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Indian Tyre Industry is Expected to Show A Healthy Growth Rate of 9-10% Over the Next Five Years

May 11, 2018

Indian tyre industry is highly competitive with the presence of a large number of global & Indian auto-CoS. However, top 10 CoS account for about 80% of the market share. Tyre demand is directly proportional to the automobiles demand. Therefore, demand swings in the automobiles have an impact on the demand for tyres.

Indian Tyre Industry Brief

The tyre is an assembly of numerous components that are built up on a drum & then cured in a press under heat & pressure. Heat facilitates a polymerization reaction that crosslink’s rubber monomers to create long elastic. Tyre plants are traditionally divided into five departments that perform special operations. These usually act as independent factories within a factory. Large tyre makers may set up independent factories on a single site, or cluster the factories locally across a region. Domestic tyre industry is in modernization phase & largely driven by demand & supply conditions, rather than govt. regulation as it was earlier. Domestic tyre industry can be classified on the basis of its design, markets & vehicle category, which have been evolved over the years.

Vehicles

Category wise: The domestic tyre industry can be classified in terms of types of vehicles in which it is used. The category comprises of tyres used in T&B, LCVs, tractors, OTR & ADVs. Since these tyres are used for commercial usages they are sturdier, bigger & heavier than personal tyre category. In the overall sales of tyres in unit terms, the commercial segment contributed about 19% in 2015-16 while the remaining came from sales of personal vehicles (passenger vehicles & Two & Three wheelers). Under personal segment, two & three wheelers constituted about 66% sales while the passenger cars made up for the balance sales. T&B dominates overall commercial usage segment with around 57% share in the units sold in FY16. This is followed by LCV segment with a share of 28% during the year. Tractor front & rear tyre segment constitute around & 9% & 7% respectively during the same period.

Market wise: Tyre demand originates from two end-user categories, i.e., OEMs & the replacement segment. Consumption by OEMs is dependent on new automobile sales trend while the replacement segment is linked to usage patterns & replacement cycles. Demand from the replacement segment dominates the Indian tyre market contributing about 56% of demand, in terms of units. The major reason for high replacement share is due to the fact that the no. of registered vehicles/annual sales remains at about 10x at close to 20 Cr. registered vehicles vis-a-vis Rs. 2.4 Cr. annual vehicle sales. The export category is about 18% of the total units sold in the domestic market. The industry registered sales of around 151,026 (000 units) in the domestic market while the total exports of tyres during the year was 26,699 (000 units) in 2015-16. Therefore, the total tyre sales during the year was 177,724 (000 units) registering a marginal growth of about 4% YoY.

Tyre Production

Indian tyre industry is highly competitive with the presence of a large number of global & Indian auto-CoS. However, top 10 CoS account for about 80% of the market share. Tyre demand is directly proportional to the automobiles demand. Therefore, demand swings in the automobiles have an impact on the demand for tyres. India’s annual automobiles production registered a sluggish growth of 2.6% YoY in 2015-16. This led to decline in demand for tyres as well during the year. Tyres production (in volume terms) increased only marginally by about 4% in 2015- 16 after increasing by about 13% in the preceding year. Category wise, two & three wheeler tyres have a share of about 53% in the overall tyre production. This is followed by passenger vehicles & commercial vehicles with a share of about 26% & 17% resp. Tractor segment constitutes only about 4% of the total tyre produced in the country. Off-the-road & other tyres constitute minute shares of less than 1% of the industry production. A similar share trend is witnessed in the sales of tyres registered in the country. In 2016-17 (Apr-Dec), tyre production increased by 11.9% YoY on back of increased OEM demand as well as the replacement market. PV production grew by about 12%, Tractors by about 17%, CVs & 2 & 3 wheelers production by about 4% & 5.5% respectively during the same period. However, cheaper imports from China & slower exports pose a threat to this growth in production of tyres.

In 2015-16, India’s annual production stood at 23,960,940 vehicles (including passenger vehicles, commercial vehicles, three wheelers, two wheelers & quadricycle) as against 23,358,047 in 2014-15, registering a sluggish growth of 2.6% YoY. Two-wheelers have dominated the production volumes of the automobile industry over the years. Over the past 4 years, Two-wheeler production share in the overall automobile production has remained constant at around 80%. This is followed by passenger vehicles having a share of 14%. Productions of commercial vehicles & three-wheelers have about 3% share each in the automobile industry. Two & Three wheelers together comprising about 83% in the overall automobile production in 2015-16, demands about 53% of the total tyre production volumes, followed by passenger vehicles segment that accounts for about 26% share of the total tyre production volumes.

