry is domestically sourced, with only a marginal amount beingimported. This is an advantage for the industry, since natural rubber constitutes 52 per cent of the total raw material cost of the tyres.

The two types of synthetic rubber used in tyres are Poly Butadiene Rubber (PBR) and Styrene Butadiene Rubber (SBR). The former is used in most of the tyres, while the latter is mainly used in the radials for passenger cars.Other raw material accounts for 2 percent of the raw material cost. Unlike inthe case of natural rubber, India imports 60 per cent of its synthetic rubber requirements.

Apart from rubber, major raw materials are nylon tyre cord and carbon black. The former is used to make the tyres strong and impart tenacity to it.The latter is responsible for the colour of the tyre and also enhances the lifespan of the tyre. Nylon tyre cord comprises 8 percent, while carbon black accounts for another 23 percent of the raw material cost. In India, the carbon

black used is of the N660, N220 and N330 variety.

To sum up, the tyre industry is highly raw-material intensive, with raw

material costs accounting for 70 percent of the cost of production.Fortunately for the industry, the rubber and carbon black prices have taken a beating recently, which means lower costs for the tyre industry. The export-import policy allows free import of all types of new tyres and tubes.However, import of retreaded tyres, either for use or for Reclamation of rubber is restricted. This has led to used tyres being smuggled into thecountry under the label of new tyres. Though tyre import and all rawmaterials for tyres except natural rubber are under open general license(OGL), only import of natural rubber from Sri Lanka is eligible under OGL.


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1.5 Out look for the Industry:

It is estimated that there would be a volume growth of 12-14 percent in2008-09. The performance of the tyre industry is linked to the automobileand infrastructure sectors, the growth of which is dependent on the

performance of the economy. The current estimated economic growth over 8 percent. The continuous thrust being placed by the Government on thedevelopment of infrastructure, particularly roads, agriculture and

manufacturing sectors, would lead to an impressive acceleration in theautomobile, ultimately generating more demand for tyres.

However, tyre companies face immense competition together with price andcost pressures. Pricing pressures, from OEMs because of their high

bargaining power and in the replacement market due to huge competition,are existent dampeners. Companies are now giving emphasis to innovationin product and process technology and operational efficiencies. The tyrecompanies would definitely show improvement in the margins sequentially,and if prices remain at these levels, profitability would improve. But then, itwould be highly dependent on prices of major raw materials like Rubber,Carbon Black, and NTC Fabric which are highly volatile. The continuouslyrising trend witnessed in the prices of raw materials remains an area of concern. The trend is very volatile and the future pundits expect the pricesto go upwards from the current levels.

Globally, the OEM segment constitutes only 28 per cent of the tyre market,the balance from the replacement market. In India, the scenario is quitedifferent. Nearly 50 per cent of the total tyre demand in the country is for replacement. This anomaly has placed the retreaders in a better position thanthe tyre manufacturers. Retreading is looming over the tyre industry as acolossal threat. The Coimbatore based Elgi Tyres and Tread Ltd., the largest

retreader in India, is giving the tyre barons sleepless nights.

Simply put, retreading is replacing the worn-out tread of the old tyre with anew one. The popularity of retreading stems from the fact that it costs only20 per cent of a new tyre but increases its life by 70 per cent to 80 per cent.Most of the transporters in India retread their tyres twice during its lifetime,while a few fleet owners even retread thrice. In their zealousness toeconomise costs, they overlook the reality that retreading reduces the qualityof the tyre. It is highly popular in the South unlike in the North where thetransporters overload their trucks and have to ply their vehicles in a roughterrain an environment in which buying a new tyre is the best option.


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Though retreading has penetrated 25 per cent of the tyre market, it as not

made much of a dent in the rapidly growing two-wheeler and passenger car segments.


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1.6 Indian Tyre Industry at a glance:

Table: 1 Indian tyre industry at a glance

Financial Year 2007-2008

Turnover of Indian TyreIndustry

Rs. 20,000 Crores

Tyre Production (Tonnage) 11.35 lakh M.T.

Tyre Production – AllCategories (Nos.)

850 Lakh

Tyre Export from India(Value) :

Rs. 3000 (est.) crores

Number of tyre companies: 43

Industry Concentration 10 Large tyre companies account for over 95% of total tyre production.

Radialisation Level - Current(as a % of total tyre production)

Passenger Car tyres: 95%Light Commercial Vehicles: 12%Heavy Vehicles ( Truck & Bus ): 3%

Calendar Year 2007

Turnover of Indian TyreIndustry

US $ 4600 Million

Installed Capacity (Nos.) 85 Million

Capacity Utilitsation 87%

Total Tyre Production (Nos.) 78 Million

Total Tyre Import (In 000 Nos.) 2077

Government Policy

Tyre Industry Delicenced since 1987

Export (of tyres and tubes) Freely allowed

Import (of new tyres and tubes) Freely allowed Since 2001Import Policy for Used /Retreaded tyres:

Restricted Since April, 2006

(Source:ATMA)

1.7 Current Scenario:

1.7.1 Sector trends


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Cross ply tyres have been used in India for several decades. In these tyres,

the ply cords run across each other or diagonally to the outer surface of thetyre. Rayon and nylon tyre cords are used as the reinforcing medium. Thesetyres can be retreaded twice during their lifetime and are hence preferred byIndian transport operators who normally overload their trucks. A vehiclewith the normal carrying capacity of around 12 tonnes is usually loadedwith double the capacity.

Moreover, one also has to contend with the bad suspensions and bad roadconditions. No wonder, 95 per cent of the tyres used in India are crossplies.

Radial tyres have their cords running radially from bead at 90 degrees angleto the rim or along the outer surface of the tyre. The reinforcing mediumsused in these tyres are polyester, nylon, fiberglass and steel. Hence, thesetyres are 20 per cent more expensive than the crossplies. But they have alonger life and provide lower fuel consumption. The unhealthy condition of the Indian roads has resulted in radial tyres accounting for only 5 per cent of the tyre industry as against a global trend of 60 per cent. With two-thirds of the capacity of all major tyre manufacturers being reserved for radials, thisis a real cause for concern.

1.7.2 Pricing Scenario

Pricing is influenced by the demand. Since the tyre demand has significantlyincreased in the last one year, many of the tyre companies have surplusstocks. Hence in. The cheap imports of non-radial tyres from China are alsoadding to the present woos of these tyre manufacturers. The All India Tyre Dealers' Federation has sought a 17-22 per cent cut intyre prices from the tyre majors like Apollo, JK, MRF andCeat. In a letter to the Prime Minister Manmohan Singh andUPA Chairperson Sonia Gandhi seeking their intervention,the Federation has claimed that “tyre majors are

indiscriminately jacking up prices even when the rawmaterial prices have nosedived to the bottom”. Thefederation has pointed out that natural rubber prices havefallen by 46 per cent to Rs 85 per kg since October, butthese companies have hiked prices by 2 per cent in the lasttwo weeks. Tyre prices had been jacked up by 15-20 percent during March-August period for all categories, the lettersaid. “High tyre prices lead to increased capital investmentand low rate of return for tyre dealers,” the federation said.

(Business Standard , 14 November’08)


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1.7.3 Exim Scenario

The demand from the export market obviously hinges on the globaleconomic scenario. This apart, the economic health in key tyre-producingcountries in South-East Asia and China would also have a major bearing onthe export of tyres.

Exports contribute about Rs 8 billion to the total industry turnover of Rs 100 billion. China has an advantage in terms of lower prices for its tyres - almost25 per cent less than India’s tyre prices. However, Indian tyres areconsidered to be of better quality than Chinese made tyres. The exportmarket holds tremendous potential for domestic manufacturers. Tyre exportshave grown at an annual compounded rate of 27% over the past 10 years.Indian tyres are exported to 56 countries, which are primarily developingcountries

Approximately, 19 per cent of total Truck & Bus tyres produceddomestically are exported. Indian cross ply tyres have excellent acceptancein developed countries. All large tyre companies are engaged in sustainedexports as a long-term commitment. The bulk of exports are directed to the

US. Apart from the US, tyres are also exported to the West Asian and Asiancountries. A segment-wise analysis of exports indicates that the truck and bus tyre segment accounts for about 74 per cent of the total tyre exports.

1.7.4 Government Policies

All categories of tyres can be exported freely

All categories of new tyres can be imported freely except Truck /Bus (Radial Tyres), which is in the Restricted List from 24th

Nov. 2008 onwards.

No WTO Bound Rates for Tyres & Tubes

All raw materials required for the manufacture of tyres can beimported freely (OGL) except Carbon Black, which is in theRestricted List from 24th Nov. 2008 onwards.

1.7.5 Crystal Gazing

The future is expected to see many strategic alliances among the domesticand global players to enable them to have access to latest technology andexpand their distribution network. A better distribution will also ensure easyavailability. The introduction of newer auto models will significantly have a

bearing on the tyres demand. The tyre companies will also be looking for


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tie-ups with the OEMs for better stability and long-term relationship. For

instance, the international player Bridgestone has a tie-up with Tatas for supply of tyres for its model Indica. Bridgestone has entered the Indianmarket in association with Associated Cement Companies and has set up amanufacturing plant at Khera in Madhya Pradesh. Hyundais associate tyremanufacturer is reported to set up operations at Sriperumbudur, in Tamil

Nadu. Other multinational tyre companies are also likely to enter the Indianmarket viz. Michelin with J.K. Tyres and Pirelli of Italy, with Birla Tyres.Such arrangements are very essential if one has to remain competitive. Thegovernment’s emphasis on improving the road infrastructure will facilitatethe road transport sector that in turn will brightenthe prospects of the tyre industry in the coming years.

1.7.6 Imports of tyres and its Impact on the Industry

Cheaper imports of tyres, especially from China, South Korea, Japan,Thailand and Indonesia, which sell at very low prices, have been posing achallenge to the industry. India signing of the Bangkok agreement withASEAN countries, in October 2003, intensified the import threat, as thisagreement provided for preferential customs duty of 15 per cent for importsfrom China and South Korea, along with Sri Lanka and Bangladesh, as

against the standard rate of 20 per cent. This led to a gush of imported tyresfrom these countries. The landed price is approximately 25 per cent lower than that of the corresponding Indian Truck/LCV

tyres. Imports from China now constitute around 5 per cent of the marketshare. However the import of tyre decreased around 2% due to devaluationof Indian currency.

1.7.7 Increasing Radialisation in India

Rate of radialisation is actually an index of the status of road development,vehicle engineering and the economy in general. Radialisation can be aptlyclassified as the most important innovation in tyre technology. Despite itsseveral advantages (additional mileage; fuel saving; improved driving)radialisation in India earlier did not catch on at a pace that was expected.This could be attributed due to several factors, viz. Indian roads generallynot being suitable for ideal plying of radial tyres; (older) vehicles producedin India not having suitable geometry for fitment of radial tyres.

However, the situation has radically changed in recent years, especially for the passenger car tyre segment where radialisation has crossed 85 per cent

mark and is expected to reach 95 per cent in two years. In the Medium and


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Heavy Commercial vehicle segment current level of radialisation is up-to 2

per cent, and that in the LCV segment is estimated at 10 per cent. Goingforward, with the improvement in the quality of highways, radialisation isexpected to gather some momentum; levels of radialisation in MHCV is

predicted to be 10 per cent in five years time, while in LCV, around 20 per cent.

1.8 Road infrastructure

Sr

no.

