Industry Profile

The Tyre Industry Millennia ago the primitive man discovered the rudimentary wheel; it was probably just a circular disc with space for spoke. Man eventually developed this to a rough stone circle. Man thus created in the tyre highly sophisticated instruments designed to take us to our desired destination, smooth and safety. Without the tyre we cant imagine our everyday life. The journey become pleasurable and tension free with the help of vehicle that runs using tyres. The new technology is capable of producing tyres that withstand the adverse conditions of environment such as heavy rain, glowing sun or whirls of wind. Robbery Thomson, a Scottish Engineer in 1845, invented the tyre. At that time most vehicles had wooden wheels and steel tyres. Thomsons tyres gave a smoother ride but were not enough. These tyres were used in cars and bicycles. Tyre Industry in India The origin of the Indian Tyre Industry dates back to 1926 when Dunlop Rubber Limited set up the first tyre company in West Bengal. MRF followed suit in 1946. Since then, the Indian tyre industry has grown rapidly. Transportation industry and tyre industry go hand in hand as the two are interdependent. Transportation industry has experienced 10% growth rate year after year with an absolute level of 870 billion ton freight. With an extensive road network of 3.2 million km, road accounts for over 85% of all freight movement in India. The demand and growth for the industry depends upon primary as well as secondary factors. The primary being the overall GDP growth, agriculture, industrial production and growth in vehicle demand. Secondary factors are the infrastructure development, prevailing interest rate, financing options etc.

3|Page

Growth of Tyre Industry in India The Indian tyre industry dates back to 1930 when multinationals like Firestone, Goodyear and Dunlop entered the market. MRF, premier and Ceat at various locations in the country carried out the domestic production of the tyres. The growth of the Indian tyre industry can be divided into 3 phases. In the first phase, the multinational tyre companies like Firestone, Goodyear, and Dunlop etc came to India and started selling tyres. In the second phase the multinational started their domestic production. The first generation tyres of Indian are made by the multinationals in India. The third phase began when the Indian companies started their productions which are called second generation tyres. Important among are MRF tyres, Premier, Goodyear, Ceat etc. They started their production in the sixties. In the seventies the third generation tyres were introduced. This includes APOLLO TYRES, JK tyres, Modityres, Vikrant etc. All tyres companies which started production after the 70s and the tyre companies which are yet to production are classified as fourth generation tyres. Notable among them are Radio tyres, S.K Kumartyres and Sri Chakra tyres. All the major players have fostered ties with the global companies concentrate on exclusive retaining in the market, brand positioning discount schemes and thereby dealers and customer satisfaction. At the present there are about 43 tyre companies in India. Altogether 53 factories are producing different type of tyres. Over 85% of total production us accounted by 12 companies. Tyre Industry is the 11th highest contributor of excise duty to the Indian Government. Market Profile The tyre industry is mainly dominated by the organized sector, the unorganized sector holds sway in bicycle tyres. The major players in the organized tyre segment consist of MRF, Apollo Tyres, Ceat and JK Industries, which account for 63 per cent of the organized tyre-market. The other key players include Modi Rubber, Kesoram Industries and Goodyear India, with 11 percent and 6 percent share respectively. Dunlop, Falcon, Tyre Corporation of India Limited (TCIL), TVS- Srichakra, Metro Tyres and Balkrishna Tyres are some of the other players in the industry. Apollo tyres and MRF are, the largest tyre manufacturer in the country, these companies have strong brand equity. While these company rules supreme in the industry,
4|Page

other players have created niche markets of their own. Market for tyres can be broadly classified into two categories: Original equipment manufacturer Replacement market

The major segments are trucks, bus and car tyres. Value share of truck and bus segment is about 73%. Replacement market forms largest segment about 58%. OEM is about 22% and export market for about 5%.

Outlook Globally, the OEM segment constitutes only 30 per cent of the tyre market, exports 10 per cent and the balance from the replacement market. In India, the scenario is quite different. Nearly 85 per cent of the total tyre demand in the country is for replacement. This anomaly has placed the retreaders in a better position than the tyre manufacturers. Retreading is looming over the tyre industry as a colossal threat. The Coimbatore based ElgiTyres and Tread Ltd., the largest retreader in India, is giving the tyre barons sleepless nights. Simply put, rethreading is replacing the worm-out tread of the old tyre with a new one. The popularity of retreading stems from the fact that it costs only 20 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 to economic costs, they overlook the reality that retreading reduces the quality of the tyre. It is highly popular in the South unlike in the North where the transporters overload their trucks and have to play their vehicles in rough terrain an environment in which buying a new tyre is the best option. Though retreading has penetrated 25 per cent of the tyre market, it has not made much of a dent in the rapidly growing two-wheeler and passenger car segments. The industry already bogged by over capacity, is facing a severe threat of dumping of cheap tyres by South Korea. Under the Bangkok agreement, signed between India and South Korea on 1976, import of tyres from the latter into India would attract a concessional duty of 33 per cent as against the normal tariff of 40 per cent.

