Analysis of The Indian Tyre Industry

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“Sector analysis – Tyre

“Sector analysis – Tyre Industry”

Industry”

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD O SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD O FF

DEGREE OF MASTERS OF MANAGEMENT STUDIES MMS FROM THE UNIVERSITY OF DEGREE OF MASTERS OF MANAGEMENT STUDIES MMS FROM THE UNIVERSITY OF

MUMBAI MUMBAI

SUBMITTED BY

Mukesh R. Gehani

MMS FINANCE

BATCH: 2007-09

Under the guidance of

PROF. P L ARYA

N.L.DALMIA INSTITUTE OF MANAGEMENT

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

STUDIES & RESEARCH

SHRISHTI, SECTOR 1, MIRA ROAD (E),

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CERTIFICATE

This is to certify that Mr. Mukesh R. Gehani, student of N.L. Dalmia

Institute of Management Studies and Research, has successfully carried

out the project titled “

out the project titled “ SECTOR ANALYSIS – TYRE INDUSTRY

SECTOR ANALYSIS – TYRE INDUSTRY”, under my

”, under my

supervision and guidance as partial fulfilment of the requirements of MMS

course, Mumbai University Batch 2007-2009

Prof.

Prof. P.L.

P.L. Arya

Arya

Prof.

Prof. P.L.

P.L. Arya

Arya

Project

Project Guide Guide DirectorDirector

Date:

Place: MUMBAI

ACKNOWLEDGEMENT

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CERTIFICATE

This is to certify that Mr. Mukesh R. Gehani, student of N.L. Dalmia

Institute of Management Studies and Research, has successfully carried

out the project titled “

out the project titled “ SECTOR ANALYSIS – TYRE INDUSTRY

SECTOR ANALYSIS – TYRE INDUSTRY”, under my

”, under my

supervision and guidance as partial fulfilment of the requirements of MMS

course, Mumbai University Batch 2007-2009

Prof.

Prof. P.L.

P.L. Arya

Arya

Prof.

Prof. P.L.

P.L. Arya

Arya

Project

Project Guide Guide DirectorDirector

Date:

Place: MUMBAI

ACKNOWLEDGEMENT

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MUKESH R. GEHANI

MMS FINANCE

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1. Executive Summary

1.1 Introduction

19 Valuation 19.1 Relative Valuation 19.2 FCFF 19.3 FCFE 55 56 62 20 Results 68 21 Conclusion 69 22 Bibliography 70

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The Indian Tyre Industry produced 736 lakh units of tyres (11 lakh tonnes) garnering Rs. 19000 crores in FY07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo Tyres Ltd. (21%). The other major players were JK Tyre & Industries (18%) and Ceat Ltd.

(13%).

The Indian tyre industry is characterized by its raw material intensity (raw material costs account for approximately 70% of operating income), capital intensity, cyclicality, fierce competition among the top players, low bargaining power and resulting low margins. The top players are now focusing on branding their products and strengthening their distribution network so as to increase their market share.

The industry derives its demand from the automobile Industry. While OEM market offtake is dependent on the new vehicle sales, replacement market demand depends on the total population of vehicles on road, road conditions, vehicle scrapping rules, overloading norms for trucks,

average life of tyres and prevalence of tyre retreading.

The main category of tyres produced in the country is that of Truck & Bus tyres. These tyres accounted for 57% of the total tyre tonnage production in FY07 followed by LCV tyres which accounted for 9% of the total tyre tonnage production. Approximately 53% of the total tyre tonnage offtake was by the replacement market, 31% by OEM and 15% by the export market in FY07.

The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07. The largest category of Truck & Bus tyres recorded a 5 year CAGR of 7.85% (slower than the industry) while Light Commercial Vehicle (LCV), motorcycle and car tyre categories grew at 15%, 16% and 14% respectively (faster than the industry). Off the road (OTR) tyre category (customized tyres) which fetch a higher margin compared to other tyre categories, is the fastest growing category. The OTR tyre category has registered a 5 year CAGR of over 20% in the last five years. Most of the top players are increasing their capacity for the production of OTR tyres so as to improve their product mix, this being a high margin product.

The exports from the country clocked a CAGR of 13% in unit terms and 18% in value terms in the period FY 02-07. Most of these tyres that are exported are of cross ply design. With

radialisation catching up in some of these markets, the Indian manufacturers will need to

graduate to production and export of radial tyres so as to protect their share in the export market.

Radialisation of tyres is still minimal in India. Only the car tyre market has moved to radial tyres (95%) but in all other categories, cross ply tyres are still preferred. Poor road co nditions,

overloading in trucks, higher cost of radial tyres and poor awareness of the tyre users are the main reasons for the non transition of the domestic market to radial tyres. However, going ahead radialisation in truck & bus tyres may increase due to government’s focus on infrastructure development.

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The achievements of the Indian tyre and rubber industry have been an unheralded success story. It is perhaps the only industry in India to have achieved an average annual 6.5 percent growth rate for almost 44 years, since 1960.aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

The country's rubber industry got off to a very modest start in Calcutta in 1936 but India is today the world's 4th largest rubber consuming country, with rubber consumption of over 1 million tones (1,065,020 tonnes) including 50 percent of reclaim rubber as pure polymer. China is currently the world's largest consumer followed by the US and Japan. Despite the high volume of consumption, India's per capita rubber consumption is still under 1kg, compared to an average of 12 kilos in Europe and the US and nearly 3kg in China. This underscores the tremendous potential of the rubber industry with the country's increasing prosperity and industrialization.