Tyre production traditionally, is multi-stage, with sig. inter-stage differences in the intensity of labor requirement, & a highly complex process involving the use of around 37 different materials including rubber, steel, fabrics & vulcanizing materials. The production system in the Indian tyre industry has been traditionally very labor intensive. The automation of manufacturing processes has increased gradually, which has slashed the size of the workforce to a considerable degree & has effected a change in its composition. The degree of automation has been greater in the area of radial technology, while cross ply technology is still labor intensive. The firms have been resorting to automation in order to tackle problems related to labor unionization & indiscipline in the sector. The rationale provided by the firms for the increasing drive towards automation of the manufacturing facilities has been that high quality & uniformity of the final product usually cannot be guaranteed with a labor intensive process.

Raw Material

Raw material cost forms the largest cost head in the tyre industry accounting for about 65-70% of the total. The main raw materials used to manufacture tyres are natural rubber, poly butadiene rubber (PBR), styrene butadiene rubber (SBR) & nylon tyre cord fabric. All these raw materials impart different properties, which are combined to develop tyres with particular characteristics. Rubber including (natural & synthetic), nylon tyre cord fabric (NTC) & carbon black constitute a sig. portion i.e. ~60-65% of the overall raw material cost of the industry. Hence any change in the prices of these materials impact the overall industry’s profitability. However, since FY13 the rubber prices witnessed a correction thereby reducing the overall raw material cost as a percentage of total exp. to 68% on aggregate basis in FY16 as compared to 80% in FY11. However, the price of rubber is prone to fluctuations & in 2016-17 (Apr-Feb), domestic & international rubber prices increased by about 28% after declining by 24% & 15% YoY for 2 consecutive years. The demand-supply gap in production & consumption of rubber in the country remains the reason for higher natural rubber prices in the domestic market & competitive prices in the international market leads to high imports from the international market. With high rubber prices in domestic market on account of lower production, imports of rubber has increased over past few years to about 45% in the 2015-16 from about 18% in 2010-11.

Rubber

Rubber is a major component in manufacturing of a tyre. There are three categories of rubber used in the manufacturing process viz natural rubber (NR), styrene butadiene rubber (SBR) & poly butadiene rubber (PBR). Natural rubber is an elastic hydrocarbon polymer that is originated from milky colloidal suspension or latex found in the sap of some plant. Natural rubber forms around 70% of the total rubber content, which is a sharp contrast of its usage in the developed markets like USA, Europe & Japan, where it is estimated to be around 35-40%. One of the primary reasons for more usage of natural rubber in India is its local availability with India being one of the largest producers in the world. In addition to this, natural rubber absorbs greater amount of heat & is more adaptable to poor road condition & overloading compared to synthetic rubber. Styrene Butadiene Rubber (SBR) is a synthetic rubber which imparts abrasion & fatigue resistance in tyres & is used in blend with natural rubber & accounts for about 5-7% of the total raw materials costs. The content of SBR is higher in radial tyres than cross-ply tyres. However due to its poor tear strength especially at high temperatures its usage is observed to be comparatively lower in heavy duty truck tyres. In India, the demand for SBR has picked during past few years as penetration of radial tyres in passenger car industry has increased considerably. Non-tyre applications of SBR include footwear industry, car mats, battery containers, gaskets, toys etc. Apcotex is the only major manufacturer of SBR in India. However, grades SBR S1712 & S1502 used in tyre manufacturing are not manufactured domestically. Hence total demand of SBR for the tyre industry is met through imports from Thailand, Indonesia & Vietnam. Poly Butadiene Rubber (PBR) is the other variant of synthetic rubber used in the tyre industry which accounts for about 5% of the total raw material cost of tyre manufacturers. It is used as tyre treads, sidewalls, carcass & beed fillers which gives tyres increased mileage & flex cracking properties. Reliance Industries is the sole producer of PBR in the country.

