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The Indian Tyres Industry
ICRA Sector Analysis conducted in February 2004
Structure of the Industry
Background
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.
Market Characteristics
Demand
The demand for tyres can be classified in terms of:
▪ Type: Bus and Truck; Scooter; Motorcycle; Passenger Car; Tractor
▪ Market: OEM; Replacement; Export
Environment Analysis - Porter's Model
Entry Barriers: High
The entry barriers are high for the
tyre industry. It is a highly capital
intensive industry. A plant with an
annual capacity of 1.5 million cross-
ply tyres costs between Rs. 4,000 and
Rs. 5,000 million. A similiar plant
producing radial tyres costs Rs. 8,000
million.
Bargaining Power of the Suppliers:
Bargaining Power of the Buyers: High Inter Firm Rivalry: Low High
The OEMs have total control over prices. In The tyre industry in India is fairly The tyre industry consumes nearly 50% of
fact, the OEMs faced with declining concentrated, with the top eight the natural rubber produced in the country.
profitability have also reduced the number companies accounting for more than The price of natural rubber is controlled by
of component suppliers to make the supply 80% of the total production of tyres. Rubber Control Board and the domestic
chain more efficient. prices of natural rubber have registered a
significant increase in recent times.
Threat of Substitutes: Low but
Increasing
During the FY2002, over 1,10,000
passenger car tyres were imported.
This constitutes over 2% of total
radial passenger car tyre production
in the country. However, with the
reduction of peak custom duty, the
import of tyres is likely to increase.
Tyres by Type
The Indian tyre industry produces the complete range of tyres required by the Indian automotive industry, except
for aero tyres and some specialised tyres. Domestic manufacturers produce tyres for trucks, buses, passenger
cars, jeeps, light trucks, tractors (front, rear and trailer), animal drawn vehicles, scooters, motorcycles, mopeds,
bicycles and off-the-road vehicles and special defence vehicles.
The scenario in India stands in sharp contrast to that in the world tyre market, where car tyres (including light
trucks) have the major share (88%) by volume followed by truck tyres (12%). In India, however, passenger car
tyres have a mere 17% share of the overall tyre market (as of FY2003).
Compiled by INGRES
Truck and Bus Tyres
The truck and bus tyre segment accounted for 19% of tyres produced in India in FY2003. Every truck/bus
manufactured generates a demand for seven tyres (six regular and one spare) as against three in the case of two-
wheelers and five for passenger cars. In addition, the price of a truck tyre is significantly higher than that of a
passenger car tyre (roughly 10 times) or a motorcycle tyre. Thus the demand multiple emanating from the
commercial vehicle segment is highest in value terms.
Given the regular use and heavy wear and tear of truck and bus tyres, the demand from the replacement market
in this segment worked out to 68% of the total demand for truck and bus tyres in FY2003; the OEM demand
accounted for around 9% the same year. With the Indian manufacturers of cross-ply tyres focusing on the export
market, this segment accounts for around 22% of the demand for truck and bus tyres.
Passenger Car Tyres
The passenger car tyre segment accounted for 17% of all tyres produced in India in FY2003. With passenger car
production witnessing a growth of 12% in FY2003 over the previous year, OEM demand accounted for about 33%
of the total sales that year. The replacement market accounted for around 63% of the total sales of passenger car
tyres in FY2003. Exports accounted for 4% of the total passenger car tyre demand in FY2003. With the stock of
cars increasing, replacement demand is likely to continue.
Motorcycle Tyres
Motorcycles accounted for 76% of two-wheelers sold in the domestic market in FY2003. Motorcycle tyres
constitute the largest segment of the domestic tyre industry (29% of total tyre demand in FY2003). The
replacement market accounted for around 49.8% of the total motorcycle tyres sold in FY 2003, while OEM demand
accounted for around 50%.