NHDP Component Total

Length

Completed

4-lane

Under implementation

Length(km) No. of contract

1 GQ 5846 5629 (96%) 217 25

2 NS-EW 7300 1559 4762 148

3 Port connectivity 380 163 211 8

4 Other NHs 962 337 605 16

5 NHDP Phsase -3 12,109 274 1801 32

6 NHDP Phase - 4 6500 - 148 2

Total 33,097 7962 7944 231

1.8 Impact of budget on tyre industry

The Indian tyre industry was Rs.19, 000 crore market comprising 43companies with an operational capacity of 78 mn units by the end of FY’07. Despite capacities being concentrated in the hands of a fewlarge players with top 4 tyre companies accounting for over 74% of industry market share, the Indian tyre industry is intenselycompetitive and price sensitive with volumes becoming the keyearnings driver.

Demand for tyres is derived mainly from the replacement segmentwhich has been influencing the growth of the industry for long.However, with the rapid growth in automobile production, the OEM


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segment has seen robust growth in recent times. Truck & Bus tyre is

the dominant product category accounting for 59% in tonnage terms.Passenger car tyres with 9% share is one of the fastest growingsegment along with LCV and motorcycle tyres

As much as 96% of the raw material consumed by tyres is either natural rubber or petroleum products like nylon tyre cord fabric(NTC), styrene butadiene rubber (SBR) or poly butadiene rubber (PBR) etc. With their cost accounting for nearly 55% of the turnover and 70% of production cost, the price trends in key raw materialshave a major bearing on the profitability of tyre companies.

The period witnessed several price hikes across tyre categories

prompted by continuous rise in prices of natural rubber. On anaverage, increase in tyre prices has been about 10-15% in bothreplacement and OEM market during this period.

The cut in customs duty on tyres is likely to increase cheaper imports, especially from countries for which preferential tariff treatments are extended under regional trade agreements. Imports,however, form a negligible portion of the total market and wouldcontinue to remain so. Also cheaper imports are unlikely to moderatethe domestic tyre prices.

The cut in customs duty on key petroleum based raw materials likePBR, SBR, and CB etc is likely to help tyre companies contain their

costs to some extent. The cut in excise duty on caprolactam and its feedstock benzene is

likely to moderate the cost further as caprolactam is a key rawmaterial for NTC fabric which forms 22% of cost of manufacturingtyre. Continued economic expansion coupled with the investment inroad infrastructure is likely to have a favorable impact on thereplacement and OE demand for tyres in the long run.

Overall impact for the tyre industry is expected to be moderately positive.

Table: 2 Custom duty


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(Source: Financialtimes)

Table: 3 Impact on companies

(Source: Financialtimes)


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CHAPTER-2

MAJOR PLAYERS

Figure: 1 Market share Covered by Major Players

2.1. MRF

MRF is the market leader among tyre manufacturers in India, with a 22%share in terms of revenues. Its leadership position, coupled with its strong

brand recall and high quality, MRF commands the price-maker status. MRFhas a strong presence in the T&B segment, the largest segment of the tyreindustry, and commands around 19% market share in the segment. It is the

leader in the two/ three-wheeler segment (including motorcycles) and tractor front tyres, and holds second place in the passenger cars and tractor - rear tyres. Exports account for around 12% of the gross sales in MRF. TheCompany has a distribution network of 2,500 outlets within India andexports to over 65 countries worldwide.

2.2 Apollo Tyres (ATL)

Apollo Tyres is the second largest player in the Indian tyre industry, with amarket share of 21%, in terms of revenues, and the largest player in the

S.P.C.E./ MBA DEPARTMENT-Visnagar Batch 2007-2009

MARKET SHARE (%)

22%

21%18%

13%

26%MRF

APOLLO

J K TYRE

CEAT

OTHERS

15

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T&B segment, with around 21% market share and 83% of its product mix

coming from this segment. It also enjoys a strong brand recall. ATL derives80% of its revenues from the replacement market, where the EBITDAmargins are higher; hence, at operating levels, Apollo Tyres has better margins compared to those of its peers. ATL is a strong player in thedomestic market, with just 2% of sales coming from exports.

Apollo's recent foray into the relatively fast growing passenger radialmarket is probably the only major positive feature. However, thecompetitive pressure and a late entry into the segment would pressurize

profitability, at least in the near term. From an investment perspective,investors could look for opportunities to exit from Apollo and the tyre sector

per segment.

2.3. JK Industries

JK Tyre & Industries Ltd. is the flagship company under the umbrella of JK Organization. JK Industries has 18% market share, in terms of revenue,making it the third largest player in the industry. The Company ranks first inthe MHCV and Passenger Car tyre segments, with 79% and 7% of its

product mix coming from these segments, respectively. Exports account for

approximately 17% of its gross sales.

The advent of JK Organization on the industrial landscape of India almostsynchronizes with the beginning of an era of industrial awareness - anendeavor for self reliance and the setting up of a dynamic Indian industry.This was way back in the middle of the 19th century. And the rest thatfollowed is history.

Core Value

JK Organization has been a forerunner in the economic and social

advancement of India. It always aimed at creating job opportunities for amultitude of countrymen and to provide high quality products. It has strivento make India self reliant by pioneering the production of a number of industrial and consumer products, by adopting the latest technology as wellas developing its own know-how. It has also undertaken industrial venturesin several other countries.

JK Organisation is an association of industrial and commercial companiesand charitable trusts. Its member companies, employing nearly 50,000

persons are engaged in the manufacture of a variety of products and indiverse fields of commerce.


http://www.jkorg.in/




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Trusts are devoted to promoting industrial, technical and medical research,education, religious values and providing better living and recreationalfacilities. With the spirit of social consciousness uppermost in mind, J.K.Organisation is committed to the cause of human advancement.


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2.4 CEAT

CEAT has a 13% market share, in terms of revenues, and is an average player across categories. 68% of its product mix comes from the MHCVsegment. Its leading brands in the T&B segment are Lug XL, Mile XL andRib XL, Secura in two-wheelers and Formula-1 in passenger radials. Interms of profitability, CEAT has lower margins compared to its peers, inspite of deriving 60% of its revenues from the replacement market.

The oldest company of the RPG Enterprises, CEAT Tyres was establishedin 1958. Today, we are one of India’s leading tyre manufacturers, with anannual turnover of Rs 1,952 crores (US $434 million). Our solid brandequity has empowered us to establish a strong presence in both, domesticand international markets. Our tyres, tubes and flaps are renowned for their superior quality and durability, and are recognised as being ‘born tough’.

Possessing an enviable list of clients

Ceat enjoy long-standing business tie-ups with major OEMs includingTATA Motors, Ashok Leyland, Mahindra & Mahindra, Maruti, L&T,Eicher, Swaraj Mazda, Caterpillar, Bajaj Tempo, Piaggio, Hero Honda,

HMSI (wholly owned subsidiary of Honda Motors, Japan) and TVS Motors.

CEAT enjoys long-standing relationships with leading OEMs in the tyreindustry. Working closely with our partners' Research and Technologydepartments, we manufacture scientific, highly-durable, customized tyresfor all Indian vehicles including Trucks, Light Commercial Vehicles(LCVs), Passenger Cars (PCs), Utility Vehicles (UVs), Tractors, Truck Trailers and Two-wheelers.

By creating new business opportunities, reducing costs, getting to marketfaster and increasing customer satisfaction, their OEM partners haveempowered us to grow exponentially.

Table: 4 OEM partners include:

Category OEM Partner

Truck TATA Motors, Ashok Leyland, Eicher Motors

LCV TATA Motors, Eicher Motors, Swaraj Mazda,

Mahindra & Mahindra

Passenger Car Maruti Udyog, Bajaj Tempo, Piaggio, Mahindra &

Mahindra, Scooters India, Bajaj Auto


http://www.ceatyres.com/aboutus/rpgenterprises.htm

http://www.ceatyres.com/aboutus/rpgenterprises.htm

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Utility Vehicle TATA Motors, Maruti Udyog, Mahindra &

Mahindra

Farm Mahindra & Mahindra, Eicher Tractors, HMT,

TAFE

HCV JCB, L&T

Two-wheelers Bajaj Auto, TVS, Hero Honda, HMSI

OTR Caterpillar, JCB, TELCON, L&T, BEML

CHAPTER-3

TYRE MANUFACTURING PROCESS

Each tyre undergoes an extensive process beginning with raw materials andending with a final inspection.

3.1 Manufacturing Process:

• Mixing the materials

Various grades of natural and synthetic rubber are combined with carbon black, sulphur and chemical products in an internal mixer to meet specificcompound requirements. The resulting blend is called the "master batch",which is formed into rubber sheets, and cooled. Some rubber is used for additional processing while the majority is prepared for the extruding stage.

• Extruding the tread

Heat is applied to the rubber to make it more elastic and then it is putthrough extruders machines where the tread and sidewalls, which require

two different rubber compounds, are formed into the required shapes. Theextruders produce a continuous sheet of tread rubber, which is then cooledand cut to specific tyre lengths.

• Weaving the plies

Spinning cords such as rayon, nylon, steel and polyester undergo a processcalled “calendering”, where they are woven into sheets and coated withrubber on both sides.Once this is finished, the sheets are then cut at the proper angle into specific


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widths and lengths and eventually used for casing and cap plies, while steel

cords are used for the belts.

• Preparing the bead core

The bead core is formed by aligning, and then coating plated steel wireswith rubber. After, it is wound on a coil a certain number of times to form

bead rings, which provide a specific diameter and strength for a particular tyre.


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• Building process

The building process involves two stages.

Stage 1: Beginning with the woven sheets, the inner liner, body plies andsidewalls are placed on the building drum. The correctly-positioned beadsrings are then attached, which results in the automatic wrapping of the plyedges around the bead core, and the simultaneously movement of thesidewalls into position

Stage 2: The tyre is shaped by inflating the rubber and applying side treadrubber, two steel belts and a cap ply to achieve a "green" tyre.

• Vulcanisation

The “green” tyre is placed in a curing press for a certain period of time (10-15 minutes) at a specific pressure and temperature. Once heat and pressurehas been applied to the tyre, it is then removed from the mould havingachieved its final size, shape and tread pattern.

• Trimming

Excess rubber from the curing process is removed, and the tyre is trimmedto order.

• Final inspection

Each tyre is visually and electronically inspected for balance, quality anduniformity. This final check ensures consistent and reliable performance.


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3.2 Tyre Recycling:

There are some uses of waste tyres. Such as:

• operations for burning tyres as fuel are in the cement industry

• Rubber crumb is also mixed with bitumen and sprayed onto roads

• Waste tyre also used to stop flood spreading.

The ability to reuse scrap tires in polymer applications has been longdesired. Efforts have been underway over the past 30 years in many areas,including rubber modified asphalt, tire derived fuel, etc. Many of these

projects have met with various degree of success, and they have all been


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limited by the ultimate particle size of the scrap tire rubber particle. Recent

research efforts in several areas have shown how smaller particle size rubber particles have a very positive effect on physical properties. Additionally,new testing instruments focused on the areas between under rubber and

plastics have been introduced to the industry and now allow testing on thenew types of materials that are neither rubber nor plastics, but blends andalloys. The focus of these new test instruments is in the polymer viscosityarea, with the main measured parameters being torque, modulus, viscosityand tangent delta.

With the rising economies of the world, there are many products has beencreated and also many waste have been generated. Take for examples, scraptyres, the output of scrap tyres waste in almost every developing country isreaching over million tons per year and continue to be increasing at a doubledigit rate. According to research, the recovered rate of these scrap tyres areless than 50% which also means many of these scrap tyres will end up inillegal sites.