Technology

Radialization has been a sig. dimension in the acquisition of technological capability in the Indian tyre industry. The degree of radialization is a clear indicator of the status of road development, vehicle engineering & the economy in general. Inspite of some constraints & limitations, the tyre CoS in India have kept pace with the technological improvements that radialization signifies & offered state-of-the-art products, comparable to the best in the world. Radialization is linked to factors such as road development, overload control & retreading infra.. Some of the advantages of radialization are additional mileage, fuel saving & improved driving. However, attempts towards radialization have not taken off at the expected pace due to factors like lack of suitability of Indian roads for plying of radial tyres, older vehicles not possessing suitable geometry in terms of fitment, unwillingness of the Indian consumer to pay higher prices for radial tyres etc. Nevertheless, the scenario is radically different for the passenger car tyre segment, where radialization has crossed 95%. In the medium & heavy commercial vehicle segment, the level of radialization is comparatively poor, i.e. merely 4% & in the LCV segment; it is 15%. Technology generation in the Indian tyre industry is essentially geared to development research, involving the change of tread design, reinforcement material etc. Most of the major players do not engage in basic research due to the high costs involved. The source of technology for the domestic firms has been through reverse engineering, joint ventures & collaborations. The emphasis given by Indian tyre CoS to applied research & the setting up of well-equipped in-house R&D centers by the CoS, which are manned by experts & experienced professionals, have also helped in technology upgradation. Indian tyre technology has exhibited versatility in maintaining inflow of technology through foreign collaborations & tailoring the same to Indian needs. R&D is essentially business or market driven. However, raw material suppliers could also help in conceiving new projects. Compound development & in-process problems have been the main thrust of in-house R&D in the Indian tyre industry. A sig. proportion of R&D effort in the tyre sector is carried out by four or five top CoS. The proportion of raw material expenditure in relation to sales has witnessed a sharp spurt in 2007. The proportion of exports to total sales continues to be negligible in the tyre sector & a major portion of the sales revenue is garnered through the domestic market. Tyre technology upgradation is an extremely difficult process, particularly in Indian scenario, due to several factors. First, since tyre technology encompasses various disciplines such as polymer, chemical, steel etc. compromises have to be made in the upgradation of technology because of a) the conflict & complimentarity inherent in these disciplines, b) the usage pattern of the tyres & c) the cost factor. Further, a tyre’s performance could be affected due to factors such as the weather, loading pattern etc. Despite these bottlenecks technology upgradation in Indian tyre industry during the last few decades has been sig.. This has been possible to some extent due to govt. approvals of collaborations with MNCs in this sector. The emphasis given by Indian tyre CoS to applied research, the setting up of well-equipped in house R&D centres by large tyre CoS, manned by experts & experienced professionals have also helped in technology upgradation. Indian tyre technology has exhibited versatility in maintaining inflow of technology through foreign collaborations & tailoring same to Indian needs.

Policy Environment

All categories of tyres can be exported freely. All categories of new tyres can be imported freely. No WTO Bound Rates for tyres & tubes. Imports of Second hand/Retreaded tyres (major categories) are restricted under EXIM Policy & can be done against an import license. Tyres imports under Regional Trade Agreements (Asia Pacific Trade Agreement, Indo-Sri Lanka, SAFTA, India- Singapore, ASEAN, India-Malaysia etc.) allowed at preferential rates of import duty. All tyre industry related raw-materials can be imported freely (under OGL). Tyre Industry delicensed in September, 1989. Natural Rubber (NR) principal raw material of Tyre Industry, is in the ‘Negative List` (i.e. not eligible for any concession in Custom duty) under various Trade Agreements, i.e. India ASEAN Free Trade Agreement, India Sri Lanka Free Trade Agreement, South Asian Free Trade Agreement (SAFTA), India Malaysia Comprehensive Economic Cooperation Agreement (CECA), India-Singapore Comprehensive Economic Cooperation Agreement & India-South Korea Comprehensive Economic Partnership Agreement (CEPA).