Another unique factor of the Indian rubber industry is that for the past few years it has been the world's 4th largest producer of natural rubber after Thailand, Indonesia and Malaysia. However, in terms of production efficiency, India is far ahead of the other three major rubber producing countries in terms of yield per acre. This can be attributed to the country's highly skilled research scientists and the outstanding work done by the Rubber Board of India, under the Ministry of Commerce.

Till just three years ago, India was consuming all of the natural rubber it produced and in fact, had to import a quantity of the commodity as well. With an eye on globalization, while expecting increased output from the Indian rubber plantation industry, the Rubber Board decided to establish India's position as a regular exporter of natural rubber. It has succeeded beyond expectations, with the export of nearly 76,000 tonnes in the financial year ending March 2004. Strong natural rubber exports have also helped to stabilize the domestic prices of natural rubber.

Similar to the case in all industrialized nations, India's automotive tyre sector is the major user, at 53 percent, of natural rubber. The country's automotive tyre sector has also been a remarkable success. Practically every conceivable type of tyre is manufactured in India today, by almost 40 companies ranging from giants to small-scale enterprises. Today, seven Indian tyre companies

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feature in the list of the world's top 75 tyre manufacturers. According to the latest rankings based on 2003 sales, MRF (with sales of US $537.3 million) is ranked at No. 15 followed by Apollo at No. 17 (sales of $496 million), J. K at No. 18 ($455 million ), Ceat at No. 24 ($318 million ). They are followed by Birla Tyres at No. 52, Metro Tyres at No. 68 and TVS Srichakra at No. 75. In the fiscal year ending March 2004, the turnover of India's automotive tyre industry was Rs. 13,500 crore (almost $3 billion), with exports of Rs. 1400 crore ($318 million) to over 70 countries, including the US and Europe. The industry's total output of 54.27 million tyres signifies capacity utilization of 85 percent of the installed capacity of 60 million.

Since the mid-1980s, Indian tyre companies have made major efforts to established a presence in overseas markets through their exports. They have thus been able to import duty free raw materials and remain competitive in the international market, while reducing their dependence on the domestic local natural rubber market. While some Indian tyre majors export nearly 30 percent of their total tyre productions, about 20 percent of all locally manufactured tyres are

exported in total.

Dunlop Tyres of the UK, through its Indian subsidiary, was the country's first major tyre manufacturer, with a plant in Calcutta. It led the way for Firestone of the US, which established itself in Bombay and later for Goodyear and Ceat of Italy, which were also Bombay-based. It was only in the early 1960's that Indian tyre companies (MRF, Incheck and Premier Tyres) broke the monopoly of the foreign tyre makers. Modi Rubber followed in 1975, after which Apollo Tyres became a serious player. Meanwhile, the Karnataka state government set up Vikrant Tyres in Mysore in technical collaboration with the UK-based Avon Tyres. Since then, Premier Tyres has been taken over by Apollo Tyres and Vikrant Tyres by J. K. Tyres.

With the liberalization of the early 1990's came a short-lived joint venture (South Asia Tyres) between Ceat and Goodyear, after which the Japanese tyre giant Bridgestone Corporation made

its foray into the Indian market with the Tata Group. Within five years, Goodyear and Bridgestone took over full control of their joint venture companies, by buying out their local

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With enormous strides being made internationally by global tyre majors due to their vast R&D expenditure, it is naturally difficult for Indian tyre companies to manage without technology input. While J. K. Tyres has a technical collaboration with Continental AG of Germany (the world's number 4) and Birla Tyres with world No. 5 Pirelli, Apollo decided in November 2003 to enter into an agreement with French tyre giant Groupe Michelin, the world's number 1, to set up a joint venture project near Pune. Michelin has also invested in 26 percent equity in Apollo Tyres. Other Indian tyre companies manage with in-house R & D and by using the expertise of tyre experts from Europe and the US, who have taken early retirement from their earlier jobs.

With the Indian economy set for a growth rate of around 8 percent commencing 2005/2006, and with the massive increase in infrastructure developments and the $18 billion boost for highway and road construction, the Indian tyre industry is set for an average annul growth rate of at least 8 percent. It is mature enough to withstand the threat of cheap imports arising from possible Free Trade Agreements with countries like Thailand. The other challenge facing the Indian tyre industry is the high import duties of raw materials, compared to its competitors in the rest of Asia. But backed by the rising demand of the country's booming automobile sector, which crossed the 1 million sale mark in 2004, the Indian automotive tyre sector, and indeed the rubber industry, is set for an even brighter future.

2. Overview of ITI

Financial Year 2007-2008 (Est.)

Turnover of Indian Tyre Industry Rs. 20,000 Crores Tyre Production (Tonnage) 11.35 lakh M.T. Tyre Production – All Categories (Nos.) 811 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.

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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 (Est.)

Turnover of Indian Tyre Industry 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 2001 except Truck / Bus (Radial Tyres), which is in the Restricted List from 24th Nov. 2008 onwards.

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

3. Radialisation

'Radialisation' in India - Current Status & Future Trends

"Rate of radialisation is actually an index of the status of road development, vehicle engineering and the economy in general". Notwithstanding the problem areas, constraints and limitations, the tyre companies have kept pace with the technological improvements that radialisation signifies and offer state-of-the-art product (tyres), comparable to the best in the world.

• Radialisation can be aptly classified as the most important innovation in tyre technology.