It’s developed a new recycle system to extracts fuel oils, steel wires andcarbon black from these scraps tyres. These are commercially valuablematerials that can resell back for high profits. The rate of recovery is 45%for fuel oil, 30% for carbon black and 10% for steel wires for each scrap

tyres. That means if there is million tons of waste can be recycle to milliontons of fuel oil, steels and also carbon black These are not only environmentfriendly to the world but also highly profitable solutions for today’srecycling of scrap tyres.

With the latest research and development, the extraction of oil and rawmaterials from tyre is going to be an upcoming trend in the recycle industry.

3.3 Types of Tyres:

• solid and

• Pneumatic or air filled.

• High pressure tyres.

• Balloon or conventional tyres

• Super cushion tyres

Solid Tyres

Solid tyres generally confined to specialist industrial applications have verylimited usage.


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Pneumatic Tyres

These tyres employ air as a cushioning medium confined in an inner tube. Theyare classified into three types according to pressure and volume.The pneumatic tyres are further classified as tube tyres and tub less tyres

a. Tube Tyres

These tyres have an inner tube and a tyre casing or an outer cover with a specialinner lining. The inner tube retains the air and inflates the tyre while the outer cover makes contact with the road and takes the wear and weight of the vehicle.Both the tube and the tyre casing are mounted on the wheel rim. The inflatedinner tube makes the tyre casing to resist any change of shape. The casing is madeup of layers of cord impregnated with rubber. The rubber side walls and trade areapplied over them. The layers of cord called plies are formed over a spacingdevice.

b. Tubeless tyres

These tyres are a recent addition as basic equipment to the most of the new passenger’s motor vehicles. These tyres do not require inner tube. They aremounted on the rim with the air retained between the rims and casing. Theamount of air pressure required for inflating the tyres depends upon the type of

tyre and operation. Passenger car tyres are inflated to about 1.54 to 2.1 kg/cm

2

while heavy duty tyres used on trucks and buses are inflated up to pressure of 7kg/cm2.

The tubeless tyres consist of outer cover with a special inner lining. The edge of cover is sealing against the wheel rim. These tyres are lighter and run cooler thanthe tubed tyres. In these tyres, valve is a separate unit and is fitted in a hole in thewheel rim. They are constructed in such a way that the air will be retained in thaneven after being penetrated if the object is left in position of penetration.If the cover is properly and correctly sealed to the rim they would provide goodair sealing qualities. A puncture sealing is provided by the soft inner liner cones.

Care should be taken while fitting or removing these types of tyre so that the beadis not damaged.

High Pressure Tyres

These are the tyres used in certain commercial vehicles and cars. They operate at[pressures ranging from 1.96 to 5.6 kg/cm2. these tyres having a square sectiontread provide a flat surface to the road. These help them to hold their cross-sectional shape even when the tyre is under load. These tyres can be used boathwith soft and hard springs without giving much deflection. In relation to thewheel rim, they have almost no side ways movements. High pressure tyres use


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pressure into 4.2 kg/cm2. They are heavier in construction. As compared to other

two tyres, they have more plies.

Balloon or Conventional Tyres

Balloon tyres are provided pressures ranging from 1.68 to 2.8 kg/cm2 and aregenerally used on most of the American cars as original equipment. These tyresare considerably larger in cross-section as compared to corresponding high

pressure tyres because it requires a grater volume of air in the tyre to carry thesame load or decreased pressures.

Super Cushion Tyres

Super cushion tyres generally operate at pressure ranging from 1.4 to 1.68kg/cm2. they are provided with passenger cars driving and extra soft ride as anoptional equipment. As compared to similar balloon tyres, the super cushion tyresare considerably larger in cross-section.

Normal Tyres

These tyres have more flexible walls allowing side ways movement of the tread inrelation to the wheel. They have square treads. These tyres operating at pressures

ranging from 1.54 to 1.96 kg/cm

2

have limited sideways movement.

Low Pressure Tyres

These tyres operating at pressures between 0.84 kg/cm2 and 1.54 kg/cm2 are theround section tyres. The tare pattern extends round the walls of the tyre without

providing a square edge. The tyre tread provides undersides loads. It takes up afresh path gently instead of slipping side ways or skidding as usually happenswith square section trades on breakaway. Al though these system is conflicting

with most of the concepts of tyre adhesion yet it work quite efficiently. Most of radial ply tyres are of these tyopes.

Radial Ply Tyres

These tyres have considerably varying construction and manufacturer recommendations regarding pressures. Incase radial ply tyres are fitted to thefront of a vehicle with cross ply tyres at the rear or there are mixed tyres on thesame axle, there always chances of loss of stability. But these combinations arenow not allowed by the law.


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3.4 Raw Materials

The tyre industry is raw material intensive, which accounts for more than60-70% of the production cost. Therefore, prices of raw materials directlyaffect the profitability of tyre companies. Since most of these raw materialsare petroleum based, their prices fluctuate with the international prices of

petroleum products. The main raw materials for tyre are rubber (natural or synthetic), carbon black, nylon tyre cord and rubber chemicals. Exceptnatural rubber, the costs of all other raw materials in tyre production arerelated to crude oil prices. Table 5 shows the proportion of each rawmaterial in terms of their value and weight.

Table 5: Raw materials using by weight

Raw material Weight

Natural Rubber 41%

Nylon Tyre CordFabric

18%

Carbon Black 10%

Rubber Chemicals 5%

Butyl Rubber 5%

PBR 6%

SBR 5%

Others 10%

(Source: ATMA)

Figure: 2 weight of raw material


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Weight of Raw material

41%

18%

10%

5%

5%

6%

5%

10%Natural Rubber

Nylon Tyre Cord Fabric

Carbon Black

Rubber Chemicals

Butyl Rubber

PBR

SBR

Others

3.4.1 Natural Rubber

Natural rubber accounts for 50% of the cost of the tyre. In India mixture of both natural as well as synthetic rubber is used for making tyres. However the consumption ratio is towards higher usage of natural rubber due toIndian climatic conditions, over loading of vehicles and poor road condition.In India the consumption of natural to synthetic rubber is 80:20 which is instark contrast to international ratio. The industry uses RSS – 4 grade rubber.

India’s 90% of the rubber production comes from Kerala. Domestic rubber

production has increased at a average rate of 24.12% .Avg. consumption is20 %.Average import is 20 %

Table: 6 Production, consumption & import of Natural Rubber

(InTonnes )

Year Production Tyre sector

Consumption Non tyre sector

consumptionTotal

ConsumptionImport

2004-05 749660 406220 349170 755390 68700

2005-06 802625 442921 358189 801110 85285

2006-07 852895 462081 358224 820311 89699

2007-08 825345 495577 365878 861455 86394

2008-09(Est.)

875000 521000 378000 899000 80000

Total 3405525 2327799 1809461 4137260 370078

(Source: Atma)


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3.4.2 Synthetic Rubber

Synthetic rubber is generally of two types – poly-butadiene rubber (PBR)which forms 40% of the synthetic rubber used in tyres. The other variety isStyrene Butadiene Rubber (SBR) primarily used in passenger car radials togive the grip to the tyres. At present, IPCL is the only domestic producer of PBR. However it’s able to meet only 44% of the tyre industry’srequirement. Thus India is a significant importer of synthetic rubber. Thereis an urgent need to increase production capacity of SBR to supplementnatural rubber.

3.4.3 Carbon Black

Carbon black is a key raw material used in the manufacture of automotivetyres. More than 70 per cent of the demand for carbon black is from thetyres segment. Carbon black feed stock (CBFS) is the key raw material usedto manufacture carbon black. Roughly 2.2 tonnes of CBFS is required to

produce one tonne of carbon black. Its main use is as a reinforcing agent in

tyres.

Though there are more than twenty types of CB, the ones used for tyre production are mainly of three types, N220, N330 and N660. N660 ismainly used in the carcass of the tyres, N330 is used for the tread and N220is used for the tread of heavy-duty tyres. On an average, about 45% of theCB consumed by the tyre industry is of the N660 variety, 28% of N220 and27% of N330 variety.

Truck tyres consume 20 kgs of CB per tyre, while smaller tyres like Maruticonsume 1.5 kgs. Overall approximately 60 – 65% of the CB produced in

India is consumed by the tyre industry. Indian market is dominated by thetop three players in the industry -- Philips Carbon Black, Hitech Carbon(unit of Indian Rayon) and Cabot India

3.4.4 Nylon Tyre Cord

This is mainly a reinforcing material and lends strength and tenacity to thetyre. It is placed below the tyre tread, in contact with the road. Almost 90%of nylon cord manufactured in India is consumed by the industry. The tyrecord fluctuates in consonance with the prices of caprolactum its main input.


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3.4.5 Rubber industry in post GATT era

With the lifting of physical barriers on imports of all commodities by April2001, as also phasing out of various subsidies for exports, the rubber industry is in for a very rough tide. With the slowdown in economycompounding the problem, the automobile majors are in for a major shake-out.

Table 7: Consumption Patterns of Major Raw Materials (2007-08)

(In

tones)

RawMaterials

TotalCons.

TyreSector Cons.

NonTyre

Sector Cons.

TotalImport

TyreSector

Imports

Non TyreSector

Imports

Natural

Rubber

861455 57% 43% 86394 95% 5%

SBR 110965 67% 33% 97150 77% 23%

PBR 88205 86% 14% 28180 80% 20%

CarbonBlack

435000 63% 37% 20000 100% -

NylonTyre Cord

104000 100% - 50000 100% -

Rubber Chemicals

42000 52% 48% 3000 100% -

Steel TyreCord

15000 100% - 10000 100% -

ButylRubber

35000 59% 41% 59260 59% 41%

(Source:ATMA)


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CHAPTER-4

P

PRODUCTION, DEMAND & IMPORT SCENARIO

PP444.1 Production:

Table: 8 Category wise productions

(In lakh nos.)

Tyres for 2007-08

percentage2008-09

percentage

Truck &Bus

65.57 17 67.93 16

Passenger Car

80.06 20 88.36 21

LightCommercialVehicle

25.17 6 27.86 7

Tractor 19.89 5 21.89 5

Scooter /Moped

55.65 14 50.95 12

Motor 134.11 34 153.49 36


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Cycle

Others12.88 4 13.1 3

Total

393.34 100 423.58 100

(Source:ATMA)

Figure: 3 Category wise Production (2007-08)

Catagory wise production ( 2007-08)

17%

20%

6%5%14%

4%

34%

Truck & Bus Passenger Car LCV

Tractor Scooter / Moped Motor Cycle

Others

Figure: 4 Category wise Production (2008-09 Est.)


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Catagory wise Production (2008-09)

16%

21%

5%12%

36%

3%

Truck & Bus Passenger Car

Light Commercial Vehicle Tractor Scooter / Moped Motor Cycle

Others

In 2007-08 Out of total production major portion covered by Motor cycle,Passenger car and Truck and bus by 34%, 20% and 17% respectively.

4.2 Demand:

4.2.1 Demand cycle:


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Source: way to wealth

4.2.2 Demand by market:

Demand for tyres can be categorized under three segments:

• OEM

• Replacement

• Export

Table: 9 Segment wise sales

(Source:ATMA)

Figure: 5 Segment wise sales


Category Production

(Nos.)2007-08

Segment wise sales (in %)

(as % of Total Production)Replacement

Market

OEMs Export

Truck/Bus 13136592 61% 20 % 19%

Passenger Car 17904812 45% 49 % 6%

LCV 55319922 43% 27 % 30%

Tractor 3048002 50% 47% 3%

Scooter /Moped

11603930 48% 48 % 4%

Motor Cycle 27920746 52% 47 % 1%

Total sales 128934004 50% 40% 10%

33

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Replacement OEMs Export

50%40%

10%0

0.2

0.4

0.6

P e r c e n t a

Segment

Segment wise sales

The replacement market constituted 50% of tyre sales (by volume),followed by OEMs at 40%. Exports constituted 10%. According to the

products, the maximum tyre sales in the Replacement market 0f Truck &Bus at 61%, in OEM segment scooter at 48% and in Export segment LCV at30%.

