No tyre shortage. Price is the issue

While original equipment manufacturers (OEMs) like Tata Motors and Ashok Leyland have blamed the shortage of tyres in the domestic market for increasing imports from China, the tyremakers themselves have a different story to tell.

Officials at JK Tyres, Ceat and Apollo Tyres, said there is no shortage of tyres in the country.  None.

The issue, they said, is that automakers are unwilling to pay more for domestic tyres and are importing them from China.
Earlier, government restricted import of tyres, but the rules were relaxed on May 28, 2010, and OEMs and traders can now freely import.

A S Mehta, marketing director, JK Tyres, said Chinese tyres are 10-25% cheaper. “Around 10-15% of the country’s tyre consumption will be met by Chinese tyres due to this,” he said.
The average monthly offtake by OEMs in fiscal 2008 was 2.18 lakh tyres, which fell to about 1.44 lakh in fiscal 2009 due to the global slowdown. The figure recovered to 1.87 lakh in the last fiscal and for the first two months of the current year, demand has been at 2.3 lakh tyres a month.

“Meaning, from fiscal 2008 to now there has only been a 5% increase in demand whereas production has risen from 10.95 lakh tyres monthly to about 12.34 lakh in the last fiscal, a 12-13% increase,” said Rajiv Budhraja, director general, Automotive Tyre Manufacturers’ Association (Atma).

“The OEMs are not willing to pay the additional cost, which is because of the rising cost of natural rubber,” Budhraja said.
The price of natural rubber has shot up from Rs 80 per kg in June last year to Rs 186 per kg in July, which is significantly eroding the earnings before interest, depreciation, tax and amortisation margin of tyre companies, Mehta added.

Satish Sharma, chief of India operations, Apollo Tyres, said, tyre firms had to increase prices by 15-20% because of the input cost pressures, but OEMs are willing to pay only 5-6% of that price increase. “The price at which OEMs expect us to supply the truck and bus radials, which anyway come under a premium category, does not even cover the costs. We are even supplying bias tyres to OEMs at a loss,” Sharma said.

Unfazed by the slump in demand from OEMs, domestic tyre firms are continuing to expand capacity.

JK Tyres is investing Rs 960 crore to raise capacity in
Chennai.

It will add 2.5 million passenger car radials and 0.4 million radial-truck tyres capacity by FY12, taking total capacity to 12.6 million tyres.

Similarly, Apollo Tyres will add 100 tonnes/day capacity at its Chennai facility in FY11, and another 100 tonnes/day in the next year.

MRF will add capacity at Trichy for radial-truck tyres to 1.05 million units. It plans to also invest in a car and two-wheeler tyre capacity in Medak (in Andhra Pradesh).

Ceat is setting up 90 tonnes/day unit at Halol (in Gujarat) with an outlay of Rs 500 crore. The plant, to be operational in October, will manufacture radial tyres for trucks, passenger cars and LCVs. Another 55 tonnes/day capacity will be added in FY12 for an outlay of Rs 200 crore.

With tyre companies struggling to cover margins in the domestic market (by selling to OEMs), they are seeking better returns in the export (15-16% of country’s production is exported) and replacement markets.

Mehta said JK Tyres exports 1.5 lakh tyres a month. Similarly, Ceat exports over 2 lakh units and Apollo about 10% of its total production.

Ceat, which gets 74% of its revenues from the replacement market, is not worried about Chinese competition. Arnab Banerjee, vice-president (sales and marketing), Ceat, said, “Even if the OEMs use cheap Chinese tyres, the customer is very conscious of cost per kilometer. He/she changes the tyre to the better-known brands, thus giving a boost to the replacement market.”

Apollo’s Sharma said 90% of Chinese tyres are of poor quality and tyre as a product needs intense after-sales service. “We are not worried about Chinese players as we make up for the loss in the OE segment through the replacement market,” he said.
With the cheaper Chinese tyres flooding the Indian market, will the domestic tyre manufacturers reduce the cost of their tyres to remain price competitive?

Sharma, Mehta and Banerjee concurred that they will not reduce prices and will continue to maintain margins driven by robust demand in export and replacement market. Sharma said the tyre market is a brand game and it’s difficult to break the clutter on quality grounds.