The Industry: Dominated by local players(90% of tires) In 2006, 40 competitors with production volume 70 million tires 4 local players

alone accounted 75% of sales Expansion of automobile mkt, production of vehicle doubled b/w 19942004 Growth of 2 wheelers & 3 wheelers was high because of city dwellers Resulting in growth in no. of tires sold 4.5 % in 2004 and 5% in 2005 Two main tire technologies Diagonal or cross ply (created in 1950) Easily recognised with its very high profile In contrast, represented 65% of tire sales (value?) in India Because of factors specific to India (emerging countries) Variable quality of road, tendency to overload vehicles Competitive price of Cross-ply Long life expectancy, double of radial Great capacity of absorption on rough terrain But poor road holding at high speed Strong risks of coming off the rim at high torsion and stress Radial (Created in 1965 by Michelin) Flat but wider Established itself in developed countries with Increased performance Better adhesion Greater resistance to torsion and friction Sales growing slowly in India but with improvements in roads and car performance Technological improvements were being made to cars in recent years In 2006, radial represented 85% of car tire sales by volume (28% in 1995) Radial technology was non-existent in commercial vehicle tire market (1st in 1989 by MRF) CAR: 85%, LIGHT COMMERCIAL VEHICLE: 11%, COMMERCIAL VEHICLE:2% With road improvements, radicalization level will increase and thus overall tyre demand Three major markets for tire companies Original equipment manufacturer (OEM) (Sales in 2005: 34.2%) Corresponded to direct purchases of tires by car makers The replacement market (Sales in 2005:58.9%) Consisted of garages, small retailers and tire distribution networks Export market (Sales in 2005: 6.9%)

The tire market in India was more dependent on automobile market than the world market which was based more on replacement market

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OEM market Buyers: Major Indian and non Indian companies Maruti Udyog: with 50.9% share of automobile market(2005) Tata Motors: Leader in commercial market with 59.7% share Toyota: Japanese company, specific model for Indian urban traffic All were waging a fierce price war Led to decrease in their profitability over the previous 5 years To restore margin major reductions in price of tires to suppliers in OEM market(20% to 40%) Suppliers at a disadvantage: Pressure from car makers for price reduction High input costs: natural rubber and petroleum(steady rise in prices) Difficulty in obtaining good quality natural rubber (poor quality supply from Sri Lanka)

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Replacement market Thousands of independent garages and dealers Some exclusive distributers others multi brand Trend was towards vertical integration by tire manufacturers In this market, price of tires was a priority purchase criteria Tires imported at low prices from China and South Korea Mainly cars and two wheelers cos of low custom duties (high for commercial vehicles) Some Indian comp tried to collaborate with Chinese comp to jointly produce cross ply tires 3) Export market Latin America, south east asia, middle east, Africa

These three markets dealt with several lines of products

 Commercial vehicle tires, cars, two wheelers, 3 wheelers, Agri vehicle tires Commercial Vehicle Tires: 19% by volume but 60% by value in 2005 Sales growth this product 3%, overall tire market 5% Expected to grow at same level for next 10 years High price of commercial tires cos of special expects. from them (heavy load, retreading) Company became aware of impact of tire on fuel consumption(since rising prices of it) Here Radial was more economical than cross ply, retreading was also less APOLLO: 26%, JK TYRES (with radial): 25.2%, MRF (with radial): 18.8%, CEAT:18% Car Tires: 17% by volume but 24% by value Strong growth expected over the next 10 years by both value(8-10%) and volume(6-7%) Considered as basic product tire gradually increased in value because of Improvements in car performance Development of radial tire Emergence of strong brands Introduction on new technologies In 2000, intro of Tubeless tires, a real success Tubeless tires share by volume: 6.3% and growth rate 20% (as of 2000) Tubeless tires highly profitable for small cars, medium sized cars Main players: Good year(28% mkt share), Bridgestone(27%) and MRF(14% share) MRF: 24.7%, JK TYRES: 18.2%, APOLLO: 13%, GOODYEAR:10-14%, CEAT: 11% Two Wheeler Tires: 29% by volume Highest growth rate since 1999, average of 7.3% per year Growth expected to continue in next 10 years Presence of strong competition resulted in regular drops of prices and margins For three wheelers 19% by volume Competitive trends similar to 2 wheelers MRF: 42.5%, TVS: 21%, FALCON:19.5% Competition and main players: In India, 2005, 40 players & 70 million tires

 In 1980s and 90s considerable increase in no. of players The 2000s, a period of rationalization and concentration of Indian tire industry cos of Growing rivalry b/w tire manufacturers The pressure of car makers The increase in R&D costs The increase in the entry costs

SUCCESS FACTORS:

1) Indias automobile sectors growth:

With increasing per capita income, infrastructure development and growing urbanization in India, the automobile industry has grown significantly in this decade. The outlook for the domestic automobile industry in India remains robust supported by Indias growing importance as an automotive export hub for small cars. Most of the overseas automobile players are planning to set up their manufacturing plants in India. Therefore, the growing demand for automobile products is expected to fuel the growth in the tyre industry.