A. Growing OEM demand

Traditionally, the replacement market has been the main growth driver for

the tyre industry, as also the major segment that consumes tyres; however,with the recent escalation in auto sales, OEM demand too, has been on asubstantial increase, thus enlarging its share in the sales pie. Auto sales have

been growing at a CAGR of 15.8% during 2002-07, which has driven thegrowth in the tyre industry, keeping the OEM demand buoyant. Goingforward, the automobile industry is estimated to grow at double digits. This,in turn, is expected to keep demand, for tyres from OEMs, buoyant.Looking at the global rail-to-road cargo scenario, in Europe, roadways havean 84% share, while in India, currently, the ratio is 35:65, which was 62:38,two decades ago. There would be a further shift in freight movement, fromrailroad to roadways. This would lead to an increase in demand for

automobiles and hence, the OEM demand for tyres.

B. Replacement Market

Replacement market to see sustainable growth The Replacement Market isone of the more sought-after markets by Tyre players, since the margins are

better, compared to those of OEMs (who are relatively few in number andhave a huge bargaining power). Replacement demand, which comes fromexisting automobiles, has been increasing for sometime now and is expectedto do the same, going forward. Replacement of tyres varies across


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categories, due to different life-spans of tyres, which depends on reasons

like

i. Road conditions

ii. Load carried

iii. Distance traveled

iv. Re-treading

The typical life of truck tyres is 40,000-45,000 kms or, on a general basis,around 12 to 18 months. The replacement cycle is relatively longer for two-wheelers and cars, ranging anywhere between 24 to 48 months. However,the demand for radial tyres in cars has further augmented the replacementcycle.

Here, it becomes important to talk about Re-treading, which is a phenomenon of repairing the outer surface of the tyre in order to increase itslife. The cost of retreading a tyre is around 50% of the cost of a new tyre. Are-treaded tyre lasts for around 60% of the life of a new tyre. Though thequality of tyre deteriorates on retreading, since it is highly economical, it ishighly resorted to, especially in the passenger car segment. In the LCV/HCV (truck) segment, re-treading depends on the type of operator. For instance, for a single truck operator that operates over shorter distances,

mainly on inter-city and intra-state routes, re-treading is high. However, theorganised or large-fleet operators prefer to replace the tyres after an averageusage of 40,000-45,000 kms. These operators do not risk using old or re-treaded tyres on long-distance trips because breakdowns costs are immense.

The substantial growth that the auto and tyre industries have seen in the lastfew years is bound to keep the replacement demand high, in the years tocome. Similarly, the current growth in the auto industry and mounting OEMdemand would keep replacement demand further buoyant, going ahead.

The replacement market, including State transport undertakings and

Government buying, accounted for around 50% of the total tyre demand inFY 2008. The demand in the replacement market depends on the vehicle

population, the level of economic activity, life of the products transported,kilometreage per vehicle, the price of the tyres and the quality of theexisting road infrastructure. Additionally, the replacement market, whichoffers better margins, is extremely competitive. The replacement market isdominated by the truck and buses segment, which accounted for 20% of alltyre sales in the replacement market in FY 2008.The large size of thereplacement in turn is determined by the interplay of various factors asdiscussed below:


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The replacement demand may be lower because of longer

replacement intervals and lower business mileage if theeconomic activity slows down.

Replacement demand in India is higher because of a low vehiclescrappage rate.

Poor road conditions by lowering the life of tyres have a positiveimpact on replacement demand.

Stricter enforcement of the MV Act, which seeks to prevent

overloading of vehicles, will result in an increase in the life of tyres and thus impact replacement demand negatively.

Applying a new tread or "re-treading" can extend the life of thetyre at a significantly lower cost, thereby lowering replacementdemand. In India, re-treading finds greater acceptance in thecommercial segment.

Radialisation of tyres is likely to result in lower replacementdemand. While car radialisation in the country has reached alevel of 65%, truck and bus radialisation stands at just 2-10%.

Poor road and support infrastructure as well as traditional vehicledesigns act as a barrier to radialisation in the commercial vehiclesegment. Radial technology for trucks and buses would helpincrease operating efficiencies by delivering better mileage andminimizing wear and tear. According to ATMA, even if only25% of the truck and bus segment is radialised, the savings infuel costs would be around Rs. 7,500 million.

Introduction of tubeless tyres in the passenger car segment isalso likely to affect replacement demand adversely.

Introduction of eco-friendly radial tyres such as hyper-bondingsilica technology in the passenger car segment may affectreplacement demand adversely.

C. Exports

Table: 10 Export Value & growth

YEAR VALUE (IN PERCENTAGE


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CRORES) CHANGE(GROWTH)

2001-02 1100 -

2002-03 1250 14

2003-04 1460 17

2004-05 1834 26

2005-06 2383 29

2006-07 2850 20

2007-08 3000 5

(Source: ATMA)

Figure: 6 Export value and growth

Export value and Growth

0

5001000

15002000

25003000

3500

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

year

V a l u e ( i n c r o r

0

510

1520

2530

35

G r o w t h ( i n

value (in crores) %change(growth)

Government providing various export incentives and with good demandoverseas, we expect exports to add to the growth of the tyre companies. In

2006-07, exports growth rate is 20% and for 2007-08 is a growth rate is5%.Tyre exports are increasing but at decreasing rate. With tyres beingexport to over 65 countries worldwide. Tyre exports grew at a CAGR of 18.5 %, over FY2002 to FY2008.

Table: 11 Category wise Export

(in

nos.)


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Category 2007-08

Percentage

2008-09

percentage

Truck & Bus 1280939 41 1061929 35

Passenger Car 540745 17 530372 17

LCV 803280 26 924642 30

Tractor 47221 2 44604 1

Motor Cycle 164105 5 193466 6

Scooter 226506 7 250815 8

Other 34697 2 36135 3

Total3097493 100 3041963 100

(Source: ATMA)

Figure:7 Category wise Export (2007-08)

Catagory wise Export (2007-08)

41%

17%

26%

2%

5%7% 2%

Truck & Bus

Passenger Car

Light Commercial

Vehicle

Tractor

Motor Cycle

Scooter

Other


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Figure: 8 Category wise Export (2008-09)

Category wise Export (2008-09)

35%

17%

30%

1%

6%

8%3%

Truck & Bus

Passenger Car

LCV

Tractor

Motor Cycle

Scooter

Other

Tyre exports for the financial year 2008-09 is at 30, 41,963 units as against30, 97,493 units. Truck and bus tyre exports decreased by 6 % ascompared to 2007-08. Export of passenger car remains at 17%,Export of LCV increased to 30%.Export of motor car & scooter increases only by 1%

while export of tractor decreases by 1%.Tyre export is consistently, withtyres being exported to over 65 countries worldwide.

4.2.3 Demand Determinants:

Relative Importance of Road Transport

With the share of railways in carrying freight coming down over the pastfew years, this has led to higher demand for road transport. Thus, increasedusage of commercial vehicles should translate into more demand for tyres.Also, the poor road conditions in most parts of the country and overloading

of vehicles would require superior quality tyres.

Retreading

Retreading a tyre costs around 20% of the price of a new tyre. It is more prevalent in truck and bus segments due to their high prices. A tyre can beretreated at least 3 times. According to some estimates, retreading hasreduced demand in the replacement market by around 10%. As technologyfor retreading improves, it could act be a dampener to growth inreplacement market.


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Radialisation' in India - Current Status & Future Trends

63% of passenger car tyres produced in India were radials and the industryis further expecting radialisation in this segment to over 70% in the comingtwo years. While in the commercial vehicles segment they are expecting 13-15% radialisation by that time.

"Rate of radialisation is actually an index of the status of road development,vehicle engineering and the economy in general". Not with standing the

problem areas, constraints and limitations, the tyre companies have kept pace with the technological improvements that radialisation signifies andoffer state-of-the-art product (tyres), comparable to the best in the world.

Radialisation can be aptly classified as the most importantinnovation in tyre technology. Despite its several advantages(additional mileage; fuel saving; improved driving) radialisationin India earlier did not catch on at a pace that was expected,since its introduction way back in 1978. This could be attributeddue to several factors, viz. Indian roads generally not beingsuitable for ideal plying of radial tyres; (older) vehicles producedin India not having suitable geometry for fitment of radial tyres(and hence the general, and wrong, perception that radial tyresare not required for Indian vehicle; unwillingness of consumer to

pay higher price for radial tyres etc. However, the situation has radically changed in recent years,

especially for the passenger car tyre segment where radialisationhas crossed 95% mark and is expected to reach 100% in two tothree years. In the Medium and Heavy Commercial vehiclesegment current level of radialisation is up to 3% and that in theLCV segment is estimated at 12%.

A few years back a beginning was made in Radialisation of truck and bus and LCV tyres and this process is gaining momentum.

Future of Radialisation

The future of radialisation will be governed by the following factors:• Cost - Benefit Ratio

• Road Development - happening

• Overload Control - happening

• Retreading Infrastructure.

4.2.4 Demand Supply Gap


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The demand for tyres is in the domestic market and in the export market. Asfar as domestic demand is concerned, the OEM and the replacementsegments are likely to witness strong growth given the current performanceof the automotive sector. Given the strong linkages of tyre industry withautomotives, its demand is likely to be strong over the short to mediumterm. As for the export demand for tyres, the outlook is positive, eventhough some downsides remain.

As regards supply of tyres, currently, the major players are in the process of expanding their capacities, in anticipation of uptrend in sales. For instance,Apollo Tyres has set up a joint venture with Michelin for manufacture andsale of bus and truck radials. JK is expanding its Mysore truck and busradial facility along with eyeing acquisitions of smaller units. Ceat hasincreased its offtake by 3 times from Pirelli. However, a characteristic of theIndian tyre industry is that most of the tyre manufacturers in the past hadincreased capacities in anticipation of a surge in demand, but when it did notmaterialise, they reduced their addition to capacities.

4.3 Import :

Table: 12 Import value & Growth

Year Value ( in'ooo)%change(Growth)

2002-03 80 -

2003-04 88 10

2004-05 221 151

2005-06 506 129

2006-07 873 732007-08 1162 33

Figure: 9 Import value & Growth


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CHAPTER-5

Import value & growth

0

200

400

600

800

1000

1200

1400

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

year

V a l u e ( i n c r o

0

20

40

60

80

100

120

140

160

G r o w t

Value ( in'ooo)

%change (Growth)

In 2004-05, there is sharp increase in imports but after increases atdiminishing rate. In 2007-08 import growth is at 33% as compared togrowth at 151%in 2004-05.This is because of devaluation of Indiancurrency.

COST STRUCTURES AND DISTRIBUTION

SCENARIO

5.1 Raw material cost

Raw material costs account for almost 70% of the tyre industry’s incomes.Labour cost is another significant overhead. The Tyre industry has a narrow

product range, huge operating overheads and high break-even levels. Rawmaterial costs for the last three years have been raising constantly,especially those of rubber and crude oil-linked raw materials. The steep risein raw material prices has impacted profit margins of all players. Consistentrise in major raw materials costs (those of natural rubber, nylon tyre cord,carbon black, synthetic rubber), with limited pricing flexibility, has resultedin pressure on margins of tyre companies, despite a good topline growth.


