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Demand for tyres is derived from demand for automobiles. Therefore it is a ‘derived demand’ product and its fortunes are very closely linked to those of the auto segment. Within the tyre industry the trucks and buses (T&B) segment accounts for more than 70% of sales. Though scooters and motorcycle tyre demand also plays a vital role, in value terms, CVs gain significance.
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Tyre varieties can be divided into two categories – cross ply and radial. The domestic industry is dominated by cross-ply tyres, due to the poor conditions of roads in the country and overloading of CVs. This is also the reason why penetration of radial tyres in the CV segment is negligible and finds presence only in the passenger car segment. On the other hand, radial tyres dominate western markets. Radial tyres can be differentiated on the type of belt used – fiberglass, steel and nylon. Worldwide, steel belted radials are more popular due to their performance advantage.
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There are three major consumer segments for tyres namely replacement segment, Original Equipment Manufacturers (OEMs) and exports. Though fortunes of the sector are closely tied with the automobile industry, replacement demand continues to remain the key growth driver. Replacement demand accounts for as high as 57% of industry volumes. However, the contribution from OEM and replacement segments varies across sub-segments in the auto sector. For instance, for the passenger car segment, demand is balanced from replacement and OEM categories i.e. 50:50.
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Another key transition that is taking place in the industry is the entry of multinationals like Good Year, Bridgestone and Michelin in the domestic market. MNC tyre makers have cornered a higher market share in India in the last three years due to their international relationships apart from superior technology. Since Honda, Hyundai and Toyota have an international sourcing agreement with Bridgestone, it is also the preferred supplier in India. Goodyear is believed to be the preferred supplier for Ford India.
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An extensive distribution network and strong brand recall are factors critical to tyre sales. Brand building is given a lot of importance by manufacturers, who allot 2-3% of sales to advertising. With the introduction of radial tyres, even technology has assumed significance. All foreign cars introduced in the country are on radial tyres.
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Raw materials constitute 60%-70% of production cost of tyres. Natural rubber and Nylon cord fabrics are the most critical raw materials as it accounts for 50% of total raw material cost. Since most of the raw materials are crude derivatives, a rise in prices has a negative impact on margins.
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The export market holds tremendous potential for domestic manufacturers. Tyre exports have grown at an annual compounded rate of 27% over the past 10 years. Indian tyres are exported to 56 countries, which are primarily developing countries.
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| Supply |
Supply has grown faster than demand. Industry faces overcapacity.
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| Demand |
Linked to auto demand from OEM and replacement market.
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| Barriers to entry |
Capital intensive and technologically competitive. Distribution network is also important in a country like India.
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| Bargaining power of suppliers |
Some suppliers have better bargaining power on account of cost-advantage. Suppliers have increased prices continuously for the last two years (carbon black for instance).
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| Bargaining power of customers |
High, as supply exceeds demand. Large scale re-treading also enhances bargaining power of customers.
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| Competition |
Significantly higher in OEM as well as the retailing segments. |
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The key contributors of tyre demand, in volume terms, in order, are CVs, cars, motorcycles and scooters. Barring motorcycles, overall YoY volumes for other categories remained subdued in FY02. The encouraging news was the recovery in CV demand, which is estimated to have gone up by more than 5%. Demand in export markets also was lower on account of slowdown in all-major economies. Given this backdrop, tyre demand increased marginally in value terms in FY02.
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During FY02 there was intense competition in the tyre industry. This led to price wars between the major companies. Also rising raw material costs affected the operating margins of majority of the tyre manufacturers. Even though rubber prices have been weak in the past year the higher costs of carbon black and others have offset the reduction in rubber prices. Indian Rayon, the market leader in the carbon black sector, increased prices by 7% in FY02. Tyre manufacturers were unable to pass on these costs to the consumers, as competition was intense.
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On the demand front, tyre manufacturers are expected to benefit from the upturn in CV segment. Tata Engineering expects CV sales to increase by 4%-5% in FY03. Also most of the auto majors have plans to introduce new models/variants in the current fiscal. Combined with a robust motorcycle demand, we expect tyre demand to increase by more than 7% in FY03. The other growth driver is the gradual migration towards radial tyres with the advent of government thrust on road development. Most of the new models introduced typically run on radial tyres (though customer has a choice). This is a positive for the industry.
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The other major factor that affects profitability of tyre manufacturers is raw material prices. Nylon rubber cord and natural rubber prices have remained weak during the year. Though carbon black manufacturers resorted to a price increase in FY02, given the weakness in crude prices, further rise seems unlikely (carbon black prices have gone up by more than 15% in the last two years). Besides, the government has reduced peak customs duty from 35% to 30% in the last budget. Overall, one can expect raw material prices in FY03 to remain subdued.
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A number of smaller and larger tyre manufacturers, including the likes of Modi Rubber, have shut down plants. Since Modi is one of the market leaders in the bus tyre segment, other key players are expected to benefit from the plant closure (Modi has a 11% market share in FY00). Consolidation is also expected to gain momentum as we go forward. Though there are about 12 tyre manufacturers in India, 10 of them account for as high as 85% of industry sales. This is expected to come down gradually with players like MRF, Apollo, Ceat, JK Industries, Goodyear, Bridgestone and TVS Srichakra expected to dominate the scene. Within this twelve, two or three players like TVS Srichakra predominantly cater to the two-wheeler segment.
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Under the existing customs duty regulations, all new tyres can be imported freely. Second hand and used tyres are allowed for imports if the CIF value is above US$ 175 for truck & bus tyres (Rs 8,750) and above US$ 25 for passenger car tyres (Rs 1,250). Tyre imports between countries like India, Bangladesh, South Korea and SriLanka are allowed at 5% concession. Retreading of tyres also considerably reduces the demand for new tyres. It costs about 20 per cent of a new tyre. A tyre can be retreaded thrice and any improvement in retreading technology can lead to dampening of new tyre sales. Retreading and imports could pose a greater threat to tyre manufacturers in the future.
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