Industry eyes double-digit growth in 2019

on Indian tyre industry. Having reached the 80% capacity utilization mark, tyremakers are planning to invest Rs 35,000 Cr. in Greenfield & Brownfield projects to expand capacity. Manufacturers also anticipate double-digit growth from FY19 against single-digit growth this year, driven by domestic & export demand. During the same time last year, the capacity utilization of tyre industry was 65-70%. Not only growth in automobile industry that has helped tyre segment. Growth has been aided by govt. policies also claims to represent about 90% of tyremakers. Industry had benefited from policies, demonetization had curtailed Chinese imports. GST put even more pressure on Chinese imports, which have dropped by 50%. In 2016, China had exported 150,000 tyres a month to India. The no. has now fallen to 60,000. The no. is likely to go down further, as Indian tyres would be competitively priced against Chinese ones. Tyre industry invested about Rs 25,000 Cr. between FY11-16. CEAT plans to invest about Rs 5,000 Cr. in Chennai, & MRF plans to invest Rs 800-1,000 Cr. every year, besides opening Rs 4,000-Cr. facility in Gujarat. Expect 2nd half of FY’18 to be better than 1st for the industry. Even 2nd rung tyre firms have reported good volume growth, & the industry would close the year with high single-digit growth. Expect between 2015 & 2026, the industry’s total turnover would grow by nearly 4 times. This will be led by both domestic & export markets. In value terms, tyre exports for the first 6 months of 2017-18 rose by 13% to $1,620.96 mn. Corresponding growth last year was 7%. In the coming years, growth would even touch around 20%. Besides SAARC, West Asia, ASEAN countries, the tyre industry was betting big on Africa, currently dominated by the Chinese players. Industry needs to get into Africa & other countries. This would need support from the govt.

Conclusion

ATMA has asked the Ministry of Commerce for duty free import of natural rubber equivalent to deficit in domestic production. Request by the body came after the Rubber Board projected domestic natural rubber deficit of 3.4 lakh tonne during the year 2017-18. Domestic production of natural rubber continues to be far below its requirement. Lately, sharp volatility in natural rubber prices has led to further crunch in the domestic markets. In the last 2 months, natural rubber prices have zoomed a sig. 30% & growers are holding back stock in the hope of a continued rally in the prices. With rise in prices & high import duty, imports have become un-viable. Tyre industry consumes 65-70% of the natural rubber produced in the country. However, import of natural rubber in India attracts 25% duty which is highest in the world. Higher import duties will hurt the margins of tyre manufacturers as they will be left with no option other than importing natural rubber in case of a deficit in production. Manufacturers are also worried about the rampant dumping of cheap Chinese radial tyres in the domestic market. Tyre OEM segment is expected to witness growth in 2016-17 largely driven by the buoyancy witnessed in automobile sales. Post demonetization, growth estimation of two-wheelers & small cars has been hit slightly. However, lower cost of ownership of auto vehicles triggered by series of interest rate cuts, push on manufacturing & infra. segment by the govt. combined with lower fuel prices have resulted in recovery of auto sector. Tyre industry stands to benefit from this turnaround in OEM demand & stable replacement demand. However, tyre manufacturers supplying to CV, PV & tractors segment are expected to benefit the most in the near term as the outlook for these auto segments in the Indian market is relatively more positive than TW. Capacity utilization levels for manufacturing TBRs have come down to 60-65% from 80-85% in couple of years ago due to increasing dumping of TBR tyres from China. Also, the tyres & tubes industry was expected to witness completion of about 5 projects worth Rs 45.9 bn in 2016-17 adding an incremental capacity of about 13.7 mn units to the industry. In the next two years (FY18 & FY19) about Rs 70 bn worth projects are to be completed adding another 12 mn unit capacity to the industry. Going forward, sig. capex will put pressure on the utilization levels & hamper the operational margins of the players. Over the past few years, the trend in tyre production & sales for OEM market has been in line with the automobile sales for the period. While demand from replacement market has been higher, sales are expected to grow at 10-11% per annum during 2017-18. Both, domestic & export demand for tyres is expected to remain robust during this period on the back of strong growth prospects for Auto OEMs as well as the stable replacement market. Indian Tyre industry is expected to show a healthy growth rate of 9-10% over the next five years, according to a study by CARE. While the truck & bus tyres are set to register a CAGR of 8%, the LCV segment is expected to show a CAGR of about 14%. However, we have to also take account of the effect of the global recession on the sector in making these assessments. Growth of the sector is closely linked to the expansion plans of the automobile CoS; govt.’s thrust on development of road infra. & the sourcing of auto parts by the global OEMs. Some sig. hurdles towards attaining these projected growth rates could be raw material related price volatility, rupee appreciation & the looming threat of cheap Chinese imports. Indian tyre CoS need to make active efforts to explore newer markets as the existing markets for bus-truck tyres, which account for about 45 % of the total export volume, is nearing saturation. There is also an urgent need to increase the degree of radialization in order to safeguard their share in the export market. Global tyre manufacturers have been making constant efforts to innovate & offer a diverse range of products such as tyres with pressure warning systems, run flat tyres, eco-friendly tyres & energy efficient tyres. In this context, the Indian domestic CoS have to pursue a growth strategy of continuous innovation & increasing emphasis on product differentiation.

 

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