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Consequently, while the revenues showed a healthy growth, profitability

remained depressed. In fact, some of the major tyre companies are operatingat break-even situations

Table: 13 Raw material Cost in a Tyre construction

(Source: ATMA)

Figure: 10 Raw material cost

Raw material cost

52%

23%

8%

15% 2% Rubber

Carbon Black

Nylon tyre cord

Chemicals

Others


Raw materials Cost (%)

Rubber

52

Carbon Black

23

Nylon tyre cord8

Chemicals

15

Others

2

Total

100

43

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5.1.1 Rubber Prices

Table: 14 Rubber Prices

year Domestic International

2003-04 5040 5278

2004-05 5300 5455

2005-06 6699 7200

2006-07 9204 9779

2007-08 11000 10000

(Source: ATMA)

Figure: 11 Rubber Price (Domestic Vs International)

Domestic & international Rubber prices

0

2000

4000

6000

8000

1000012000

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

year

R u b b e r p r i c Domestic Rubber

price

InternationalRubber

price

In 2007-08, production and imports of rubber grew decrease whileconsumption increased. And that’s why the average domestic price of rubber increased by 19.5%, while the international prices soared by 2.21%in the same period. Domestic rubber prices have been witnessing an upwardtrend from 2003-04 onwards. The annual average price increased to Rs5,040 per quintal during 2003-04 compared to Rs 3,919 per quintal during2002-03 due to an increase in the growth of the tyre industry. The annualaverage price for 2005-06 was even higher at Rs 6,699 per quintal becauseof increased economic activity, including increased automobile sector activity. The annual average price for 2006-07 soared to Rs 9,204 per


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quintal. This phenomenal increase has been due to the robust growth of the

tyre sector, which consumed about 55 per cent of the total rubber production. The spot price is Rs 11000per quintal. In the international rubber market, the Bangkok market price of RSS-3grade rubber is considered equivalent to Indian RSS-4 grade. From thefollowing chart, we can observe an upward trend for rubber prices for the

period under consideration. Beginning from a low of Rs 3,343 per quintalfrom 2001-02, the prices have increased to Rs 9,779 per quintal (average) in2006-07. During 2003-04, prices went up to Rs 5,278 per quintal because of large supply-demand imbalance, leading to stock depletion, while year 2005-06 was marked with a civil unrest in some Thai provinces and heavyrain in rubber producing areas, which pushed up prices. In 2006- 07, pricessoared to Rs 9,779 per quintal (average) due to unseasonable heavy rainover the main rubber producing regions of South East Asia and increaseddemand from China and Japan.

5.1.2 Other Raw Materials

The prices of other raw materials like carbon black, styrene butadienerubber (SBR) and poly butadiene rubber (PBR) are closely linked to global

crude oil prices. The average domestic price of carbon black increased by 9%, nylon price increased by 11.6%, the average prices of both SBR andPBR increased by 17% and 46%, respectively, prices of rubber chemicaland bead wire increased by 16% & 30% respectively during 2007-08.

5.1.3 Hike in Raw material cost

The rising raw material prices have been the key concern for the tyreindustry, especially due to the lack of pricing flexibility. Since the tyreindustry is highly competitive and price sensitive, players have been veryconservative about increasing the prices. However, after the constant rise inraw material costs, almost every player has, stepped up their product prices.In 2005-06, the average tyre prices have been hiked thrice and thecumulative increase in truck & bus tyres is 4.6%, in car nylon is 1.2% and incar radial tyres is 5.1%, over the same period last year. The price hikes in2007-08 have resulted in a cumulative price hike of 20% across allcategories, by almost all players, with MRF an exception, which did notincreased prices in July06. Combined with the price hikes, if the current

price-levels of raw materials persist, it would result in better profitability for tyre companies. There also exists a possibility of tyre companies rolling

back the price hikes, since the prices of rubber and oil-related raw materials


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have come down. However, it is very difficult to predict rubber and other

raw material prices.

5.2 Distribution Scenario

The distribution system consists of distributors, followed by large dealersand also small/sub dealers. Some tyre companies also follow a system of appointing C&F agents, in place of distributors.

5.2.1 Replacement market:

Tyre companies sell tyres through widespread dealer distribution network (over 5000 in the country), either through exclusive dealer of the companiesor through multi-company dealers.

5.2.2 OEM: Direct supply by tyre companies through negotiations.

5.2.3 STU: Direct supply by tyre companies through tender system.

5.2.4 Government: Direct supply by tyre companies through tender system. Through dealers in the exporting countries.


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CHAPTER-6

GLOBAL SCENARIO

6.1 Current Global Scenario

The world tyre industry is worth around US$70bn. The industry is marked by a presence of around half a dozen major players who together occupy

70% of the world market share. The table below indicates the individualmarket share of the major players.

The worldwide tyre industry is likely to witness more restructuring effortsafter the deal between Goodyear and Sumitomo of Japan. Analysts arespeculating that there will be only six to seven major players across theglobe.

Table 15: Current Global Scenario

Companies Market share (%)

Michelin19.4

Bridgestone19.4

Goodyear 16.6

Continental7.1

Sumitomo

4.9Pirelli

3.9

Yokohama

3.5

Kumho1.7

Others23.5


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Figure 12: Market share of global companies

market share of global companies

19%

19%

17%7%

5%

4%

4%2%

23% Michelin

Bridgestone

Goodyear

Continental

Sumitomo

PirelliYokohama

Kumho

Others

The 'big three' of the industry i.e. Michelin, Bridgestone and Goodyear (before its alliance with Sumitomo) each had annual sales of US$12bn.inevitably; the alliance has increased the competitive pressure on second-tier majors, notably Continental of Germany, Pirelli of Italy and Yokohama of Japan. They would also have to go on the acquisition route in order to

survive. The structural developments are taking place against a backgroundof continuing overcapacity in the industry, estimated at around 30% andslow growth in Latin America and the Asia-Pacific region in the wake of their financial crises.

Table: 16 Segment wise Worldwide Sales of Tyres

Mn nos.Cars % of

totalTruck % of

totalTotal % of total

OEM217.7 31.10 50.6 20.3 268 28.3

Replacement482.4 68.90 198.2 79.7 681 71.7

Total700.1 100.00 248.8 100.0 949 100.0

Figure: 13 Segment wise Worldwide Sales of Tyres


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segmentwise world wide sales of tyre

OEM

28%

Replacement

72%

One striking feature, which comes out prominently from the above table, isthat major part of world sales of car and truck tyres is to the replacementmarket. The replacement market is self-perpetuating and has inbuilt growthdespite short-term setbacks from time to time. As the worldwide automotivesales is rising by a marginal 2% per annum, sales to the replacementsegment will continue to dominate.

However, some recent trends in new vehicle manufacturing will go to helpthe OEM segment. Today, tyres are being purpose-developed for each newmodel with technicians working alongside car suspension engineers.Secondly, new markets like India and China offer the world major tyre

producers a large market to exploit.

In its latest industry analysis, the Economic Intelligence Unit (EIU)forecasts that sheer muscle in terms of marketing and technical developmentwill enable the three biggest players to continue to take an ever-larger shareof the global market, reaching 70% by 2009 from little more than 50% fromnow.

6.2 India Vs Global:

The global tyre market currently is estimated at USD 70 billion while theIndian market is around Rs. 100 million. The global market is dominated byGoodyear-Sumitomo with a share of 22%. On the other hand, the domesticindustry is dominated by MRF Ltd. Several mergers and acquisitions havecharacterized the global market, in the recent past. This is essentially toacquire technology, gain wider access to markets and be competitive. Indian

players are also reengineering their businesses and looking at strategic tie-ups in this segment.


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CHAPTER-7

In terms of technology, radial tyre usage has been catching up at a quick

pace in the global market. Almost all the automobile segments have shiftedto radial tyres and the usage of cross ply is restricted to trucks and busesonly. On the other hand, in the domestic market, the radial tyres are beingused only in the passenger car segment while the rest of them still stick tothe cross ply variety. This is because of the lower price of cross ply and itsretreadability. In addition, the poor quality of roads in Indiarestricts the use of such tyres.


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OVERALL ECONOMIC ANALYSIS:

Table: 17 Indian Economy Statistics & Indicators:

SR.NO. ECONOMICINDICATOR

2006 2007 2008

1. GDP GrowthRate

9% 7.4% 8.7 %

2. Labor wages $496.4

million

$509.3

million

$516.4 million

3. Export 4,65,748 cr. 5,79,128 cr. 6,37,190 cr.

4. Import 6,95,412 cr. 8,65,484 cr. 9,99,286 cr.

5. Inflation Rate 8% 9.21% 8 %

6. Investments 28.1%(GF) 29.2%(GF) 31.8%(GF)

7. Current a/c -43,737 cr. -45,343 cr. -70,357 cr.

8. Exchange Rate Rs. 44.101 Rs. 45.33 Rs. 50.23

(Source: RBI)

ANALYSIS:-

1. While analyzing trends in the global economy it has been observed thatserious challenges confront the WTO as far as implementation of theDoha Round of World Trade Talks are concerned. The Trade Talks aimsto allow greater accessibility to world markets to goods produced in the

Third World Countries.2. The foreign exchange rate of India amounted Rs.50.23 in Nov. 2008.3. India’s GDP growth rate was 7.4% in 2007 while it is 8.7% in 2008.4. Exports is 6, 37,190 Cr. In 2008, while Import figures stood at 9, 99,286

Cr.5. Investment is 31.8% in 2008.6. The inflation rate in dec.-2008 is 8%.7. The GDP rate in aug-2008 is 8.7%


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.

As to the World Bank data, the world constitutes a total surface area of 133940.9 thousand square kilometers in the year 2006. The estimated

population over the world has reached at 6,525,170,264 according to July2007 estimation with an annual percentage growth rate of 1.14. It has a lifeexpectancy rate of 64.77 years as to July 2007 estimation. The birth rate anddeath rate per 1000 is calculated at 20.05 and 8.67 respectively in the sameyear. The infant mortality rate per 1,000 life births for July 2006 is 48.87.

The output over the world increased by 4.4% in the year 2006. The largestcontributors of the world output were India, China and Russia. The GrossWorld Product (in purchasing power parity) as to the 2006 estimated datahas reached at $ 60.71 trillions with a real growth rate of 4.7%. The services sector contributes a largest share to the world GDP. As to the2006 estimated data, the services sector accounted for 64% followed byindustries at 32% and Agriculture 4%. The Gross Domestic Product in the country like India is experiencing afaster rate of growth in the recent years. With regards to the composition of GDP, the percentage shares of various sectors have largely changed. The

percentage share of the agriculture in the total GDP has declined, on thecontrary the percentage share of services in the GDP is rising faster..


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CHAPTER-8

ANALYSIS

8.1 4 p’s analysis:

Product

Based on the technology, the automotive tyres can be broadly classified intotraditional cross-ply tyres and technically superior radial tyres. The usage of the radial tyres is picking up steadily, especially in the passenger car segment. Radial constitute about 50% of the total market for passenger car tyres. However the usage of radials is negligible in other segments.

Though the host of the radial facilities has been set up in the recent past,

India is still a major producer of cross-ply tyre has India’s forte. Globallythe cross-ply tyre is a fading concept characterized by relatively low valeaddition. Radial tyre production involves a highly technology intensive

process as a result the price of a radial tyre is about 30% more than cross- ply.

