The Indian Tyres Industry ICRA Sector Analysis conducted in February 2004 Structure of the Industry Background The

origin of the Indian Tyre Industry dates back to 1926 when Dunlop Rubber Limited set up the first tyre company in West Bengal. MRF followed suit in 1946. Since then, the Indian tyre industry has grown rapidly. Transportation industry and tyre industry go hand in hand as the two are interdependent. Transportation industry has experienced 10% growth rate year after year with an absolute level of 870 billion ton freight. With an extensive road network of 3.2 million km, road accounts for over 85% of all freight movement in India. Market Characteristics Demand The demand for tyres can be classified in terms of: Type: Bus and Truck; Scooter; Motorcycle; Passenger Car; Tractor Market: OEM; Replacement; Export Environment Analysis - Porter's Model Entry Barriers: High The entry barriers are high for the tyre industry. It is a highly capital intensive industry. A plant with an annual capacity of 1.5 million cross-ply tyres costs between Rs. 4,000 and Rs. 5,000 million. A similiar plant producing radial tyres costs Rs. 8,000 million. Bargaining Power of the Buyers: High The OEMs have total control over prices. In fact, the OEMs faced with declining profitability have also reduced the number of component suppliers to make the supply chain more efficient. Bargaining Power of the Suppliers: High The tyre industry consumes nearly 50% of the natural rubber produced in the country. The price of natural rubber is controlled by Rubber Control Board and the domestic prices of natural rubber have registered a significant increase in recent times.

Inter Firm Rivalry: Low The tyre industry in India is fairly concentrated, with the top eight companies accounting for more than 80% of the total production of tyres.

Threat of Substitutes: Low but Increasing During the FY2002, over 1,10,000 passenger car tyres were imported. This constitutes over 2% of total radial passenger car tyre production in the country. However, with the reduction of peak custom duty, the import of tyres is likely to increase.

Tyres by Type The Indian tyre industry produces the complete range of tyres required by the Indian automotive industry, except for aero tyres and some specialised tyres. Domestic manufacturers produce tyres for trucks, buses, passenger cars, jeeps, light trucks, tractors (front, rear and trailer), animal drawn vehicles, scooters, motorcycles, mopeds, bicycles and off-the-road vehicles and special defence vehicles.

The scenario in India stands in sharp contrast to that in the world tyre market, where car tyres (including light trucks) have the major share (88%) by volume followed by truck tyres (12%). In India, however, passenger car tyres have a mere 17% share of the overall tyre market (as of FY2003).

Compiled by INGRES Truck and Bus Tyres The truck and bus tyre segment accounted for 19% of tyres produced in India in FY2003. Every truck/bus manufactured generates a demand for seven tyres (six regular and one spare) as against three in the case of two-wheelers and five for passenger cars. In addition, the price of a truck tyre is significantly higher than that of a passenger car tyre (roughly 10 times) or a motorcycle tyre. Thus the demand multiple emanating from the commercial vehicle segment is highest in value terms. Given the regular use and heavy wear and tear of truck and bus tyres, the demand from the replacement market in this segment worked out to 68% of the total demand for truck and bus tyres in FY2003; the OEM demand accounted for around 9% the same year. With the Indian manufacturers of cross-ply tyres focusing on the export market, this segment accounts for around 22% of the demand for truck and bus tyres. Passenger Car Tyres The passenger car tyre segment accounted for 17% of all tyres produced in India in FY2003. With passenger car production witnessing a growth of 12% in FY2003 over the previous year, OEM demand accounted for about 33% of the total sales that year. The replacement market accounted for around 63% of the total sales of passenger car tyres in FY2003. Exports accounted for 4% of the total passenger car tyre demand in FY2003. With the stock of cars increasing, replacement demand is likely to continue. Motorcycle Tyres Motorcycles accounted for 76% of two-wheelers sold in the domestic market in FY2003. Motorcycle tyres constitute the largest segment of the domestic tyre industry (29% of total tyre demand in FY2003). The replacement market accounted for around 49.8% of the total motorcycle tyres sold in FY 2003, while OEM demand accounted for around 50%. Scooter Tyres Scooters were the dominant segment in the Indian two-wheeler industry till FY1998, accounting for around 42% of domestic two-wheeler sales. However, the introduction of new motorcycle models has seen the share of scooters declining to 19% of domestic two-wheeler sales in FY2003. The OEM segment accounted for around 34% of the total sales in the scooter tyre segment in FY2003, with the rest being accounted for by the replacement market. Tyre Demand by Markets

