Rolling with the punches: Slowdown in auto sales drags tyre industry

Growth in the tyre industry has been slowing, especially from the second half of 2018-19, on account of a liquidity crunch, lower infrastructure spending because of elections and the general slowdown in auto sales. Full-year growth production came in at just 7-8 per cent against 6-7 per cent in 2017-18. The second half of 2018-19 has been particularly poor (see table).

This slowdown is hardly surprising in an uninspiring year for the original equipment manufacturers (OEMs), which account for 22-52 per cent of production of the tyre industry, depending on the segment. Passenger car sales grew marginally by 2.7 per cent , though commercial vehicles saw healthier growth at 17.55 per cent in 2018-19.

In spite of this, tyre manufacturers appear to be upbeat and the industry is planning major investments to the tune of Rs 20,000 crore via expansions or greenfield projects. A major chunk of this new investment is coming in faster-growing segments such as truck, bus and specialised tyres.

For instance, Apollo Tyres is planning to invest Rs 2,800 crore this year in India, primarily towards the greenfield plant in Andhra Pradesh for Truck Bus Radial (TBR). Recently Apollo doubled its truck-bus radial capacity in Chennai, from 6,000 to 12,000 tyres per day, at an investment of Rs 2,700 crore.

MRF has signed an agreement with the Tamil Nadu government to invest Rs 3,100 crore for capacity expansion, and it has a greenfield project in Gujarat. RPG group’s Ceat is lining up investments of around Rs 4,000 crore towards capacity creation at Halol (TBR), Chennai (passenger cars), Ambarnath (off-highway tyres) and Nagpur (two-wheelers). Out of this, Rs 1500-1600 crore  will be spent this year.

Satish Sharma, President, APMEA (Asia Pacific, Middle East & Africa) at Apollo Tyres, said that the company is investing as it is optimistic about the future growth of the industry.

From July, the industry should see some upward movement on anticipation of a good monsoon. The demand outlook for the Indian tyre industry is very much in sync with the automotive industry. 

This apart, all the international tyre majors including Michelin, Yokohama and Maxxis are already in India or are in the process of setting up capacities.

Yokohama, for example, which set up its plant in 2014, has announced plans to more than double the annual production capacity to 15,30,000 tyres from 7,00,000 tyres at an investment of Rs 380 crore. This facility is expected to begin production in the fourth quarter of 2019. Taiwanese tyre major Maxxis Group has announced plans to invest around Rs 2,600 crore in India, setting up its first manufacturing plant at Sanand, Gujarat, and is expanding it in phases to manufacture 60,000 two-wheeler and 12,000 four-wheeler tyres over a period of time.

This is significant. The tyre industry is a sort of secondary bellwether business, and the upbeat sentiment appears contrary to the prevailing reality. So what’s driving this optimism?

“The tyre industry in India is on the cusp of a significant change and is all set to register a bigger mark internationally. There is a distinct shift in tyre manufacturing in Asia, and India is poised to play a larger role in the days to come," said K M Mammen, managing director of MRF Ltd and chairman of Automotive Tyre Manufacturers’ Association (ATMA), which represent 11 large tyre makers which account for over 90 per cent of domestic tyre production.

ATMA predicts that the industry would grow 7 to 8 per cent in fiscal 2020, and some segments would grow faster than others, depending on demand. Trucks and bus tyres, for instance, grew by 17 per cent in April to February 2018-19, while passenger car grew just one per cent. 

“Post elections, and especially in the second half of the fiscal year, the industry is anticipating an upsurge in demand on account of a push for infrastructure and possible easing of liquidity,” said Rajiv Budhraja, director general, ATMA.

The other major growth-driver: Anti-dumping duties on Chinese imports on truck and bus radial tyres, mainly for the replacement market, which accounts for 70 per cent of industry revenues. The fact that Chinese imports dropped a stunning 79 per cent in 2018-19 over the previous fiscal indicates the slack that domestic manufacturers were able to pick up.

This apart, tyre makers are setting their sights on exports. Preliminary figures show that tyre exports have crossed Rs 12,000 crore during FY2019, with the US and Germany accounting for over 20 per cent of total exports, up marginally from Rs 11,180 crore in FY18.

With investments in road and highways infrastructure going up, truck tyres are expected to grow at 15-20 per cent for the next couple of years. There will be the BS-VI pre-buy spree in the second half of 2019-20, plus there is replacement market for the segment. In this segment, radialisation has reached nearly 50 per cent in 2018-19 from 44 per cent last year. 

This optimism also has to be balanced against some major challenges in the year ahead, chiefly on account of a downturn in the commodity cycle that kept the cost of raw materials, principally crude and rubber, low. 

Crude oil derivatives such as carbon black, synthetic rubber and nylon tyre cord fabric together make up nearly half the cost of producing a tyre. The rise in the price of crude oil by nearly 35 per cent since January and rubber prices by 12-13 per cent year-on-year certainly squeezed profits for tyre makers, which was visible in the fourth quarter results.

With the US sanctions on Iranian imports kicking in and rubber production falling, prices are expected to increase further, which may put further pressure on the margins.

The exports market is also challenging. Growing nationalism leading to various kinds of import/custom duty, trade quota, volatile currencies are also leading to a challenging international business scenario.

Tyre makers, however, are looking beyond the temporary headwinds at the larger picture  “Large infrastructural spend by government along with steady rise in disposable income and low vehicle ownership in India creating huge potential for growth combine to provide a favourable environment for tyre makers,” says Anant Goenka, managing director, CEAT.

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