Two years ago, the industry estimated the growth in the passenger car radial demand at 20 per cent per annum. However, the auto recession has hit them badly. But South Korea made a killing
5|Page

by dumping cheap car radial and walked away with 11 per cent of the tyre market. Another threat to the industry is the price of its raw materials, most of which are petroleum byproducts. Carbon, synthetic rubber and nylon tyre cord are offshoots of petro-chemicals. Thus, the future of the industry will swing the supply of crude oil. The biggest threat, however, is yet to fully materialize. It will be from global majors like Bridgestone and Michelin, which control 36 per cent of the global tyre market. These players have set up their bases in south-east Asian and the slump of the markets in this region, coupled with the vast growth potential of the Indian market, is beckoning them towards India. Bridgestone has tied up with ACC for a 100 per cent radial tyre unit and Michelin is also marketing its products through retail outlets. The industry is driven more by volumes than by margins and each of the big five in the global tyre industry. Continental, Michelin, Goodyear, Pirelli and Bridgestone generate an annual tyre production equivalent to the total demand of the Indian market. These MNCs have deep pockets and can easily withstand losses for 2-3 years. Their financial muscles also permit them to invest in R&D, which is beyond the reach of the average Indian tyre manufacturer.

Major Players CEAT Being the second largest selling brand in India with a market share of14.6 per cent, CEAT caters primarily to the replacement market. Due to the strong growth in the OEM sector, the share of the replacement market in the total revenue of the company has fallen. However, the production growth in the automobile sector over the past few years should provide a boost to the replacement market in the coming years and CEAT could be a major beneficiary thereof. With the advent of multinationals like Goodyear, Michelin, Bridgestone and Continental, a major shakeout in the industry is imminent and the same could result in CEAT, which is already operating on thin margins, being hived off as a joint venture with Goodyear, in collaboration with which CEAT has already promoted South Asia Tyre for manufacturing radial tyres in India. With a modest track record on the financial front, the forthcoming results may not be encouraging.

APOLLO TYRES LTD. (ATL) A slow-down in the tyre market and rubber procurement at high prices has put the brakes on Apollo Tyres Limited (ATL). The company has traditionally been the market leader in the truck
6|Page

and bus tyres segments. ATL caters to the replacement segments of the domestic market. Following its takeover of Premier Tyres, ATLs market share has risen. Besides the core truck and bus tyre business, fairly considerable part of its turnover comes from automotive tubes and flaps, for which it has commissioned a plant in Pune. Despite a reversal in the fortune of the automobile industry, the chief user base of the companys products, the demand for truck tyres, particularly in the replacement market, was not encouraging. Even as tyre producers grapple with over-capacity and high levels of inventory, the government stirred a hornets nest by proposing free imports of used and second hand tyres. ATL has conversion agreements for small tyres with TCIL, Stallino Tyres and Rado. Its exports are routed through Apollo International to the US, Germany, Brazil, Sudan, Egypt, etc. A well-entranced position in the replacement market, favors ATL and the declining price trend of key inputs like natural rubber and carbon black may provide relief to its wafer-thin margins. At the current price level the scrip has emerged as an attractive buy; thus accumulate its shares in small lots.

MRF A leading company in the tyre industry, MRF Ltd. boasts of an enviable track record. The company has continued in the same vein and has been posting excellent results, notwithstanding the winds of recession blowing across the economy. Performance of the company has been commendable in light of the fact that the user industry is facing a slowdown. The company has benefited from better productivity and operational efficiency. The company caters to a host of impressive clients. It has signed on to be the sole supplier for auto giants like General Motors, FIAT and Ford in India. The company is also renowned for its exports, which have also been witnessing positive growth. The company has recently entered the radial tyre segment and has met with positive response. The performance of the company could further improve with the revival of the auto industry. Thus, MRF Ltd. can be expected to retain its position in this segment. However, investors can move out of the scrip, considering the outlook for the industry as a whole.

7|Page

8|Page