Despite its several advantages (additional mileage; fuel saving; improved driving) radialisation in India earlier did not catch on at a pace that was expected, since its introduction way back in 1978. This could be attributed due to several factors, viz. Indian

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roads generally not being suitable for ideal plying of radial tyres; (older) vehicles produced in India not having suitable geometry for fitment of radial tyres (and hence the general, and wrong, perception that radial tyres are 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 radialisation has crossed 97% mark and is expected to reach 100% in two to three years. In the Medium and Heavy Commercial vehical segment current level of radialisation is upto 4%, and that in the LCV segment is estimated at 15%.

• 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 • Overload Control • User Education

• Retreading Infrastructure.

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RETREADING INDUSTRY IN INDIA

In the manufacture of a new tyre, approximately 75%-80% of the manufacturing cost is incurred in tyre body and remaining 20%-25% in the TREAD, the portion of the tyre which meets the road surface. Hence, by applying a new TREAD over the body of the worn tyre, a fresh lease of life is given to the tyre, at a cost which is less than 50% of the price of a new tyre. This process is termed as 'tyre retreading'.

However, the body of the used tyre must have some desirable level of characteristics to enable retreading. Retreading cannot also be done if the tyre has already been over used to the extent that the fabric is exposed/damaged. Retreading could be done more than once.

Types of Retreading

Retreading can be done by the following two processes:

1. Conventional Process (also known as 'mould cure' or 'hot cure' process) - In this process a un-vulcanized rubber strip is applied on the buffed casing of the tyre. This strip takes the

pattern of the mould during the process of vulcanization;

2. Precure Process ( also known as 'cold cure')- in this process a tread strip, where the pattern is already pressed and precure is applied to the casing. It is bonded to the casing by means of a thin layer of specially compounded uncured rubber (known as cushion or bonding gum) which is vulcanized by the application of heat, pressure and time.

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The present all India pattern, by type of retreading, is as follows:

Precured - 50%, Conventional 50%.

Retreading is primarly done in the Truck and Bus trye segment. On an average a Truck/Bus trye is retreaded 1.5 times.

At present only 3-4 large companies are in the organized sector of tyre retreading .Organized sector is classified as that comprising of companies which operate through the franchisee route.

International vs. Indian Experience in Tyre Retreading : Similarities & Differences

Similarities

As is the experience in other parts of the world, tyre retreading in India has gained greater acceptance in the commercial segment, especially truck/bus and light commercial vehicle (LCV) tyres, due to operational savings.

The share of passenger car tyre retreading is on the decline due to several factors, viz. fitment of radial tyres as OE fitment giving increased mileage (encouraging owners to go in for new radial tyres at the time of replacement, strong preference of improved aesthetics of new generation of passenger cars (and hence new tyres) and above all, a growing concern for safety (due to driving

at increased speeds.

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In the developed countries retreading, by and large, is only through precured methods, whereas the share of hot/conventional retreading in India is high 50%, with the share of hot/conventional retreading in select segments, like farm tyres, being considerably higher.

Expected Future Trends in Tyre Retreading in India

Tyre retreading in the commercial vehicle segment is poised for growth in the future. This growth will be aided by the following favourable factors and major developments taking place:

Increased level of Radialization in the commercial vehicle segment (due to reduced incidence of overloading of commercial vehicles);

• Growth in and increased share of multi-axle trucks (with the catching up of the concept

of 'hub & spoke' transportation, long distance movement of road freight will be by multi-axle trucks whereas distances within and around the cities will be catered by smaller commercial vehicles);

• National Highway Projects, especially Golden Quadrilateral Project and Highways

connecting North-South and East -West corridors (coupled with reduction in overloading and improved condition of road network, higher level retreading will offer added financial benefits).

5. Statistics

Past Trends

TOTAL TYRE PRODUCTION IN INDIA

F.Y. 1994 - 95 T0 2007 - 08 (in 1000’s)

CATEGORY 1994 - 95 1995 - 96 1996 - 97 1997 - 98 1998 - 99 1999

-2000 2000 - 01 Truck & Bus 7309 7696 8095 8095 7913 8969 8612 Passenger Car 3283 3324 3888 4263 4571 6054 6813

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Jeep 780 881 1098 1342 1247 1283 1155 Light Comml. Veh.

(L.C.V.) 1133 1177 1833 1903 1917 1980 2108 Tractor Front 933 976 1040 1075 1085 1203 1186 Tractor Rear 562 663 683 785 839 903 852 Tractor Trailer 608 686 360 214 223 295 277 A.D.V. 759 673 581 528 593 589 511 Scooter 8791 9853 9545 9577 10975 10140 9385 Motor Cycle 3410 3788 4457 5582 7277 9275 11196 Moped 771 833 795 400 234 516 119 Industrial 89 95 66 143 137 172 219 O.T.R. 39 36 30 37 37 36 38 Aero 18 7 0 0 0 0 0 TOTAL 28485 30688 32471 33907 37048 41415 42471 CATEGORY 2001 - 02 2002 - 03 2003 - 04 2004 - 05 2005 - 06 2006 - 07 2007 - 08 Truck & Bus 8474 9863 10821 11092 11941 12367 13137 Passenger Car 7481 8544 9959 11862 13605 14264 16437

Jeep 1247 1384 1440 1462 1272 1368 1467

Light Comml. Veh.