Scooter Tyres
Scooters were the dominant segment in the Indian two-wheeler industry till FY1998, accounting for around 42%
of domestic two-wheeler sales. However, the introduction of new motorcycle models has seen the share of
scooters declining to 19% of domestic two-wheeler sales in FY2003. The OEM segment accounted for around 34%
of the total sales in the scooter tyre segment in FY2003, with the rest being accounted for by the replacement
market.
Tyre Demand by Markets
Vehicle Manufacturers or OEMs
The demand from the OEM segment is a derived one and directly correlated to the level of automotive production.
The OEMs demand varies significantly across categories from between 8% for truck and bus tyres to over 50% for
some other segments like, jeeps and mopeds.
Replacement Market
The replacement market, including State transport undertakings and Government buying, accounted for around
59% of the total tyre demand in FY2003. 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 the existing road infrastructure. Additionally, the replacement market, which offers
better margins, is extremely competitive. The replacement market is dominated by the truck and buses segment,
which accounted for 22% of all tyre sales in the replacement market in [Link] large size of the replacement
in turn is determined by the interplay of various factors as discussed below:
▪ The replacement demand may be lower because of longer replacement intervals and lower business mileage if
the economic activity slows down.
▪ Replacement demand in India is higher because of a low vehicle scrappage rate.
▪ Poor road conditions by lowering the life of tyres, have a positive impact 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 the tyre at a significantly lower cost, thereby
lowering replacement demand. In India, re-treading finds greater acceptance in the commercial segment.
▪ Radialisation of tyres is likely to result in lower replacement demand. While car radialisation in the country
has reached a level of 65%, truck and bus radialisation stands at just 2-10%. Poor road and support
infrastructure as well as traditional vehicle designs act as a barrier to radialisation in the commercial vehicle
segment. Radial technology for trucks and buses would help increase operating efficiencies by delivering
better mileage and minimising wear and tear. According to ATMA, even if only 25% of the truck and bus
segment is radialised, the savings in fuel costs would be around Rs. 7,500 million.
▪ Introduction of tubeless tyres in the passenger car segment is also likely to affect replacement demand
adversely.
▪ Introduction of eco-friendly radial tyres such as hyper-bonding silica technology in the passenger car segment
may affect replacement demand adversely.
Exports
In the light of the prevailing domestic market situation, most of the tyre manufacturers have taken to exports to
reduce inventory build-ups. In FY2003, Indian tyre exports stood at Rs. 10.8 billion (10% of the total industry) in
value terms and 3.1 million in unit terms (6.5% of total production). Indian companies have currently entered into
sourcing agreements (for tyres) with neighbouring countries. For instance, Ceat and J K Tyres have sourcing
agreements with tyre producers in Sri Lanka and China. This is likely to have a positive impact on tyre exports
from India.
Market Players
Some of the major players in the Indian tyre industry are MRF, Ceat, JK Industries, Apollo Tyres, Bridgestone
India, Goodyear India, Falcon Tyres and TVS Srichakra. The tyre industry in India is fairly concentrated, with the
sample of eight companies (as in the text) accounting for 82% of production in FY2002. Besides, not all
companies have a diversified product portfolio.
Key Issues
High tax usage
The high tax content on tyres can be gauged from the fact that the percentage of total tax to the tax excluded
price for various categories of tyres is - 44% for Truck Tyre; 41% for Passenger Car Radial Tyre, 35% for Tractor
Rear Tyre and 76% for Truck Tyre Tube.
Increase in raw material costs
Apart from being capital intensive, the tyre industry is highly raw material intensive. Any change in the prices of
raw materials affects the profitability of tyre companies. The raw materials used in the manufacture of tyres are
rubber and petroleum derivatives like nylon tyre cord, carbon black, styrene butadiene rubber and poly butadiene
rubber. The most important raw material is rubber-natural and synthetic. Natural rubber (NR), with 29%
weightage in the cost of raw materials used by tyre industry, is the highest cost item. Annual consumption of NR
by tyre industry is 3.50 lakh tonnes, valued at Rs. 14 billion. Over 85% of NR consumed' by the industry is
procured domestically. 15% is imported.
