Indian tyre manufacturers have been facing a situation of squeezing margins and rising input costs for the past many months now. Moreover, the rising imports from the Chinese markets have added to the griefs of the domestic players.
With the market leader Maruti Suzuki crossing the one million unit sales mark in the fiscal, almost every other company operating in the automobile sphere was in a party mode. Moreover, the first two months of 2010 have been certainly much better than expected by the industry watchers. With the industry growing by over 25% in April and May 2010, the unit sales have also amazed many auto majors present in the country. However, amidst the exciting environment, the industry faces a huge challenge in the form of acute shortage of components, resulting in a notional loss for the autocos.
The tyre industry in particular has been caught on the wrong foot as it is already operating under severe pressure. Notably, the price of natural rubber has grown by leaps and bounds in the past couple of months. The domestic tyre manufacturers have already announced a hike of around 2-4% for the past couple of months in the aftermarket sales bowing to the rising input costs. With the rising threats for the domestic manufacturers in the form of cheap imports from China, TSI attempts a sneak peek into the future for the Rs.300 billion Indian tyre industry.
The price of natural rubber has almost doubled to Rs.170/kg from Rs.90/kg over the past 12 months. And being a commodity that contributes to over 40% in the manufacturing process, it is certainly taking a toll on the tyre manufacturers. Moreover, coupled with other commodities i.e. the crude-based products like nylon, carbon black and certain other chemicals that are used in the manufacturing process, the costs have risen in the range of 20-25% over the last one year. 'As the input cost is rising and is not in our control, we are forced to raise our prices,' says A. S. Mehta, Marketing Director, JK Tyres. In fact, as the pressure from the end of OEMs is very high, the tyre manufacturers have now decided to make it up from selling high in the aftermarket. 'Keeping in mind the high level of competition in the Indian passenger car market, tyre manufacturers are left with no other option than to raise their prices in the aftermarket,' said Abdul Majeed, Leader ' Automotive Practice, PricewaterhouseCoopers (PwC) India.
Considering the fact that close to 70-75% of the total volume of the tyre manufacturers come from the replacement market, while close to 10-12% is contributed from the OEMs and the remaining by exports, aftermarket certainly offers high margins and as well as high volumes to the tyre manufacturers. 'As the aftermarket offers better margins to the manufacturers, it is currently the focus area of the Indian companies,' said Shashank Srivastava, CGM ' Marketing, Maruti Suzuki. In fact, several auto majors are running with a huge backlog of orders on their books due to the shortage of components. Rajesh Jejurikar, Chief Executive at M&M's automotive division, says, 'The shortage of key parts has resulted in production losses in April and May.' He also pointed out the fact that the company could have sold a couple of thousand more vehicles and it is an opportunity loss for the industry. However, even the replacement market has its own challenges as the rising imports from the Chinese market are denting the profitability of the Indian companies.
Excluding the exports segment, experts peg the domestic market to be close to Rs.270 billion, while the size of the domestic truck tyre industry is expected to be close to Rs.189 billion. Notably, close to 60-70% of the Chinese truck tyres goes into the replacement market and is surely standing as a cause of concern for the domestic industry. As the Chinese tyres are selling at price points that are 20-30% lesser than those offered by the Indian manufacturers, it is posing a big threat to domestic players. 'We are in a scenario where the import duty on natural rubber stands at 20% and even the duty on the import of tyres as a finished product stands at 10%, thus making it difficult for the domestic players to offer products at a competitive price as compared to the Chinese imported tyres,' adds Mehta. The Automotive Tyres Manufacturers Association (ATMA) has recently demanded a reduction of import duty on natural rubber to 7.5% from the commerce ministry, but keeping in mind the effect that it will have on domestic rubber industry, experts believe that the challenges will stay intact at least for the coming months.
However, considering the situation the Indian market is in currently, it is likely that majority of the tyre manufacturers would like to bank on the large replacement market rather than targeting OEMs for consistent volumes. According to the automotive mission plan, car and SUV annual sales are expected to surge to 3.6 million to 4 million units by the end of FY 2016 and many industry officials even consider the hurdles as a short-term challenge for the industry. 'The future of Indian automobile industry is undoubtedly very bright and factors like shortage and pressure on margins may seem as a big cause of worry but is a short-term challenge for the industry,' says Sandeep Singh, Deputy MD, Toyota Kirloskar Motors. In fact, the replacement market is also expected to be the playfield in the future as far as the tyre industry is concerned. Clearly, the bigger the automobile market will get in terms of unit sales, the more potential it will generate for the replacement market. 'Though, it is difficult to predict the movement of the natural rubber prices, it is expected that the price will soon start cooling down,' said Majeed.
However, there is a need to lower the import duty on natural rubber as it will help making the tyre manufacturers stand at par with the Chinese manufacturers. But for now, the consumer should be ready for many more hikes in the short-run as the pressure on margins is becoming a big challenge for keeping the companies afloat.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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