Vehicle Manufacturers or OEMs The demand from the OEM segment is a derived one and directly correlated to the level of automotive production. The OEMs demand varies significantly across categories from between 8% for truck and bus tyres to over 50% for some other segments like, jeeps and mopeds. Replacement Market The replacement market, including State transport undertakings and Government buying, accounted for around 59% of the total tyre demand in FY2003. The demand in the replacement market depends on the vehicle population, the level of economic activity, life of the products transported, kilometreage per vehicle, the price of the tyres and the quality of the existing road infrastructure. Additionally, the replacement market, which offers better margins, is extremely competitive. The replacement market is dominated by the truck and buses segment, which accounted for 22% of all tyre sales in the replacement market in FY2003.The large size of the replacement in turn is determined by the interplay of various factors as discussed below: The replacement demand may be lower because of longer replacement intervals and lower business mileage if the economic activity slows down. Replacement demand in India is higher because of a low vehicle scrappage rate. Poor road conditions by lowering the life of tyres, have a positive impact on replacement demand. Stricter enforcement of the MV Act, which seeks to prevent overloading of vehicles, will result in an increase in the life of tyres and thus impact replacement demand negatively. Applying a new tread or "re-treading" can extend the life of the tyre at a significantly lower cost, thereby lowering replacement demand. In India, re-treading finds greater acceptance in the commercial segment. Radialisation of tyres is likely to result in lower replacement demand. While car radialisation in the country has reached a level of 65%, truck and bus radialisation stands at just 2-10%. Poor road and support infrastructure as well as traditional vehicle designs act as a barrier to radialisation in the commercial vehicle segment. Radial technology for trucks and buses would help increase operating efficiencies by delivering better mileage and minimising wear and tear. According to ATMA, even if only 25% of the truck and bus segment is radialised, the savings in fuel costs would be around Rs. 7,500 million. Introduction of tubeless tyres in the passenger car segment is also likely to affect replacement demand adversely. Introduction of eco-friendly radial tyres such as hyper-bonding silica technology in the passenger car segment may affect replacement demand adversely.

Exports In the light of the prevailing domestic market situation, most of the tyre manufacturers have taken to exports to reduce inventory build-ups. In FY2003, Indian tyre exports stood at Rs. 10.8 billion (10% of the total industry) in value terms and 3.1 million in unit terms (6.5% of total production). Indian companies have currently entered into sourcing agreements (for tyres) with neighbouring countries. For instance, Ceat and J K Tyres have sourcing agreements with tyre producers in Sri Lanka and China. This is likely to have a positive impact on tyre exports from India. Market Players Some of the major players in the Indian tyre industry are MRF, Ceat, JK Industries, Apollo Tyres, Bridgestone India, Goodyear India, Falcon Tyres and TVS Srichakra. The tyre industry in India is fairly concentrated, with the sample of eight companies (as in the text) accounting for 82% of production in FY2002. Besides, not all companies have a diversified product portfolio. Key Issues High tax usage