2) Increasing radialisation level on back of infrastructure development

Based on their construction, tyres are of two types - cross ply or bias tyres and the fuel efficient radial tyres. The Indian tyre industry was mainly a cross ply/bias tyre industry. Now, the market has been shifting towards radial tyres. While bias tyres are sturdier and better suited for extreme road conditions, radial tyres provide better mileage and have a higher life. (The table given below gives the radialisation levels in different segments in India.

The low level of radialisation in the truck and bus segment in India is mainly due to poor road conditions. The Indian T&B tyres are expected to perform, under different and extreme road conditions, from zig-zag village roads to newly constructed national highways, prevailing in different geographical parts of the country. As a result, while the world average radialisation for this segment is 68%, in India it is just 12% The Government has been focusing on improving the roads and has proposed huge investments in roads development (for ex- 35,000 km of highways during FY 2008-09 FY 2013-14) to improve connectivity. Hence, we expect that such future road development projects will gradually increase the radialisation level in T&B segment and overall tyre demand.

3) Robust capacity expansion: A key growth driver

The Indian tyre manufacturers had total installed domestic tyre capacity of 122 million tyres in FY10-11. According to a research report by ICRA, with good demand from both OEM and replacement market, the total installed domestic tyre capacity is expected to increase by more than 47% to around 180 million tyres by 2012-13. Considering the demand of T&B tyres and its low radialisation level, the TBR segment is expected to attract the highest share of investments (over 50%) over the next three years followed by the passenger car segment. The total capital expenditure is expected to be around Rs. 17,500 Cr. over the period of 2010-2013. Below given table shows planned expenditure of the major players.

4) Vast distribution network

The tyre companies have built a vast distribution & marketing network in India.The distribution system consists of distributors, followed by large dealers and then small/sub dealers. There are more than 5000 dealers across India. As a result of that all categories of tyres are readily available in all parts of the country including villages. The distribution network is primarily needed for replacement market. CONCERNS:

1) Volatile raw material prices

The key raw material for the tyre industry is natural rubber. Rubber prices have been very volatile over the years. This volatility affects the margins of the company. In FY10-11, due to lower production and higher demand of rubber, rubber prices had surged from Rs 160/kg in April 2010 to Rs 240/Kg in March 2011, which resulted in losses to many of the

players. Currently, the prices are close to Rs. 225/kg. Prices will remain a key concern for the industry in the near future as well due to lower production and higher demand The chart given shows how increasing rubber prices affected the profit margin of the tyre industry over the last year. 2) Inability to pass on price rise to OEMs The ability to pass on sharp rises in raw material prices to OEMs remains a challenge for industry players. Generally, many tyre manufacturers are unable to pass on higher raw material prices to OEMs, due to bulk demand fearing loss of market share. In contrast, tyre players enjoy better pricing power in the replacement market. But now, the pricing power in the replacement markets has also been affected, due to competition from lower-priced Chinese imports. Hence, we expect that competition will increase in the future due to import of lower-priced tyres and possible backward integration from OEMs. This will lead to lower growth for many players. 3) Stagnant Export due to competition from low cost manufacturing tyre countries The Indian tyre industry is dominated by domestic market which contributes around 90-95% of the total industry turnover. The export market share to the total tyre industry turnover has been stagnant over the years. This is because of capacity constraints and intense competition from China and other South East Asian countries in tyre exports to other countries. The quality of Indian tyres is better and has wider acceptance. However, due to lower prices and higher tyre production, Chinese tyres are cutting into the share of the Indian tyre exports. 4) Rising interest rates make finance expensive The tyre industry is a capital-intensive industry. Many tyre players have planned huge investment in India to expand their tyre production capacity which will be funded largely by debt However, the government in its bid to counter inflation has been steadily increasing interest rates and is expected to continue with this in the near future. Hence, rising interest rates may affect the profitability of the tyre players.