Realizing growing importance and reference for radial tyres, domesticmajors are gearing up to exploit the opportunities. Almost all companiessuch as CEAT, Goodyear, MRF and JK Industry has set up facilities for radial tyres. Apollo which had hitherto confined itself to the trunk and bussegment, has turned its attention to the radial market.

Price

The tyres are available in different price according to it’s size and quality of the tyre. The price of the tyre is mostly depending on the price of the rawmaterial used. In the tyre Industry significant portion of the buyers areorganized, so prices are more competitive in the Industry. It is very difficultto charge premium price for the product as there is no significant differencein the quality of product.


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The two wheelers and three wheelers are available in the price range of

1000 to 2500 rupees, small car and big car tyres are available in the pricerange of 2500 to 5000 and the trucks, tractor and LCVs, a type available inthe price a range of 10,000 to 40,000.

Place

Most of the companies have their own exclusive dealers in the country for the distribution of their products. Some of them also have replacementcentre for the replacement facility to the customers. The distributionnetwork is very with the kind of buyers’ viz. OEM, Replacement and ExportMarket. The typical distribution network in the industry is as follows.

Original

Company C & F Agent Equipment

Manufacturer

Dealers ReplacementCompany Exclusive, Buyers

Show rooms

Promotion

The Indian tyre Industry is become more competitive than before in such acompetitive market sales promotion plays very important role for remain

present and enhance sale the various tools of sales promotion are used bydifferent players in the market viz. exclusive show room for attractcustomer, offering discount, offers services like computerized wheelaligning, balancing and tyre fitting, besides selling plain vanilla tyres and

providing physical ambiences.

Most important perhaps, though exclusive showrooms, tyre companies candirectly influence purchase in fever of the labels they make.

High-voltage advertising that a few tyre companies do, word of mouthcounts for a lot and is usually a very important purchase influencer. Littlewonder that it makes sense to directly influence your customers buying


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habits by creating an ambience where he feels happy about buying the

product.

Exclusive ambience is required, given the technologically upgraded carsavailable today.

8.3 Five Force Analysis:

Michael Porter's Five Forces Model


Threat of

New Entrants

Bargaining power

of Suppliers

Bargaining power

of buyers

Threat of

New Substitutes

Industry Competitors

Intensity of rivairy

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Bargaining power of suppliers

In the tyre industry the Bargaining power of suppliers is high because thedemand for most raw materials, especially rubber, is high. While the supply


The demand of most raw materialespecially rubber is high, while

supply is restricted

Threat of Substitutes-

Low

No direct substitutes

Here we consider retread tyre as

a substitute for new tyre

Rivalry among

competitors-

High

Top 4 players enjoyingover 74% of total market

share

Buyer Power- High

High competition pressure due tohigh bargaining power of OEMs andwide brand choice in the replacementmarket.

Barriers to New

Entrant-High

Capital- intensiveDistribution Network Low operating Margin

Branding

Supplier Power-High

57

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is restricted. So, it will result into the rise in the price. And it will be resulted

in high supplier power.

Bargaining power of buyers

This can be segregated into two parts as follows.

OEM's

The OEMs are always in strong position when the bargaining power of buyers is concerned. The reason behind this is most of them are havingcontract with their relative tyre manufacturer under which the prices of tyre

remains stable for this OEM irrespective of market price. The benefits aregiven to them as they are buying in bulk and the relation gives the tyre firmssome thing called brand association.

Replacement The scene in replacement segment is quite reverse as the bargaining power for the replacement segment is moderate due to the fact that the buyers arenot that strong as compared to OEMs. The demand in buses and truck segment is always high because of Indian poor road conditions apart fromthis the purchase is made in small units.So it is obviously that bargaining power of buyer is high.

Threat of substitute

It is moderate as the industry is facing opposition from retreading sector allover the globe. This cheaper option, around 20-25% of the original tyre cost,is present in developed countries and this is heading towards strong positionin India too.

Threat of new entrants

The threat of new entrant is moderate or can be described as low becausethe industry is highly capital intensive and the level of technologicalexpertise required is also highly specific. But if we see from domestic(Indian) industry's point of view, this better can be defined as high. Thereason being, global tyre industry is already seeing mergers and acquisitionsin order to restructure. And as of now India and China going to be the hubof activities as far as tyre industry is concerned due to low production costas well as other relevant benefits. So for any of the global big shot Indiancompany will be a good option to go for.

Industry rivalry


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High, because gradually the overseas players are expanding their wings over Indian tyre industry and also a limited and every player is moving towardsautomated technology, like ERP and SCM.

Apart from the aforementioned reason, the industry is seeing highcompetitive scenario at present because of various reasons like rising inputcosts, low realizations from growing OEM segment where the vehiclemanufacturers are not ready to share the burden of tyre firms, the portion of replacement pie continuously taken away by the retreading sector which isslowly but firmly rising its head and that to in high realization segment of Bus-Truck tyres and last but not the least the unorganized sector is alwaysthere to give head ache to these established players like CEAT, JK, Apolloand MRF etc.

8.4 PEST Analysis:

Description

• The PEST analysis is a framework that strategy consultants

use to scan the external macro-environment in which a firmoperates. PEST is an acronym for the following factors:

PEST factors play an important role in the value creation opportunities of astrategy. However they are usually outside the control of the corporation


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and must normally be considered as either threats or opportunities. In the

table below you find examples of each of these factors.

Political (inclLegal)

Economic Social Technological

Environmental

regulations and

protection

Economic

growth

Income distribution Government

research

spending

Tax policies Interest rates& monetary

policies

Demo Figureics,Population growth rates,

Age distribution

Industry focuson

technological

effort

International

trade

regulations and

restrictions

Government

spending

Labor / social mobility New

inventions

and

development

Contract

enforcementlaw Consumer

protection

Unemployment

policy

Lifestyle changes Rate of

technologytransfer

Employment

laws

Taxation Work/career and leisure

attitudes/Entrepreneurial

spirit

Life cycle and

speed of

technological

obsolescence

Government

organization /

attitude

Exchange rates Education Energy use

and costs

Completing a PEST Analysis is relatively simple, and can be done viaworkshops using brainstorming techniques. Usage of PEST analysis canvary from: company and strategic planning, marketing planning, businessand product development, and research reports.

Political Factors


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A. Trade Policy

• All categories of tyres can be exported freely

• All categories of new tyres can be imported freely except Truck /

Bus (Radial Tyres), which is in the Restricted List from 24th Nov.

2008 onwards.• No WTO Bound Rates for Tyres & Tubes

• All raw materials required for the manufacture of tyres can be

imported freely (OGL) except Carbon Black, which is in theRestricted List from 24th Nov. 2008 onwards

B. Tariff – Duties

Item - Tyres-Basic Import Duty Normal rate of basic custom duty(MFN) -10%

• Under the Asia Pacific Trade Agreement (formerly Bangkok

Agreement)-8.60%

• Under the Indo Sri Lanka Agreement-Nil

• Under the SAARC Agreement-5% ( only Truck/Bus tyres)

• Under the India Singapore Agreement-5%

C. Budget Impact on Tyre Industry

Budget Proposals

Excise duty on tyres and its raw materials to remain at 16% Reduction in excise duty on Caprolactam (raw material for NTC)

from 16% to12%. Excise duty on Benzene used in manufacture of Caprolactam also reduced from 16% to 12%.

A special purpose fund for re-plantation and rejuvenation of rubber to be launched.

As many changes were made in the 2007-08 Budget there are very fewrecommendations this time. In the budget 2007-08 customs duty on tyreswas reduced from 15 per cent to 12.50 per cent where as there was no


Government PolicyTyre Industry Delicenced 1987

Export (of tyres and tubes) Freely allowed

Import (of new tyres and tubes) Freely allowed Since 2001

Import Policy for Used / Retreaded tyres: Restricted Since April, 2006

61

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reduction in customs on natural rubber smoked sheets and technically

specified natural rubber and duty on these continues to be 20 per cent. Thisis an anomalous situation and needs to be corrected in such a way thatindigenous rubber grower’s interest is not adversely affected. As a result theindustry has asked for the following.

• Reduce custom duty from 20 per cent to 10 on natural rubber smoke

sheets and technically specified natural rubber, subject to tariff ratequota allocation in a financial year.

• In case of polyester tyre cord and butyl rubber, customs duty should

be 2.5 per cent less than the applicable on tyres and tubes.

As far as the possibility of above thing happening is very low, the reductionin the custom duty will definitely help the tyre companies to improve themargins as it would reduce the cost of SBR, PBR and NTC.

The Union Budget 2008 offers a mixed bag to the domestic tyre industry.Despite lobbying, the Budget continued extending protection to thedomestic natural rubber growers and belied tyre manufacturers' hope of areduction in import duty on its prime raw material from the existing 20 per cent. However, reduction in customs duty on synthetic rubber, rubber chemicals and other inputs will offer some breather to the industry.

This coupled with the reduction in duty on imported tyres from 12.5 per cent to 10 per cent is expected to keep a check on tyre prices in India. Since,tyre constitutes a substantial part of the cost of road transportation, theBudget may, therefore, keep a check on freight cost too.

"The reduction in duties in other raw materials will offer tyre manufacturersand opportunity to part offset the impact of rising cost of natural rubber.


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Economical Factors

The industry is expected to grow at an average rate of 7% per annum duringEleventh Five-Year Plan period.

Volatility in Raw Material Cost with Exchange rate:

Table: 18 Natural rubbers cost Vs Avg. exchange rate

Year Nat. rubber cost avg. ex. Rate

Q1-07 100 44

Q2- 07 109 41Q3-07 96 40

Q4-07 106 39

Q1-08 104 40

Q2-08 100 42

Q3-08 105 44

Figure: 14 Natural rubber cost Vs Avg. exchange rate

natural rubber cost vs avg. ex. rate

100109

96106 104 100

105

44 41 40 39 40 42 44

0

20

40

60

80

100

120

Q1-07 Q2- 07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08

year

p r i c

nat. rubber cost avg. ex. Rate

Table 19: Tyre cord fabric cost Vs Avg. exchange rate

Year TCF cost Avg. ex. Rate

Q1-07 100 44

Q2- 07 100 41

Q3-07 101 40


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Q4-07 100 39

Q1-08 95 40Q2-08 91 42

Q3-08 90 44

Figure 15: Tyre cord fabric cost Vs Avg. exchange rate

tyre cord fab. vs avg ex. rate

100 100 101 100 95 91 90

44 41 40 39 40 42 44

0

20

40

60

80

100

120

Q1-07 Q2- 07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08

year

p r i c

TCF cost avg. ex. Rate

Table 20: Carbon Black cost Vs Avg. exchange rate

Year carbon black cost avg. ex. Rate

Q1-07 100 44

Q2- 07 107 41

Q3-07 119 40

Q4-07 107 39

Q1-08 100 40

Q2-08 98 42Q3-08 101 44

Figure 16: Carbon Black cost Vs Avg. exchange rate


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carbon black cost vs avg ex. rate

100107

119107

100 98 101

44 41 40 39 40 42 44

0

20

40

60

80

100

120

140

Q1-07 Q2- 07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08

year

p r i c e

carbon black cost avg. ex . Rate

Table 21: Overall raw material cost Vs Avg. exchange rate

Year overall raw

material cost avg. ex. Rate

Q1-07 100 44

Q2- 07 105 41

Q3-07 102 40

Q4-07 103 39

Q1-08 100 40

Q2-08 99 42

Q3-08 100 44

(Source: Way2wealth) Figure 17: Overall raw material cost Vs Avg. exchange rate


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overall r/m cost vs avg. ex. rate

100105 102 103 100 99 100

44 41 40 39 40 42 44

0

20

40

60

80

100

120

Q1-07 Q2- 07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08

year

p r i c e

overall r/m cost avg. ex. Rate

Trade Policy:

• All the category of tyre can be exported freely.