(L.C.V.) 2352 2844 3271 3945 4529 4820 5320 Tractor Front 1150 1125 1148 1311 1383 1754 1814 Tractor Rear 785 825 842 1096 1134 1296 1234 Tractor Trailer 320 470 415 408 596 823 886 A.D.V. 488 456 295 197 325 381 409 Scooter 8547 9875 9274 9992 9519 9643 11604 Motor Cycle 12275 15654 16688 18127 21053 26079 27921 Moped 135 185 168 124 55 0* 0* Industrial 214 309 295 377 514 635 733 O.T.R. 46 51 74 89 106 115 141 Aero 0 0 0 0 0 0 0 TOTAL 43514 515585 54690 60082 66032 73545 81103

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Current Statistics

Categorywise Tyre Production in India

Financial Year 2007-08 & 2008-09(April-September) (In Lakh Nos.)

Tyres for: 2007-08 2008-09 % Change

Truck & Bus 65.57 67.93 4 Passenger Car 80.06 88.36 10 Jeep 7.40 7.38 0 Light Commercial Vehicle 25.17 27.86 11 Tractor Front 9.17 10.32 13 Tractor Rear 6.30 7.28 16 Tractor Trailer 4.42 4.29 -3 Animal Drawn Vehicle 1.49 1.51 1 Scooter / Moped 55.65 50.95 -8 Motor Cycle 134.11 153.49 14 Industrial 3.31 3.44 4 Off the Road (OTR) 0.69 0.77 12

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Categorywise Export of Tyres

Financial Year 2007-08 & 2008-09(April-September) (in Nos.)

Category 2007-08 2008-09 % Change

Truck & Bus 1280939 1061929 -17 Passenger Car 540745 530372 -2 Jeep 2320 6018 159 Light Commercial Vehicle 803280 924642 15 Tractor Front 7810 4307 -45 Tractor Rear 30761 23233 -24 Tractor Trailer 8650 17064 97 Motor Cycle 164105 193466 18 Scooter 226506 250815 11 Implements 2009 3090 54 Industrial 7704 4285 -44 OTR 22634 22742 0.5 ADV 30 0 -100 Antique 0 0 0 Total 3097493 3041963 -2 Exports Export Realisation/Value

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Year Value

(Rs./crores) % Change CAGR

1993-94 606 22 11% 1994-95 680 12 1995-96 719 6 1996-97 832 16 1998-98 907 9 1998-99 808 (-)11 1999-00 864 7 2000-01 1190 38 2001-02 1100 (-)8 2002-03 1250 14 2003-04 1460 17 2004-05 1834 26 2005-06 2383 29 2006-07 2850 20 2007-08 (Est.) 3000 5

Average Annual Compound growth rate in exports during last one decade is 11%.

Categorywise Tyre Exports -2000-01 to 2007-08

[ Nos.] CATEGORY 2001 -02 2002 - 03 2003 -04 2004 - 05 2005 -06 2006 - 07 2007 -08

Truck & Bus 1805203 2141438 223155 2503956 2408759 2276049 2431545 Passenger Car 287547 364514 591494 1024561 1052874 966046 1091715 Jeep 40 20 220 391 885 1420 7461 Light Commercial

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Tractor Front 23431 20698 18990 18202 13408 11078 17072 Tractor Rear 51218 72263 89758 84684 98807 56186 66644 Tractor Trailer 444 852 1448 3686 3833 8665 17468 Motor Cycle 33019 34088 47333 62710 84908 151677 322630 ADV 170 20 0 0 0 0 30 Scooter 43391 49966 120725 202656 289984 320536 45338 Implements 15758 9143 6558 2096 2447 4045 5637 Industrial 15570 20716 10702 9885 7303 11543 12777 OTR 21468 29079 21168 23375 33480 43085 45919 Antique 2894 0 0 0 0 0 0 TOTAL 2910845 3443665 41029235067038 5387502 5449560 6094116

6. Raw Material

6.1 Raw Materials of Tyre Industry - Overview

(FY 2007-08)

Tyre Industry is highly raw-material intensive. Raw materials cost accounts for approx. 62% of tyre industry turnover and 70% of production cost

Given below is the composition of raw-materials as a percentage (%) of Total Raw Material Cost:

Natural Rubber 41% Nylon Tyre Cord Fabric 18%

Carbon Black 10% Rubber Chemicals 5% Butyl Rubber 5%

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PBR 6%

SBR 5%

Others 10%

57% of total Natural Rubber consumption is by the Tyre Sector, balance by rubber based non-tyre industries.

Total weight of raw-materials consumed by tyre industry – 13.39 Lakh M.T. Total Cost of Raw Materials consumed by tyre industry – Rs.12,500 Crores

6.2 Raw Material Availability

No domestic Production of Butyl Rubber, Polyester Tyre Cord and Styrene Butadiene Rubber of tyre grades, i.e., 1502 and 1712.

Production of Nylon Tyre Cord Fabric, Polybutadiene Rubber, Rubber Chemicals, Steal Tyre Cord insufficient to meet domestic demand.

Tyre industry imports raw materials on account of the following factors:

duty-free imports permitted against export of tyres; domestic demand not sufficient to meet complete requirement; technical and commercial considerations; business strategy to have multiple sources of supply.

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7. Government Policy

Trade Policy - Tyres & Raw Materials

• 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 the Restricted List from 24th Nov. 2008 onwards.