In the 2003-04 fiscal, as against the Minimum Statutory Price of Rs. 32.0 per kg, the ruling domestic price of NR
had been over Rs. 50 per kg. This is higher than the world rubber prices. However, this does not entail the tyre
industry players to import as a number of restrictions are imposed on the import of NR. NR can be imported only
through two ports-Kolkata & Visakhapatnam. The customs duty on import of natural rubber is 20%, with 10%
under Bangkok Agreement. However, this is not relevant, as NR is not cultivated in South Korea, Bangladesh &
China (signatories under the Bangkok Agreement). Hence, NR can be sourced only from Sri Lanka (under the
Indo-Sri Lanka Agreement), which is of bad quality. Thus, the options of rubber import are restricted and the
manufacturers have to rely on the domestic market for procuring rubber.
Import of tyres
During the FY2002, over 1,10,000 passenger car tyres were imported. Although this constitutes a small
percentage (1.5%) of total passenger car tyre production in the country, since total imports are of radial
passenger car tyres, the percentage is higher when compared against domestic production of radial passenger car
tyres. A large percentage of imports are from South Korea at a concessional rate of customs duty (i.e. 15%)
under the Bangkok Agreement - as against 20% normal rate of customs duty.
Even though the Government has imposed a restraint on the import of used tyres into India, occasionally there
are reports of import of such tyres in a clandestine manner, sometimes as new tyre at low value, since there is no
restriction on import of new tyres or as tyres under the "others" category. Many countries such as Japan,
Bangladesh, Pakistan, Philippines, Thailand, Kenya, South Korea, etc. have either put a complete ban on import of
used tyres or have placed stringent conditions on such imports.
Tyre Exports
The product focus of tyre exports from India has been Traditional Truck Tyres. Globally this segment of tyre
export is shrinking due to greater acceptance of radial tyres. Over the years, China has emerged as a major
exporter in bias tyre category. Additionally, export of Indian tyres to select countries is subjected to non-tariff
barriers (NTBs) by way of standards, tests, etc. Export of cheaper tyres from China to major tyre importing
markets, like US, is adversely affecting Indian tyre exports to these markets. India's share in exports to these
countries (especially USA) is progressively declining. If the trend is not reversed, Indian tyre industry will find it
extremely difficult to regain its erstwhile position in these markets. Low rate of interest, cheaper electricity tariff,
hidden subsidies by the Chinese Government, better infrastructure facilities and lower transaction costs are factors
favourable to Chinese tyre industry.
Trends in Production, Consumption, Price & Capacity Utilisation
The total tyre produced in the country was 51.58 million units in FY2003 - a 19% growth rate over FY2002.
CAGR of tyre production (in %)
FY 1993-2003 9%
FY 1993-1998 7%
FY 1999-2003 9%
FY 2002-2003 19%
Compiled by INGRES
Currently, the size of the Indian tyre industry is estimated at Rs. 128 billion (0.5% of Indian GDP), as of FY2003.
The total installed capacity of the Indian tyre industry is around 60.5 mn units, and the capacity utilisation is
around 85%. The capacity utilisation improved in FY2003 following improved demand from the automotive
segment (75% in FY2001). Additionally, in FY2003, the price realisation of tyre manufacturers also registered an
increase by 8%, as against a 0.6% increase in FY2002.
Demand Supply Gap
The demand for tyres is either in the domestic market or in the export market. As far as domestic demand is
concerned, the OEM and the replacement segments are likely to witness strong growth given the current
performance of the automotive sector. Given the strong linkages of tyre industry with automotives, its demand is
likely to be strong over the short to medium term. As for the export demand for tyres, the outlook is positive,
even though 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
and sale of bus and truck radials. JK is expanding its Mysore truck and bus radial facility along with eyeing
acquisitions of smaller units. Ceat has increased its offtake by 3 times from Pirelli. However, a characteristic of the
Indian tyre industry is that most of the tyre manufacturers in the past had increased capacities in anticipation of a
surge in demand, but when it did not materialise, they reduced their addition to capacities. Thus, the demand-
supply gap is likely to be an important issue for the Indian tyre industry over the short to medium term.