• All the category of new tyre can be imported freely. No WTO bound

rates for tyre & tubes.

• Second hand /used tyre can also imported freely (certain condition)

Dumping

Dumping means to sell the same product in another country at the fewer prices then that countries price. So basically to break market by selling atcheap price. The domestic’s tyre industries fear dumping of tyre in Indian

by mid-size foreign tyre companies following the government s decision toallow tyre imports. The industry is more worried about import of used andsecond- hand tyre into the country than the new tyres. The second handtyres could be offered to Indian customer at throw –away prices sincedisposing of used tyre is a major problem in developed countries. Thus thesehow the Indian tyre industry is getting affected by dumping.

The recommendation for imposing provisional anti-dumping duty on importof cross-ply tyres from China and Thailand seems to have brought thedomestic manufacturers to a stand-off with its dealer network and sectionsof user industry as well.

All India Tyre Dealers Federation (AITDF), which had objected to ATMA'santi-dumping plea before the designated authority, however, believes that


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imports are here to stay and is going to have a long term impact on trade and

services for two reasons: First, new players are bringing in new trade practices like paving way for higher rate of return to the dealer network.

Second, apart from the low-end products, imports are increasing at a faster clip in the high-end category as well.

Import-Export and Tyre Industry

Relief on reduction on import duty by 3.5% on input like buty rubber, nylontyre cord, rubber chemicals, steel tyre cord and synthetic rubber will help.

Big tyre manufactures will be happy, as there are ancillary industries in thissector.

Social Factors

Human Resource Development

Employment is always a major factor when measuring the significance of any economic activity. The automotive industry, on account of its backwardand forward linkages, is a significant generator of employment - both directand indirect. While direct employment is by way of workers engaged in the

production of Tyre, indirect employment is generated in feeder and supplier industries to the tyre industry, such as the growers of Natural Rubber,dealer, retreaders, service and maintenance provider and employment in rawmaterial sector etc. Thus steps are needed to ensure that demand – supplygap, both quantitative and qualitative, in terms of human resources, does notarise.

Vision Statement: Based on the above scenario, the Vision Statement for India’s automotive sector will be as follows:

“To emerge as the destination of choice in Asia for the design andmanufactureof automobiles and automotive components. The output of India’sautomotiveSector will be USD 145 billion, contributing to more than 10% of India’sGrossDomestic Product and providing employment to 25 million personsadditionally

by 2016”.


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Manufacturing process of Tyre include the burning of rubber, so obliviously

it spread lots of air pollution in the environment and it may be dangerous for the heath concern.


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Technological Factors

Increased cash and technology requirements in the domestic automobiletyres industry, given the strain on sales and working capital requirements asa fallout of the low growth and excess capacity in the industry.

The industry was facing increasing technology requirement in terms of quality, consistency and longevity necessitating additional investments inmodernization, larger working capital requirements were also expected onaccount of the stiff demand conditions prevailing in the industry, it added.

The rating agency believes that increasing technology needs of the industry,especially with respect to radial tyres, is likely to emerge as a key area infuture.

Technology Ladder

A. Tyre with Cotton (reinforcement) Carcass:

In the starting phase of proper Bias or Cross ply tyre, cotton plies were usedas main reinforcing material (end of 19th and early 20th Century). Cottonreinforcing material had inherent problems of low strength and high

moisture regainer. Leading to large number of plies to get the requisitecasing strength for the tyre weight of the tyre and poor heat dissipation.This, in turn, gave an adverse impact on Tyre weight and buck rendering

poor performance.

B. Tyre with Rayon (reinforcement) Carcass:

With the development of viscose and rayon the strength of reinforcingmaterial went up and found application in tyres in early 20th Century. Dueto higher strength of rayon it was possible to reduce number of plies andweight of the tyre. Since less number of plies was needed to match cotton

strength, concept of ply rating developed. It was also possible to have higher ply ratings now.

C. Tyre with Nylon (reinforcement) Carcass:

Persuent to development and introduction of Polymide (Nylon) the strengthand flexing behavior of reinforcing materials improved substantiallyresulting in further reduction of number of plies, consequently the weight of the tyres. This development substantially improved the heat and impactresistance of the carcass leading to better tyre performance and higher


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durability. Nylon casing gave a boost to retread ability. Thus effective cost

of the tyre in operation became much more economical.Development of Tyre Technology due to change in Reinforcing material is

basically in the case of Cross Ply or Bias Tyres. Bias tyre has cotton, Rayonor Nylon Cords, bound as plies and each ply (i.e. Cords) cross each other ata definite angle anchoring at the bead.

D. Radial (Construction) Tyre - Textile/Textile belt

(Rayon/Nylon/Polyester):

In spite of continuous development in Bias Tyre Technology, inherent problem of high heat development and poor life remains a continuouschallenge.In early 1950s new concept of Tyre design was developed namely"RADIAL" wherein plies were made highly flexible by keeping the cords at90 and in order to improve tyre life, inextensible (stiff) belts were placed onthe top of the Carcass under the tread. This led to stiffer tread portion,leading to higher tread life (Mileage) and much more comfortable ride dueto flexible carcass. This was the beginning of 'Revolution' in tyretechnology.Initially Radial tyres were introduced with Casing Plies as well as beltmaterial of textiles.

Continuous development in Radial Concept led to furtherimprovements as explained below.

E. Radial (Construction) Tyre - Textile/Steel belts:

Once Steel Tyre cord got developed it found its immediate application inBelt material, keeping casing plies of Textile, to further improve durability.

F. Radial (Construction) Tyre - Textile/Glass Fiber Belt:

Similarly, development of glass fiber which is practically inextensible, ledto application in passenger and Light Commercial Vehicle tyres with Textile

Casing, providing corrosion free radial Tyre belt material.

G. Low Aspect Ratio (Cross Ply or Bias) Tyre:

A new concept of low aspect ratio (ratio between section height and sectionwidth) of the tyre in cross ply construction was introduced for higher speedand better performance.

H. Tubeless Tyre (Cross Ply):


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Concept of tubeless tyre in cross ply construction wherein an inner liner

compound based on chlorobutyl or Halo Butyl which is impermeable togases, was introduced eliminating the usage of tubes. This concept could notfind sustained application in India due to bad roads and poor handling/maintenance of Rims other than in OTR range. However, Tubelesstyres are produced for Export Market.Gradually this concept will become fully acceptable with the advent of newgeneration vehicles and improved service facilities.

I. Radial (Construction) Tyre - Textile/Aramid Belt:

Due to poor roads and inadequate vehicle maintenance, Steel belts hadcorrosion problem due to cuts and chips in the tread. This led to trials withAramid belt (Textile material with very high strength and Lowextensibility).

J. Radial (Construction) Tyre - All Steel:

In developed countries, Radial Truck/Bus tyres use steel wires in casing aswell as in Belts to achieve the optimum advantage of radial construction. InIndia also this construction was tried since late 1970s by Indian Companies

using tyres of collaborators. This could not succeed.Indian companies started experimentally since late 1980s (themselves or with collaborators) which continues and the product has found gradual entryinto low load application.

K. Tubeless Tyre - Radial Construction:

As in the case of Bias Tyres, the concept of tubeless tyre was extended toradial construction and introduced in later half of the century in Developedcountries. A tubeless tyre not only has tube eliminated but provides for smoother ride and vehicle handling. This is slowly entering into the Indian

market with the advent of new generation vehicles.

L. Low Aspect Ratio - Radial (Construction) Tyres:

The concept of low aspect ratio tyre, after gaining the experience from cross ply construction, was introduced in Radial construction also. The presenttrend of tyre development for high speed tyre is being pursued in thisdirection. Tyres with aspect ratio up to 0.65 are being manufactured todayenabling Indian Industry to adopt high speed rating e.g. 190 kmph, 210kmph etc.


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M. High Performance Passenger Car Radial Tyre:

High Performance Passenger Car radial tyres not only have very low aspectratio (0.65 - 0.35) but also have substantial changes in construction. Verylow aspect ratio enables use of large diameter wheels which, in turn, allows

better stability at high speeds. The tyre contour is based on the cross sectionof a fully loaded tyre and this reduces the energy losses within the tyre andreduced dynamic fatigue. High performance Passenger tyres are made withspeed rating up to ZR indicating speed capability in excess of 240 kmph. InIndia, this concept has not yet been found popular though customers aredemanding tyres up to 220 kmph (V Rating).

N. Run Flat (Puncture Proof) Tyre - New Concept:

A new concept of run flat tyre (puncture proof) was introduced byContinental in early 1980s wherein the basic construction of the rim and

bead was changed by which on loosing air the tyre tread sits on the rim thusenabling one to drive at a reasonable speed for a long distance till the flattyre could be attended to.This revolutionizes the OE need for a new vehicle as the Stepney tyre canalso be dispensed off. However, there is very slow progress of this concept.

This has not been tried in India so far.

O. Fuel economy/low rolling resistance tyre - special compound:

Tremendous work is being carried out towards the development of tyreswith modified special compounds, besides tyre construction aspect, toreduce rolling resistance thus gaining in fuel consumption. However, theultimate advantage is obtained by Radial Construction which is graduallyfinding its well deserved place in Indian Industry.

P. Green Tyre (Environment Friendly):

This is the latest development in Passenger Radial tyres. These tyres have arolling resistance appreciably lower than normal tyres. These tyres havehigh proportion of non petroleum based material used in their constructionand are called environment friendly or 'green tyres'.This concept is well perceived and will gradually find its application worldover, including India.


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8.2 OT Analysis:

Opportunities

o Growing Economy - --Growing Automobile Industry ----Increasing

OEM demand ----Subsequent rise in replacement demand.

A. Growing Automobile Industry

Since the first car rolled out on the streets of Mumbai (then Bombay) in1898, the Automobile Industry of India has come a long way. During itsearly stages the auto industry was overlooked by the then Government andthe policies were also not favorable. The liberalization policy and varioustax relieves by the Govt. of India in recent years has made remarkable


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impacts on Indian Automobile Industry. Indian auto industry, which is

currently growing at the pace of around 18 % per annum, has become a hotdestination for global auto players like Volvo,General Motors & Ford.

A well developed transportation system plays a key role in the developmentof an economy, and India is no exception to it. With the growth of transportation system the Automotive Industry of India is also growing atrapid speed, occupying an important

place on the 'canvas' of Indian economy.