Custom Duties : Tyres

Normal rate of Basic Customs Duty (MFN) 10%

Preferential/ concessional Customs Duty under Trade Agreements

* Asian Pacific Trade Agreement (formerly known as Bangkok Agreement)

8.60%

* Indo Sri Lanka Free Trade Agreement Nil * SAPTA ( SAARC Preferential Trading

Agreement)

Nil* 5%** * India Singapore Comprehensive 2.5%

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Economic Cooperation Agreement (CECA)

For details please refers to Preferential Tariff Table for Tyres/ Raw-Materials of Tyre Industry (Ref. Section on RTAs)

Excise Duty: Tyres

All categories of Tyres 14%

* When import from Bangladesh, Bhutain, Maldivies and Nepal. ** When import from Pakistan and Sri Lanka.

8. Regional Trade Agreements

REGIONAL TRADE AGREEMENTS (RTAs) AN OUTLINE WITH REFERENCE TO TYRE INDUSTRY

Trade Agreements are broadly on the following lines:

o RTAs (Regional Trade Agreements, can be bi-lateral or plurilateral)

o RTAs aim to establish a Preferential Trade Area (PTA) an d/or a Free Trade Area (FTA) o Framework Agreement (setting the ground for establishing a Free Trade Area) generally

precedes complete FTA.

o In case of simultaneous applicability of more than one RTA, trade can take benefit only

under one Agreement

o RTAs are WTO compatible.

The following are the important and integral components of any RTA:

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Preferential/Concessional Rate of Import Tariff: specified as extent/percentage of concession on the MFN rate (i.e. applied/basic rate of normal customs duty);

o RTAs have assumed added significance due to slowdown of trade talks at multilateral

platforms (WTO), each industry/sector trying to source/sell globally, intense competition, progressive reduction in import tariffs etc.

Tyre Industry Related (key features and practical dimension)

The following RTAs concern tyres and raw materials of tyre industry:

a) Asia Pacific Trade Agreement (Bangkok Agreement ) Tyres and inner tubes can be imported from signatories to the Bangkok Agreement (please see list attached) at concessional rate of customs duty for signatories to the Agreement and specific details, please refer to the statement given below).

b) Indo-Sri Lanka Free Trade Agreement Tyres can be imported at nil customs duty. Natural Rubber is in the Negative List of India. Several other raw-materials of tyre industry are eligible for duty concessions of varying magnitude.

c) SAPTA ( SAARC Preferential Trading Agreement) Truck & Bus, LCV and Jeep tyres and select raw-materials of tyre industry can be imported into India at concessional/Nil rate of duty from signatory countries, (viz . Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka) Reference statement given below.

d) India-Singapore Comprehensive Economic Co-operation Agreement: Truck and bus, passenger car (bias) and other tyres can be imported into India at concessional custom duty rate

of 5%.

e) India-Nepal Trade Treaty Select raw-materials of tyre industry eligible for concession in customs duty when imported from Nepal under the Treaty. For details please statement of customs duty concessions, given below:

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9 . Marketing

Categorization

Segmentwise Tyre Supplies (2007 - 08)

Tyre supplies are broadly to the following segments:

• Replacement Market (aftermarket)

• Original Equipment Manufacturers (OEMs), i.e. vehicle manufacturers • Export

• State Transport Undertakings (STUs) (primarily for Bus tyres) • Government Purchases

Estimated supplies of key tyre categories to various segments are given in the following table:

11. Factors to be considered in selecting tyre for vehicle

1. Vehicle Type and Use

When specifying a tyre, analyze the size and type of the vehicle to determine whether it is better to use standard original equipment (OE) tyre or whether optional tyre should be

selected. Options in tyre sizes are limited by vehicle clearances and rim widths. Also one has to consider the proposed type of operation to determine tyre service conditions. For instance a dump truck tyre may be used to haul gravel over highway from pit to the job or to haul gravel exclusively in the pit for construction. Since the operating conditions vary widely, tyres should be selected carefully to assure maximum tyre life and safety of operation.

2. Load

From the safety point of view, the overloading of tyres should be carefully avoided, otherwise dangerous conditions exists. Misapplication of tyre from the load capacity is

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prevented for original equipment on new vehicles, which require manufacture of motor vehicles and trailers to affix a label that include the gross Axle Weight Rating on the front and all other axles. The total load per tyre must not exceed the manufacturers specified tyre load-carrying capacities at corresponding inflation pressures for both the tyre and the rim.

3. Speed and Continuity of Operation

The right tyres used on the vehicle ensure various speeds at which the vehicle runs without discontinuance of the vehicle run.

4. Tyre/ Rim Combination

It is of utmost importance that appropriate Tyre/Rim combinations are met. These combinations are specified by the tyre manufacturer in their selection manuals and should be complied to.

12. Peculiar Features of the Tyre Industry

• High Capital Cost

This sector is capital intensive. A 1.5 million tyre per annum radial tyre plant costs Rs8 billion, while 1.5 million crossply tyre plant would cost Rs 4-5 billion

• Distribution

Network-With typically higher margins in the replacement market, companies need to invest in brand building and distribution network, which acts as an effective entry barrier. A nation wide distribution network and strong brand recalls are factors critical to tyre sales. Domestic companies enjoy the advantage of an existing distribution network and so will however spend higher on marketing, distribution and advertising to maintain brand visibility among foreign majors.

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Due to high minimum economic size, demand supply mismatches constantly exist. Tyre industry has a derived demand due to dependence on a cyclical auto industry. Prices of petro- based raw material and natural rubber also tend to be cyclical.

• Technology Incentive

Tyre manufacturing involves sophisticated technology and now with the advent of radial tyres, technology has assumed importance in tyre manufacturing. Global spending on R & D is growing (more than Rs. 10 billion per annum by each major producer). All foreign cars introduced in India are launched on redial tyres.