Review of Performance
Overall Performance
The operating margin of the representative sample of tyre companies improved during FY2003. However, the net
profit margin of the tyre companies even though improved, was still at 3%.
Performance in FY2004
The tyre industry continues to be driven by good demand growth, propelled by sustained uptrend in demand and
sales of automobiles in general, and commercial vehicles and passenger cars in particular. However, this does not
get translated into improved margins for the industry, as it is witnessing sustained rise in prices of raw materials
like natural rubber. Additionally, the customs duty on imports has been brought down from 25% to 20% and
Special Additional Duty of 4% has been dispensed with.
Outlook
The level of economic activity, performance of domestic automotive industry, and the faring of the transport
sector directly influence the performance of the tyre industry in India. With the replacement segment dominating
the overall tyre demand in India, the industry remains inherently vulnerable to economic cycles. While
radialisation has become the norm in the passenger car segment, in the bus and truck tyre segment, its
acceptance is still limited. Bus and truck radialisation could emerge in the long term as the quality of roads
improves and the restrictions on overloading are better enforced. The practice of re-treading, which is gaining
increasing acceptance, could pose a challenge to replacement demand in the medium term. The ability of the re-
treading sector to capture potential replacement demand would depend on the awareness among customers (of
the benefits of retreading) and also the quality of retreading done. Given the low levels of penetration of two-
wheelers and passenger cars in the country, OEM demand is likely to increase, which in turn would push up
replacement demand with a lag.
The prospects of tyre exports from India appear healthy, following efforts by Indian companies to increasingly
enter into outsourcing agreements with tyre producers in Southeast Asia, Eastern Europe and Latin America.
Overall, tyre manufacturers are likely to tap the export market in an effort to boost sales. The increasing exports
of bus and truck tyres (crossply variety) from India to developing countries is because of the fact that developing
countries are unable to source them from developed countries as these are no more produced there. Tyre imports
are unlikely to pose a threat to the domestic industry, given that domestic prices are lower than international tyre
prices.
In the domestic market, tyre manufacturers are expected to increasingly focus on expanding their dealership
networks & explore possibilities of tie-ups among themselves to penetrate the growing customer base. They are
also likely to pursue innovative measures (such as "dial-a-tyre service and road shows) to improve customer
awareness.
The consolidation of the Indian tyre industry is likely to continue in the coming years through mergers among
existing players. The industry is likely to expand through a combination of organic and inorganic growth. While
organic growth would come from raising efficiency levels, inorganic growth would be achieved through alliances
and M&As.
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Bargaining Power of the Buyers: High
The OEMs have total control over prices. In fact, the OEMs faced with declining profitability have also reduced the number
of component suppliers to make the supply chain more efficient.
Entry Barriers: High
The entry barriers are high for the tyre industry. It is a highly capital intensive industry. A plant with an annual capacity of
1.5 million cross-ply tyres costs between Rs. 4,000 and Rs. 5,000 million. A similiar plant producing radial tyres costs Rs.
8,000 million.
Inter Firm Rivalry: Low
The tyre industry in India is fairly concentrated, with the top eight companies accounting for more than 80% of the total
production of tyres.
Bargaining Power of the Suppliers: High
The tyre industry consumes nearly 50% of the natural rubber produced in the country. The price of natural rubber is
controlled by Rubber Control Board and the domestic prices of natural rubber have registered a significant increase in
recent times.
Threat of Substitutes: Low but Increasing
During the FY2002, over 1,10,000 passenger car tyres were imported. This constitutes over 2% of total radial passenger
car tyre production in the country. However, with the reduction of peak custom duty, the import of tyres is likely to
increase.