The high tax content on tyres can be gauged from the fact that the percentage of total tax to the tax excluded price for various categories of tyres is - 44% for Truck Tyre; 41% for Passenger Car Radial Tyre, 35% for Tractor Rear Tyre and 76% for Truck Tyre Tube. Increase in raw material costs Apart from being capital intensive, the tyre industry is highly raw material intensive. Any change in the prices of raw materials affects the profitability of tyre companies. The raw materials used in the manufacture of tyres are rubber and petroleum derivatives like nylon tyre cord, carbon black, styrene butadiene rubber and poly butadiene rubber. The most important raw material is rubber-natural and synthetic. Natural rubber (NR), with 29% weightage in the cost of raw materials used by tyre industry, is the highest cost item. Annual consumption of NR by tyre industry is 3.50 lakh tonnes, valued at Rs. 14 billion. Over 85% of NR consumed' by the industry is procured domestically. 15% is imported. In the 2003-04 fiscal, as against the Minimum Statutory Price of Rs. 32.0 per kg, the ruling domestic price of NR had been over Rs. 50 per kg. This is higher than the world rubber prices. However, this does not entail the tyre industry players to import as a number of restrictions are imposed on the import of NR. NR can be imported only through two ports-Kolkata & Visakhapatnam. The customs duty on import of natural rubber is 20%, with 10% under Bangkok Agreement. However, this is not relevant, as NR is not cultivated in South Korea, Bangladesh & China (signatories under the Bangkok Agreement). Hence, NR can be sourced only from Sri Lanka (under the Indo-Sri Lanka Agreement), which is of bad quality. Thus, the options of rubber import are restricted and the manufacturers have to rely on the domestic market for procuring rubber. Import of tyres During the FY2002, over 1,10,000 passenger car tyres were imported. Although this constitutes a small percentage (1.5%) of total passenger car tyre production in the country, since total imports are of radial passenger car tyres, the percentage is higher when compared against domestic production of radial passenger car tyres. A large percentage of imports are from South Korea at a concessional rate of customs duty (i.e. 15%) under the Bangkok Agreement - as against 20% normal rate of customs duty. Even though the Government has imposed a restraint on the import of used tyres into India, occasionally there are reports of import of such tyres in a clandestine manner, sometimes as new tyre at low value, since there is no restriction on import of new tyres or as tyres under the "others" category. Many countries such as Japan, Bangladesh, Pakistan, Philippines, Thailand, Kenya, South Korea, etc. have either put a complete ban on import of used tyres or have placed stringent conditions on such imports. Tyre Exports The product focus of tyre exports from India has been Traditional Truck Tyres. Globally this segment of tyre export is shrinking due to greater acceptance of radial tyres. Over the years, China has emerged as a major exporter in bias tyre category. Additionally, export of Indian tyres to select countries is subjected to non-tariff barriers (NTBs) by way of standards, tests, etc. Export of cheaper tyres from China to major tyre importing markets, like US, is adversely affecting Indian tyre exports to these markets. India's share in exports to these countries (especially USA) is progressively declining. If the trend is not reversed, Indian tyre industry will find it extremely difficult to regain its erstwhile position in these markets. Low rate of interest, cheaper electricity tariff, hidden subsidies by the Chinese Government, better infrastructure facilities and lower transaction costs are factors favourable to Chinese tyre industry. Trends in Production, Consumption, Price & Capacity Utilisation The total tyre produced in the country was 51.58 million units in FY2003 - a 19% growth rate over FY2002. CAGR of tyre production (in %) FY 1993-2003 FY 1993-1998 FY 1999-2003 FY 2002-2003 Compiled by INGRES Currently, the size of the Indian tyre industry is estimated at Rs. 128 billion (0.5% of Indian GDP), as of FY2003. The total installed capacity of the Indian tyre industry is around 60.5 mn units, and the capacity utilisation is around 85%. The capacity utilisation improved in FY2003 following improved demand from the automotive segment (75% in FY2001). Additionally, in FY2003, the price realisation of tyre manufacturers also registered an increase by 8%, as against a 0.6% increase in FY2002. Demand Supply Gap The demand for tyres is either in the domestic market or in the export market. As far as domestic demand is concerned, 9% 7% 9% 19%

the OEM and the replacement segments are likely to witness strong growth given the current performance of the automotive sector. Given the strong linkages of tyre industry with automotives, its demand is likely to be strong over the short to medium term. As for the export demand for tyres, the outlook is positive, even though some downsides remain. As regards supply of tyres, currently, the major players are in the process of expanding their capacities, in anticipation of uptrend in sales. For instance, Apollo Tyres has set up a joint venture with Michelin for manufacture and sale of bus and truck radials. JK is expanding its Mysore truck and bus radial facility along with eyeing acquisitions of smaller units. Ceat has increased its offtake by 3 times from Pirelli. However, a characteristic of the Indian tyre industry is that most of the tyre manufacturers in the past had increased capacities in anticipation of a surge in demand, but when it did not materialise, they reduced their addition to capacities. Thus, the demand-supply gap is likely to be an important issue for the Indian tyre industry over the short to medium term. Review of Performance Overall Performance The operating margin of the representative sample of tyre companies improved during FY2003. However, the net profit margin of the tyre companies even though improved, was still at 3%. Performance in FY2004 The tyre industry continues to be driven by good demand growth, propelled by sustained uptrend in demand and sales of automobiles in general, and commercial vehicles and passenger cars in particular. However, this does not get translated into improved margins for the industry, as it is witnessing sustained rise in prices of raw materials like natural rubber. Additionally, the customs duty on imports has been brought down from 25% to 20% and Special Additional Duty of 4% has been dispensed with. Outlook The level of economic activity, performance of domestic automotive industry, and the faring of the transport sector directly influence the performance of the tyre industry in India. With the replacement segment dominating the overall tyre demand in India, the industry remains inherently vulnerable to economic cycles. While radialisation has become the norm in the passenger car segment, in the bus and truck tyre segment, its acceptance is still limited. Bus and truck radialisation could emerge in the long term as the quality of roads improves and the restrictions on overloading are better enforced. The practice of re-treading, which is gaining increasing acceptance, could pose a challenge to replacement demand in the medium term. The ability of the re-treading sector to capture potential replacement demand would depend on the awareness among customers (of the benefits of retreading) and also the quality of retreading done. Given the low levels of penetration of two-wheelers and passenger cars in the country, OEM demand is likely to increase, which in turn would push up replacement demand with a lag. The prospects of tyre exports from India appear healthy, following efforts by Indian companies to increasingly enter into outsourcing agreements with tyre producers in Southeast Asia, Eastern Europe and Latin America. Overall, tyre manufacturers are likely to tap the export market in an effort to boost sales. The increasing exports of bus and truck tyres (crossply variety) from India to developing countries is because of the fact that developing countries are unable to source them from developed countries as these are no more produced there. Tyre imports are unlikely to pose a threat to the domestic industry, given that domestic prices are lower than international tyre prices. In the domestic market, tyre manufacturers are expected to increasingly focus on expanding their dealership networks & explore possibilities of tie-ups among themselves to penetrate the growing customer base. They are also likely to pursue innovative measures (such as "dial-a-tyre service and road shows) to improve customer awareness. The consolidation of the Indian tyre industry is likely to continue in the coming years through mergers among existing players. The industry is likely to expand through a combination of organic and inorganic growth. While organic growth would come from raising efficiency levels, inorganic growth would be achieved through alliances and M&As.