• Retreading

As only the outer surface of the tyre wears out, tyres are usually retreated and used again. Truck tyres are usually retreated twice, while other tyres are retreated around 4 times.

13. Michael Porter’s five forces model

1) Bargaining power of supplier

Bargaining power of suppliers can be segregated in two parts according to the demand of industry.

Rubber

There are two reasons behind this being low first one is most of the tyre firms get150 days credit for buying the rubber from international market which is not the case if they buy it from

domestic rubber growers. And the second reason is, this credit is being offered at LIBOR, which is the London Inter-bank Offered Rate. It is the rate of interest at which banks borrow funds from other banks.

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Other Petro chemical based material (Carbon black, Nylon tyre cord etc.)

The power of suppliers is high in this category as India is limping back in case of Petro based raw materials like carbon black and chemicals which account low in quantity terms but are high cost generators. Also the price of NTC fluctuates in line with the prices of Caprolactam (a

petroleum derivative)-it¡¦s main raw material. The prices of these materials are beyond control of tyre industry.

2) Bargaining power of buyers

This can be seggeregated 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 having contract with their relative tyre manufacturer under which the prices of tyre remains stable for this OEM irrespective of market p rice. The benefits are given to them as they are buying in bulk and the relation gives the tyre firms some 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 are not that strong as compared to OEMs. The demand in buses and truck segment is always high because of Indian poor road conditions apart from this the purchase is made in small units.

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It is moderate or as the industry is facing opposition from retreading sector all over the globe. This cheaper option, around 20-25% of the original tyre cost, is present in developed countries since some decade back. And this is heading to wards strong position here in India too.

4) Threat of new entrants

The threat of new entrant is moderate or can be described as low because the industry is highly capital intensive and the level of technological expertise required is also highly specific.

But if we see from domestic (Indian) industry's point of view, this better can be defined as high. The reason being, global tyre industry is already seeing mergers and acquisitions in order to restructure. And as of now India and China going to be the hub of activities as far as tyre

industry is concerned due to low production cost as well as other relevant benefits. So for any of the global big shot Indian company will be a good option to go for.

5) Industry rivalry

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

Apart from the aforementioned reason, the industry is seeing high competitive scenario at present because of various reasons like rising input costs, low realizations from growing OEM segment

where the vehicle manufacturers are not ready to share the burden of tyre firms, the portion of replacement pie continuously taken away by the retreading sector which is slowly 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 always there to give head ache to these established players like CEAT, JK, Apollo and MRF etc.

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14. SWOT Analysis

Strengths

 Established brand names (key in the replacement market)

 Extensive distribution networks - For example Apollo Tyres has 118 distinct offices, 12 distribution centres and 4250 dealers.

 Good R&D initiatives by top players

Weakness

 Cost Pressures - 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

 Pricing Pressures - The huge raw material costs have resulted in pressure on the realisations and hence, the

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have not been able to pass on the entire increase to the customer

 Highly capital intensive - It requires about Rs 4 billion to set up a radial tyre plant with a capacity of 1.5 million tyres and around Rs 1.5-2 billion, for a cross-ply tyre plant of a 1.5 million tyre-manufacturing capacity

Opportunities

 Growing Economy Growing Automobile Industry Increasing OEM demand Subsequent rise in replacement accounts for demand

 With continued emphasis being placed by the Central Government ondevelopment of infrastructure, particularly roads, agricultural and manufacturing sectors, the Indian economy and the automobile sector/ tyre industry are poised for an impressive growth. Creation of road infrastructure has given, and would increasingly give, a tremendous fillip to road transportation, in the coming years. The Tyre industry would play an important role in this changing road transportation dynamics

 Access to global sources for raw materials at competitive prices, due to economies of scale.

 Steady increase in radial Tyres for MHCV, LCV

Threats

 Continuousincrease in prices of natural rubber, which accounts for nearly one third of total raw material costs

 Cheaper imports of Tyres, especially from China, selling at very low prices, have been posing a challenge. The landed price is approximately 25% lower than that of the

corresponding Indian Truck/ LCV tyres. Imports from China now constitute around 5% of market share

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 Ban on Overloading, leading to lesser wear and tear of tyres and subsequent slowdown in demand. However, this would only be a short-term negative

 Cyclical nature of automobile industry

15. Key Players

While the tyre industry is mainly dominated by the organised sector, the unorganised sector holds sway in bicycle tyres. The major players in the organised tyre segment consist of MRF, Apollo Tyres, Ceat and JK Industries, which account for 63 per cent of the organised tyre market. The other key players include Modi Rubber, Kesoram Industries and Goodyear India, with 11 per cent, 7 per cent and 6 per sent 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. MRF, the largest tyre manufacturer in the country, has strong brand equity. While it rules supreme in the industry, other players have created niche markets of their own

15.1JK Tyres

"Excellence comes not from mere words or procedures. It comes from an urge to strive and deliver

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the best. A mindset that says, when it is good enough, improve it. It is a way of thinking that comes only from a power within." - H.S.Singhania

JK tyre, a Division of JK Industries is the flagship company under the umbrella of JK Organization. The advent of JK Organization on the industrial landscape of India almost synchronizes with the beginning of an era of industrial awareness - an endeavor 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 that followed is history.

