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Tyres

Background 

From the manufacture of cotton reinforced carcass tyres in 1940’s to high performance radial tyres in the new millennium, Indian Tyre Industry has come a long way. Tyres can be classified into two main categories based on industry segmentation : 

a)       Commercial vehicle tyres (Truck and bus, light commercial vehicle and tractor tyres) - Commercial vehicle tyres account for 79 % of the total production of the tyre industry. Truck and bus tyres, the largest tyre category, accounts for around 64 % of the total tyre production tonnage.

b)       Passenger vehicle tyres (Car, jeep, motorcycle and scooter tyres) - Passenger vehicle tyres account for around 21 %. 

Because of a high 15% growth in India’s automotive production during FY2006 and increased exports, production of tyres increased 9.9% during FY2006 to 66.03 million units. Production for the domestic market increased 10.2% to 60.64 million units during FY2006. Overall automotive production increased 15.5% (year on year or yoy) during 9MFY2007 (April-December 2006) to 8.01 million units driven by significantly high production of commercial vehicles (CVs) and three wheelers (3W), and high growth in production of four wheelers (4W) and two wheelers (2W). 

India’s tyre exports have increased at a 3-year CAGR of 16.1% to around 5.39 million units in FY2006. In value terms, tyre exports increased at a 3-year CAGR of 12.8% to around Rs. 17,932 million in FY2006

Size 

  • The size of the Indian tyre industry is estimated at Rs. 145 billion (0.4% of India's GDP). The industry consists of around 43 companies, spread throughout the country, with many being small.
  • Against an installed capacity of 850 lakh numbers, the tyre industry produced 601 lakh tyres in 2004-05. The production during 2005-06 was 660 lakh tyres and during 2006-07 (up to Dec.) it was 548 lakhs.
  • The annual turnover of the industry is around Rs.14,500 crore.
  • From an insignificant export of Rs. 10.75 crore in 1985-86, export of tyres has risen to Rs. 2,364 crore during 2005-06. The import of tyres during 2005-06 was Rs. 285.65 crore.
  • Tyre industry consumes around 55% of the total Natural Rubber (NR) produced in the country.
  • The total contribution to excise and customs duty works out to 0.14% of India’s GDP.
  • Tyre companies directly employ over 0.13 million persons of varying skill levels.

Structural Characterstics

  • The Indian tyre industry has around 43 companies, out of which the top 10 companies account for around 95% of total production. The installed capacity is around 60.5 million units per annum.
  • The market for tyres consists of two segments viz. original equipment (OE) segment of automobile producers and replacement segment of mainly the transportation sector, corporates and individuals. The original equipment manufacturers (OEMs) or automotive manufactures account for around 43% of tyre demand, while the replacement market accounts for around 49% of Indian tyre production.
  • The performance of the tyre industry is largely driven by the performance of the replacement segment, because of the massive share of truck tyres in the product mix of the industry. In case of truck tyres, replacement segment accounts for around 65% of the total demand, exports for 21% and OEM for 14%. Truck/bus tyres are primarily exported to countries in Latin America, UAE, Bangladesh, Iran, Philippines, and Vietnam. Passenger car tyre exports have also increased significantly because of increased exports of radial tyres to UAE and Nigeria.
  • The profitability of Indian tyre companies is also significantly dependent on the availability and prices of rubber, which is a key input of the tyre industry.
  • Raw materials like nylon tyre cord (NTC) fabric, constitute around 26% of raw material costs, while carbon black accounts for about 12% of raw material costs. 

Policy 

  • The tyre industry is highly sensitive to government policies particularly with reference to import of  NR which is under OGL.  The domestic prices of NR, the primary raw materials for the tyre industry is fixed by the Government through the mechanism of Minimum Statutory Price (MSP).
  • The Indian domestic rubber prices are higher than the world rubber prices on an average, though this does not induce industry players to import as the Government through its import policies has put restrictions on the import of NR. For instance, the customs duty on import of natural rubber is currently at 12.5%.
  • The tyre industry is a signatory to several trade agreements that allows for import of tyres at a concessional rate: for example, under the Asia Pacific Trade Agreement (APTA) or formerly the Bangkok Agreement, all categories of tyres can be imported from Bangladesh, China, Korea, and Sri Lanka, at a preferential rate of 10.75%. Under South Asian Free Trade Area (SAFTA), truck/bus tyres can be imported at 6.2% customs duty from Bhutan, Maldives, Nepal, Pakistan, Bangladesh, and Sri Lanka.  

Outlook 

·         The Indian tyre industry has a broad and varied base and presently manufactures all categories of tyres except some specialised categories like Snow Tyres for which currently there is no requirement and Aero Tyres. Such a factor works as a risk mitigant in case of demand fluctuation.

·        Backed by Government’s initiative on rural roads and better connectivity with major towns and cities, improved agricultural performance, upward trend of purchasing power in the hands of rural people, the two wheeler segment has continued to post a steady growth.

·        The performance of the automobile industry in exports is also encouraging with automobile production and growth during FY2007 to be around 15%, driven by expected real GDP growth of 7-7.5% per annum, and a favourable interest rate regime.

·        The prospects of tyre exports from India appear healthy, following efforts by Indian companies to increasingly enter into outsourcing agreements with tyre producers in South-east Asia, Eastern Europe and Latin America.

·         A growing vehicle population, lower vehicle scrappage rates and poor road conditions in India have given a positive impetus to replacement demand. Given the low levels of penetration of two-wheelers and passenger cars in the country, demand for tyres from this OEM segment is likely to increase, which in turn would push up replacement demand with a lag. The truck and buses segment is likely to continue to dominate the replacement market.

·        Two specific factors are emerging to negatively influence replacement tyre demand. The increasing levels of radialisation in the passenger car segment, increases the life of the tyre and thus reduces the frequency of replacement. Also, with greater acceptance of re-treading in the commercial vehicles segment, re-treading is competing with the replacement market demand for tyres slowing down its demand.

References : ICRA & CRISIL Reports
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