An original equipment manufacturer, or OEM is typically a company that uses a component made by a second company in its own product, or sells the product of the second company under its own brand. The specific meaning of the term varies in different contexts.
Aeronautical industry

OEM refers to the aircraft manufacturers. Examples of globally present OEMs in this industry are Airbus of Europe, ATR of France/Italy, Boeing of the United States, Bombardier of Canada, Embraer of Brazil, and United Aircraft Corporation of Russia.
Automobile industry

OEMs are the industry's brand name auto manufacturers, such as General Motors, Ford, Toyota, Volkswagen, Hyundai, Honda, Mitsubishi, etc. The OEM definition in the automobile industry constitutes a federally licensed entity required to warrant and/or guarantee their products, unlike &aftermarket& which is not legally bound to a government-dictated level of liability. OEM also applies to a multitude of licensed component manufacturers, such as Bosch, BBS, NGK, Pagid, Ferodo, GUD etc. While these meet the industry definition of OEM, they are frequently called OEM Suppliers within the industry to prevent confusion with the automobile brand names. Identical products, such as spark plugs, may be supplied through official franchised dealers in appropriately branded packaging (Volkswagen, General Motors, etc). The same product may be supplied through general auto retail outlets (in the UK - Halfords, A1 Motor Stores, etc), or 'trade' motor factors (UK - Partco, Euro Car Parts, APD) in the manufacturer's original branded packaging. OEM also refers to brands of components that an automaker uses in their particular vehicles. For instance, Mark Levinson audio is used in Lexus vehicles. Also, major tire manufacturers (Michelin, Bridgestone, Goodyear, etc.) produce a line of OEM tires that are factory-installed as standard equipment on many vehicles; these companies also produce other more expensive series of tires for motorists that want higher performance.
Electrical switchgear

Many OEMs exist across the United States to manufacture electrical equipment. These OEMs exist because typically the &national& manufacturers lack the ability to adapt to certain needs (ie. special data-center requirements, dimensional challenges as well as speed of delivery). An example of one of these OEM's is California-based Industrial Electric Manufacturing (IEM).
Computers

Beside referring to manufacturers, OEM can be used as an adjective to describe software licensed only for a particular system. OEM software is purchased alongside a system or hardware parts. OEM software is often cheaper than the full versions but not as cheap as academic or student editions. OEM hardware is hardware packaged for computer administrator and builder use. These products are normally plain boxed and often don't come with any instructions or references provided in retail packages. Technical support

for such &OEM products& is usually the responsibility of the reseller, rather than of the manufacturer. OEM hardware is also called bulk hardware.
Operating systems

There are two types of OEM when it comes to operating systems. The first is when a pre-built computer is purchased, there is an OEM disk that comes with the system, which can not be transferred to another one, because that disk is designed to run only with the specific system components. The second type of OEM operating system is one that can be transferred to any other system, without the dependence on the components.
Contradictory uses in manufacturing