JK Organization has been a forerunner in the economic and social advancement of India. It always aimed at creating job opportunities for a multitude of countrymen and to provide high quality products. It has striven to make India self reliant by pioneering the production of a number of industrial and consumer products, by adopting the latest technology as well as developing its own know-how. It has also undertaken industrial ventures in several other countries.

J.K. Tyre has been at the forefront of the radial revolution in India. Since inception, we have been regularly releasing high quality, high technology products, which have withstood the test of time and are forerunners in the industry today. Our leadership position in the industry can be attributed to the mantra of offering high technology products and services to the customer. In

J.K. Tyre, it is our philosophy to continuously anticipate and understand the customer requirements, convert them into performance standards for our products and services, and meet these standards every time.

This has resulted in development of many innovative products from the most modern, technologically advanced production facilities, some of which are listed below:

• First manufacturer to launch "T" rated tyres in 1994-Ultima.

• First manufacturer to launch "H" rated tyres in 1996-97-Ultima 210 H.

• First manufacturer to launch Dual Contact High Traction Steel radials- Aqua sonic • First manufacturer to introduce India's first range of eco-friendly coloured tyres.

J K Industries Ltd. (JKI), the leader in the Indian Tyre Industry and manufacturers of well-known J K TYRE. J K Tyre along with its subsidiary Vikrant currently holds the No.1 position

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in the 4 Wheeler tyre segment with a market share of 20.8 %. J K Tyre and Vikrant continue to be the leaders in the commercial tyre segment which constitute 70% of the Tyre Market with the highest market share in the Indian Tyre Industry. J K Tyre maintains its dominant position in the Passenger Car Radials. J K Tyre is a preferred supplier with most of the OEMs. J K Tyre has launched several new products including recently launched Tractor Radial Tyre. J K Tyre is in the process of further expanding its Passenger Radial capacity to strengthen its position further.

A greater thrust on exports is yielding good results. J K Tyre along with Vikrant holds its No.1 position being the highest exporter of Tyres in the country with exports to over 60 countries across 6 continents. J K Tyre has tied up with a leading tyre manufacturer in China & is outsourcing tyres for its international markets. These initiatives shall be further intensified in the coming months. J K Sugar achieved growth of 31 % in the cane crushed for the season. J K Sugar is also implementing expansion. The 1st phase of capacity expansion up to 4300 TCD is already complete. J K Agri Genetics, the makers of "J K SEEDS" has continued to perform well and maintain its leadership in the Hybrid Seed Industry. The expected revival in the Indian economy, particularly the transport and automobile sector should lead to further strengthening the company's operations in the coming months. Today, JK Tyre's products compete with the best international players in the premium international bias market in more than 55 countries in 6 continents. JK Tyre had obtained international accreditation for its products in the US, Europe, South America and the Middle East.

JK Tyre, a division of the Hari Shankar Singhania group's flagship JK Industries, has increased its share in the commercial tyre market to 24.5 per cent from April to September 2001. The company's market share was 22.4 per cent during 2000-01, as per the data available with the Automotive Tyre Manufacturers Association (Atma). JK Tyre is the largest player in the commercial segment of the domestic tyre market. The commercial vehicles segment accounts for almost 70 per cent of the Rs 10,000 crores tyre market in India.

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MRF TYRES, India's No. 1 tyre manufacturing company manufactures an extensive range of superior quality tyres in six production facilities in India. MRF exports its products to over 75 countries worldwide - a standing testimony to MRF's outstanding leadership JK Tyre is a leading exporter of tyres from India and roughly accounts for about 26% of the total tyre exports

from India (along with its associate Vikrant Tyres Limited). 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.

HISTORY

In 1946, a young entrepreneur, K. M. Mammen Mappillai, opened a small toy balloon manufacturing unit in a shed at Tiruvottiyur, Madras (now Chennai).In 1952, MRF ventured into the manufacture of tread rubber. And with that, the first machine, a rubber mill, was installed at the factory. This step into tread-rubber manufacture was later to catapult MRF into a league that few had imagined possible. With the success achieved in tread rubber, MRF entered into the manufacture of tyres. MRF established a technical collaboration with the Mansfield Tire & Rubber Company of USA. In 1967, MRF became the first Indian company to export tyres to USA - the very birthplace of tyre technology. In 1973, MRF scored a major breakthrough by being among the very first in India to manufacture and market Nylon tyres. Then MRF entered

into a technical collaboration with the B.F. Goodrich Tyre Company of USA.MRF tyres were the first tyres selected for fitment onto theMaruti Suzuki 800 - India's first small, modern car. MRF was the clear market leader in every tyre segment.

In addition, by readers of the A & M magazine, MRF was considered as one of India's most admired Marketing Companies. Then MRF was chosen for fitment on the Daewoo Cielo, Ford Escort, Opel Astra and Fiat Uno, showing its world-class quality and appeal. A special factory dedicated entirely to the manufacture of radials was started at Pondicherry.

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• MRF Radial ZVTS • MRF Radial GP

• MRF Radial GT • MRF Radial VT

• MRF Radial CC

Bias Ply

• Legend • Estate

• SW99 (ULT) • Twin Tread

15.3 Apollo Tyres Ltd

Apollo Tyres Ltd (ATL) is one of the leading tyre manufacturing companies in India. ATL manufactures automobile tyres, tubes & flaps and is well entrenched in the T&B (truck and bus) tyre replacement segment, which comprises the bulk of the market. However, it’s presence in the fast growing passenger car and two-wheeler segments are low. One other point of concern is the less than cordial state of industrial relations in the company. After coming out of a prolonged agitation in FY99, the company’s workers in Baroda went on a strike recently. In FY2000, thanks to the upturn in the automotive segment, ATL has posted a sales growth of 17%yoy in the first nine months of the year. However, rising cost of material inputs and increased competition has put pressure on operating margins. The company has, however, succeeded in holding on to its market share by affecting a change in product mix with production of more car radials.