B. Growing OEM demand

Traditionally, the replacement market has been the main growth driver for the tyre industry, as also the major segment that consumes tyres; however,with the recent escalation in auto sales, OEM demand too, has been on asubstantial increase, thus enlarging its share in the sales pie. Auto sales have

been growing at a CAGR of 15.8% during 2002-06, which has driven thegrowth in the tyre industry, keeping the OEM demand buoyant. Goingforward, the automobile industry is estimated to grow at double digits. This,in turn, is expected to keep demand, for tyres from OEMs, buoyant.Looking at the global rail-to-road cargo scenario, in Europe, roadways have

an 84% share, while in India, currently, the ratio is 35:65, which was 62:38,two decades ago. Also, with growth in roadways and with projects likeGolden Quadrilateral and NSEW getting implemented, there would be afurther shift in freight movement, from railroad to roadways. This wouldlead to an increase in demand for automobiles and hence, the OEM demandfor tyres.

o With continued emphasis being placed by the Central Government

on development of infrastructure, particularly roads, agriculturaland manufacturing sectors, the Indian economy and the automobilesector/ tyre industry are poised for an impressive growth. Creation of

road infrastructure has given, and would increasingly give, atremendous fillip to road transportation, in the coming years. TheTyre industry would play an important role in this changing roadtransportation dynamics

o Access to global sources for raw materials at competitive prices,

due to economies of scale

o Steady increase in radial Tyres for MHCV, LCV


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Threats

o Continuous increase in prices of natural rubber, which accounts

for nearly one third of total raw material costs so it become a bigthreats again industry.

o Cheaper imports of Tyres, especially from China, selling at very

low prices, have been posing a challenge. The landed price isapproximately 25% lower than that of the corresponding IndianTruck/ LCV tyres. Imports from China now constitute around 5% of market share

o With crude prices scaling upwards, added pressure on raw material

prices is expectedo Ban on Overloading

Industry estimates say that nearly 15% of Commercial Vehicles areoverloaded to the extent of 100-150%, which results in a higher wear and tear of tyres. The recent Supreme Court order, to curb theoverloading of trucks, is expected to affect the demand for MHCVtyres, in both, the replacement and OEM markets. On account of the

ban on overloading, the life of a tyre would increase and also, tyresthat are not overloaded would further enable re-treading, before

being replaced. Hence, the replacement demand may come down.However, the curb on overloading is expected to lead to additionaltruck sales, as also the demand for multi-axle vehicles would rise.This would lead to higher OEM demand. So, in the short term, banon overloading could be a dampener, but in the long run, it isdefinitely a positive move. The ban would also provide a fillip toradialisation.

o Cyclical nature of automobile industry.

o Threat from imports

The increase in import of cheap Chinese tyres last quarter hasresulted in the fall of tyre prices by over 25 per cent in themarket. Tyres majors, including MRF and Metro, may opposethe entry of Chinese tyres, but the world’s top tyre makers — Michelin and Bridgestone — have announced to import top-end radial tyres for trucks and buses to supply across the country.

The recent easing in import norms for tyres is another bother for local tyre producers. There is hardly any major duty


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differential between the import of tyres and tyre-inputs.

Moreover, tyre imports from a few Asian countries enjoy afurther concession of 5 per cent under the Bangkok agreement.

As a result, local tyre producers face the threat of cheaper imports. Fortunately for them, the threat is confined broadly tothe radial tyre segment. Considering that India is a major maker and exporters of bias tyres, local producers do not facethe import threat in this segment.

However, it would be a bit premature to take a firm view onthe extent of import threat. Local producers have beenworking, and have also managed, to match internationalcompanies in terms of product quality. This, coupled with asharp depreciation in the value of the rupee, has stemmed theflow of imports.

However, from the long-term perspective, the flow of cheaper imports is a major threat to the domestic industry. Top globalmajors, such as Goodyear, Bridgestone and Michelin, havehuge capacities spread across the globe. With import norms

being progressively relaxed, these companies may find itlucrative to have a presence in India.

Such a trend is already evident in the cases of Michelin andBridgestone. Bridgestone has set up a unit in India and isconcentrating on the radial tyre segment. It has also decided tomarket imported tyres from its overseas parent. Industrysources also point out that Michelin has started marketing its

product in India, albeit in a very low-key fashion.


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Key Success Factors:• Technology upgradation

In Tyre Industry technology upgradation is absolutely critical issue. Inthe era of modernization and globalization, there are difficult to find a

place or exist into the business without innovations or upgradation of

technology. So, many companies are come by the certain technologyinnovations and newer things. In Tyre Industry now a day we findconcepts of Tube-less Tyres, Environmental Friendly Green Field Tyre,and Anti puncture Tyres and So on. We can put this technologyupgradation as a major Key Success Factors in the Tyre Industry.

• Radial Tyres

Industry likely to focus on the manufacturing of high performanceRadial Tyres. Radial Tyre provides long life in compare of the other

basic tyres. And there are threat from the China and South Korea who

are providing the Radial Tyres with the high amount of efficiency withthe low prices. Some companies are now realizing the importance of thistechnology and they are start working in this area. If the companies aresuccessful in production of Radial Tyre with high efficiency and low

price then it will be drives the growth rate of Tyre Industry at newlevels. So, Radial Tyre will be a one of the major Key Success Factor for the Industry.

• Introduction of new Concepts


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CHAPTER-9

Another major Key Success Factor for the Tyre Industry will be a

degree of introduction of new concepts by the players. The pace of theintroducing newer concepts will certainly helps to the Tyre Industry.

New concepts like Puncture proof tyres, Low Rolling resistance tyres,Environmental Friendly Green Field Tyres and so on.

• Growth Of Automobile Industry

Main source of demands in Tyre Industry depends on the AutomobileIndustry. So, Automobile Industry plays very crucial role as a KeySuccess Factors in Tyre Industry. In India there are constant and steadygrowth seems in the Automobile Industry. So we can put this factor as aKey Success Factor in Tyre Industry.

• Government Policy

Government policy also works as a Key Success Factors in TyreIndustry. It means to say that how much government is aggressivetowards the infrastructure developments and the other policies and rulestowards the Industry. This factor leads the whole industry in particular directions.

FUTURE OF TYRE INDUSTRY

9.1 Impact of recession

Due to global recession Indian tyre industry also affected with this.Indian tyre industry faces recession period in present time. And major decline in sells of all types of vehicles for last 1 year. So, selling of tyresalso affected with this.

Global recession impact via auto industry

Global recession has devastated the global auto industry with pinchingeffects on the Indian auto industry. India is a strong and growing economy

but the hit of recession has put red marks on the entire balance sheet of theIndian economy.


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Among the leading car manufacturers, General Motors and Ford were the

first one to file for bankruptcy. GM is struggling to stay alive and claimsthat the company has just enough cash to continue its operations. Even themerger talks of GM and Chrysler have been officially brought to a halt

because of the liquidity crunch.

U.S sales have fallen down by 32% which has directly affected the Indian car industry where GM has recorded a fall of 45%, Ford of 30% andChrysler down by 35%. All the three major car manufacturers have reporteddeclined growth after the hit of recession.

After the industry experienced a heavy fall in the month of August due toinflation, September proved to be a promising month with things setting outat the right place. Then again the market went in the negative terrain swayed

by the wind of recession.

October usually is considered to be the best month for car sales because of the festive season. Unfortunately, this year it proved to be a curse for theIndian auto industry. At one end of the spectrum, car manufacturers likeTata Motors, GM, Hyundai, Ford, Renault, Mahindra, and Maruti Suzuki are investing huge amounts to establish new production plants and line uplaunch of car models. At the other end of the spectrum, SIAM has cut down

the growth forecast of automotive sales from 12.5% to 9.5%.

This initiative taken by SIAM further forced few car manufacturers likeTata Motors and Maruti Suzuki to cut down their production which further took away the job of almost 300 workers. Even Mahindra-Renault reducedthe number of production units of their Logan.

In addition, the severe liquidity crunch in the U.S market has also forcedmany of the car buyers to cut upgrades to bigger cars and many are pushed

back from buying new cars. With deteriorating car sales, even production hasgone down to a great extent, which has eventually put a negative impact on

the auto component industry.In October, overall car sales declined to about 9.05% over October 2007 andthe car production fell down to about 12.32%. Further to that even themonth of November was not successful in bringing some charm to theindustry. In fact, November recorded the steepest fall in car sales in the pastfive years.

Maruti Suzuki recorded a fall of 27%, Mahindra & Mahindra recorded a fallof about 40%, and Tata Motors showed 12% decline in the car sales.


http://www.carazoo.com/article/1911200802


http://blog.carazoo.com/2008/11/maruti-cuts-production.html



http://blog.carazoo.com/2008/11/maruti-cuts-production.html

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It is also said that the recent Mumbai terror attack and the cyclonic rain in

South India have added to the woes of Indian car manufacturers.

9.2 Future Scenario:

The tyre industry in India has already embarked on a process of consolidation, and this is no different from what has basically happened inthe rest of the world already. India is no more an isolated economy, and thecontinued economic liberalization, and relaxation of import duties and laws,makes competition from overseas inevitable. In fact, tyres are already being

imported into India.

Nevertheless, while the Indian tyre industry does lack scale, the tyrecompanies themselves have proven to be very competitive. What isespecially encouraging is the vigor with which the Indian tyre companiesare proactively changing to face global competition in the changedeconomic and industrial environment. Product improvements and costreduction programs, along with a focus on the future - radials - augurs wellfor the industry. Also, we believe the unique road conditions, and consumer

behavior in India, provides a window of opportunity, for a few years atleast, before the mainstay of the Indian tyre industry-bias truck and bus tyres

- will be threatened by the shift towards radials. We are confident that thecontinuing innovative efforts of our partners in the Indian tyre industry will

produce the necessary results that allow them to continue to performcredibly in the future as well.

9.3 Crisis in the industry:

India, as a whole, is clearly going through trying times, while GDP growthcontinues to slow the growth rate from a peak of 7.5% has decelerated to alittle less than 5%. What is of more concern to us is the fact that the growthin industrial production had dropped drastically from a peak of around 11%

per annum to a little over 4%. The lack of investment, and project fruition,especially in the infrastructure sector, is now clearly adversely affecting theIndian industry. The general slow down in exports and increasedcompetition from imports, and the overall picture is a sea change from thehigh levels of optimism of three - four years ago.

So the tyre industry growth has also slowed down. Some manufacturershave even stopped production altogether. The fact that some of our major customers had reduced production this year due to inventory build-up, andlabor unrest, also has not helped.


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The SBM is coping with the crisis effectively. To tide over the crisis, it has

expanded its business interests outside the tyre and rubber industry. Itsupplies a healthy range of products to the plastics, optical fiber and power cables, synthetic fibers, pharmaceuticals and security industries as well.This has effectively mitigated the risks of being dependent on just oneindustry - especially a cyclical one - such as tyre and rubber.

The continued political instability, Far Eastern economic crisis, and possibleglobal recession are complex variables. We do hope, however, that by early2000, the economy should start improving.


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CONCLUSION

The industry is definitely set to grow, with an estimated volume growth of 12-14% in 2008-09. Both, OEM and Replacement demand would drivegrowth, with exports also adding-in. The growing economy and theinfrastructure sectors provide the much-needed stimulus. However, tyrecompanies face immense competition, together with price and cost

pressures. Pricing pressure, from OEMs because of their high bargaining power and in the replacement market due to huge competition, is asubstantial dampener.

Companies are now giving emphasis to innovation in product and processtechnology and to operational efficiencies. However, the continuously risingtrend witnessed in the prices of raw materials remains an area of concern.Though the rubber Price is continuously rising. But Domestic price is higher than international price. Tyre companies would definitely showimprovement in the margins, sequentially, and profitability would improve.

But then, it is highly dependent on the prices of major raw materials likeRubber, Carbon Black, NTC Fabric, SBR and PBR, which are highlyvolatile. However, with surging automobile sales, if demand for tyresincreases without the supply catching up with it, then, prices of tyres arelikely to increase.

This may provide some benefit to the tyre companies. If we view thefinancial performance of various tyre-manufacturing companies, most of them are operating at thin margins and any substantial increase in costswould hurt the business adversely .Hence, we do not find tyre stocksattractive, from an investment perspective. At current levels, all tyre stocks

look fairly valued. One can invest at lower levels, keeping in mind the viewon rubber prices. When rubber prices fell from their highs, , giving goodreturns to the investors.

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