When a company licenses products or components from another company and sells the products or components with the purchasing company's name or logo on them (usually, but not always as part of a product), the company that resells the product is called the OEM.[1][2][3] For example, when IBM purchased Tandon floppy drives for IBM's original PC, IBM sold the floppy drive to the end user via sales of IBM's PC, and IBM was called the OEM in relation to the Tandon floppy drive. However, in another common usage, Tandon would be called the OEM. According to Search Data Center, the former meaning (the reseller is the OEM) is the modern meaning, and the latter meaning (the manufacturer is the OEM) is a holdover from an older usage. The full extent of the confusion can be seen by browsing the contradictory definitions pulled up by Audit My PC from the results of various search engines. In the above example also, the Tandon Floppy drive would be called an OEM product.[8]. In the verb form, it would be said that IBM OEM'ed the Tandon floppy drives. There is a growing market for OEM version to be a version with reduced functionality. (For instance the OEM version of Cyberlink PowerDVD supports two-channel audio but not multi-channel sound systems. A customer who wishes to play DVDs with multi-channel sound is required to pay to upgrade to the full version). The OEM version of a software package may also be limited to be usable only with the hardware it came with. For instance the Nero burning ROM OEM software only functions with the same brand burner it is bundled with. Typically OEM software licenses require the installer to agree to additional terms to have a valid license. Microsoft requires certain conditions of distribution and support for its System Builders, which is how it describes the installers with privileges to use OEM licenses. The requirements include: automated methods of installation of the product; customization of the installation to identify the OEM; first level technical support of the product; application of a Certificate of Authenticity (COA) to the hardware; and distribution of original media and booklets. OEM software may be licensed under conditions requiring

that it be sold with computer hardware. Such conditions have been ruled null and void by the courts of some countries, such as Germany. In those countries where they are deemed binding, to avoid contravening the conditions while passing OEM software savings on to end users, some retailers will sell OEM software with a token hardware device of small cost, such as an obsolete motherboard, single SIMM, or a cable splitter to satisfy the letter of the licensing agreement. This practice is questionable, and may open the end user to audits by publishers. The practice of utilizing OEMs in today's cost competitive environment falls under the broader category of outsourcing - a popular business strategy which taps into the original manufacturer's ability to drive cost out of production of the product through manufacturing economies of scale; thereby being able to pass on a more competitive purchase price to the reseller which, in turn, makes each partner in the transaction more competitive.
Term origin

OEM is a term that may have been coined in the 1950s by IBM to refer to a vendor that purchased and resold their computers[citation needed], also soon after in the early 1960s by Digital Equipment Corporation and its vendors.[9][10][11] OEM refers to the manufacturer of a component of, or subassembly used in, the production of a larger item.
Bulk components

Bulk components are often mistakenly referred to as OEM products. However, these do not actually differ from retail versions except in their packaging and/or the way they are procured.
Value Added Reseller (VAR)

When the term OEM is used to refer only to the original manufacturer of the product (such as with computer hardware), the term Value Added Reseller is used to describe the reseller. The use of OEM as a verb results in the common misunderstanding/reversal of meaning. For example, a VAR might say that they are going to OEM a new product, meaning they are going to offer a new product based on components from an OEM. However, this could also be taken to mean that the VAR considers themselves to be the OEM. An OEM will typically build to order based on designs of the VAR. For example, a hard drive in a computer system may be manufactured by a corporation separate from the company that markets and sells the computer, or a loudspeaker in a stereo system made by a company that specializes in audio manufacturing.

Original design manufacturer - ODM

An original design manufacturer (ODM) is a company which manufactures a product which is eventually branded by another firm for sale. Such companies allow the brand firm to produce (either as a supplement or solely) without having to engage in the organization or running of a factory. ODMs have grown in size in recent years and many are now sufficient in size to handle production for multiple clients, often providing a large portion of overall production. A primary attribute of this business model is that the ODM owns and/or designs in-house the products that are branded by the buying firm. This is in contrast to a contract manufacturer (CM). This model is especially used in international trade, where a local ODM is used to produce goods for a foreign company which sees some advantage in the transaction, such as low labor inputs, transport links or proximity to markets. This is also used where local ownership laws possibly prohibit direct ownership of assets by foreigners, allowing a local firm to produce for a brand company for either the domestic market or export. This type of business is part of &outsourcing&. An example is Compal Electronics, which makes notebook computers and monitors, and operates as a mass producer for numerous brand companies, assisted by low labor costs, low-cost transport, and the near commodity nature of the physical inputs (in Compal's case, computer components). The market research firm iSuppli issued a report in 2006 which demonstrated that 82.6% of PC notebooks are made in Taiwan by Taiwanese original equipment manufacturer (OEMs) and ODMs.