ATL has grown rapidly in the last decade, and from being a marginal player, it has raced ahead to become the third largest player in the tyre industry. ATL management has been quick to spot opportunities and has displayed remarkable market savvy. In FY2000, ATL has tied up with Castrol Ltd and Kotak Mahindra Finance Ltd to provide multiple product opportunities to its exclusive dealers. The management has not been found wanting when it comes to introducing new products to tap growing segments in the auto industry.

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A marginal player in the tyre industry a decade ago, Apollo Tyres leads the replacement market in the heavy vehicle and car radials segments. "The focus is to increase our market share to 25 per cent from 15-18 per cent in all the market segments."

Bus and truck tyres account for a lion’s share of the industry's revenues. Since the OE market is margin-sensitive, all the action is focused on the lucrative replacement market, especially in the heavy vehicles segment. According to Satish Sharma, product manager at Apollo Tyres, "The size of the truck tyre replacement market is 4 lakh tyres per month, and our share in that is 25per cent." Though the volume will be small, talks have been initiated with Volvo India.

Apollo Tyres is also giving MRF Ltd, the leader in the car tyres market, a run for its money. Its Apollo Excel tyres, rolled out from its Baroda plant, have received an excellent response in the marketplace, according to the company. In the OE segment MRF has been losing its hold to Bridgestone. And in the replacement market, Apollo Tyres has become a major threat. Apollo Tyres is now negotiating with Hyundai Motors and Hindustan Motors for OE sales. In the two wheeler market, Apollo is focusing on the motorcycle tyres market.

To boost sales, Apollo Tyres has tied up with Castrol India and Kotak Mahindra Finance. Apollo Tyres dealers will stock Castrol lubes and improve their earnings. The tie-up with Kotak Mahindra will facilitate sales by providing finance for tyre purchases, for the first time in India. Apollo Tyres has increased its ad budget to Rs 35 crores from Rs 25 crores earlier, in order to push sales. According to the Apollo management, the company sells 1.1 lakh of the 5 lakh car

radials sold per month in India today.

At present, the company's tyres are fitted as OE in Hindustan Motors’ Ambassador and Contessa models, in tractors from Tafe, Punjab Tractors and Mahindra & Mahindra, and trucks made by Ashok Leyland and Telco.

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Ceat Ltd, a part of the RPG Goenka group, is the second largest tyre manufacturer in the country after MRF. Ceat manufactures truck & bus, passenger car, scooter and LCV tyres. The company is a

dominant player in the truck & bus and passenger car tyre segments with a market share of 14% and 17% respectively. In FY2000, Ceat

did well to posting a 21%yoy sales growth in the replacement market for truck & bus tyres. It is presently focusing on catering to the fast growing passenger car and two-wheeler industry.

Towards this, it is commissioning a new radial tyre factory in June 2000.

Being the second largest selling brand in India with a market share of 14.6 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. Ceat is part of the RPG group, which is diversified, with presence in major sectors like power, fertilizers, pharmaceuticals, tyres, computer, telecom, financial services etc. The group stumbled trying to grow via diverse platforms and has many companies that have turned sick. But lately the strategy seems to be one of restructuring and consolidation. The group is divided into 4 broad areas -rubber & allied products, power, electronics & telecom and chemicals. Ceat’s investments in its subsidiaries have also come down this fiscal which is a sign of prudence on the management.

Since inception in 1958, CEAT has been at the forefront of Indian Tyre industry. It has established itself as one of the Top Manufacturers of Superior quality tyres. Their endeavor to continually improve business processes & ensure conformance to the established quality standards has earned a high reputation with their esteemed customers. CEAT is committed to the Customers by delivery of outstanding products & services at the most affordable prices.

Amidst the rapidly changing business scenario, they have now established an additional communication platform to interact with each other. In this seamless world, they recognize the importance of linking themselves with the cyber age.

Ceat, a part of the RPG Enterprise, is planning to set up a production facility to manufacture truck radial tyres at an investment of around Rs 200-250 crore. The tyre manufacturing company is also investing around Rs 75-80 crore to expand its capacity for passenger car radial tyres.

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Though the life (number of months in use) of radial tyres for trucks is expected to last 35-40% longer, company officials said the tyres would cost 15-20% more. Development in the road infrastructure is cited as a major reason for possible shift to truck radial tyres. Almost the entire truck demand is now cross ply or bias ply tyres. On the passenger car radial tyres, Mr. Paul said, “We plan to invest Rs 75-80 crore to ramp up the passenger car radial capacity to one lakh units.” At present, the company enjoys only 6% market share in the passenger car radial market. In the two and three wheeler market, Ceat had increased its capacity to five lakh units per month during the last year (from 60,000 units) by roping in three dedicated third party manufacturers — who now contribute 80% of this capacity. He said the company had drawn up plans to increase its market share in the motorcycle segment by 9% to 20% in ‘03-04 and consolidate its presence in the scooters segment (25% market share). “We have achieved a major breakthrough by signing an OE contract with a major south-based two wheeler manufacturer. Such contracts will give boost to the two and three wheeler market.”

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,

16. 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 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 widely used in tyres.