The challenges that the Indian tyre industry faces (today) are perhaps larger and more clearly defined,” K. M. Mammen, Chairman and Managing Director of MRF, told the shareholders at the company’s recent annual general meeting in Chennai. Considering that input costs are soaring, demand is faltering, and there’s fresh threat from global tyre companies and low-cost Chinese imports, Mammen wasn’t being alarmist.
The Indian tyre industry has just entered one of the toughest periods in its recent history. What he did not tell his fellow shareholders is that the next few years pose the toughest challenge to MRF’s leadership position in the market.With a market share of 24 per cent, MRF is the largest player in the Rs 20,000-crore Indian tyre industry. Apollo Tyres is a close second with a share of 22 per cent followed by JK Tyre (19 per cent), Ceat (14 per cent) and Goodyear (6 per cent). For years that has been the pecking order. But that could soon change.
The truck tyre segment, which accounts for more than 70 per cent of the industry volume, is witnessing a faster pace of radialisation. Two years ago, it was 2 per cent and today, industry estimates it at 8 per cent. It is expected to touch 15 per cent by 2009-10. “With better roads and a ban on overloading, demand for radial truck tyres is on the rise and it is only expected to increase over the years,’’ says Paras Chowdhary, MD, Ceat. It is for this reason that JK Tyre has set up a truck radial facility and others such as Apollo Tyres, Ceat and Bridgestone are following suit. MRF, though, thinks otherwise.
“Trucks in India are used differently. They are abused. That is why radialisation has not really caught on in the truck segment as much as in the car segment. Regulated loading is triggering radialisation but implementation of the ban on overloading has been very patchy,’’ says Koshy K. Varghese, Executive Vice President (marketing), MRF. It consequently expects a much slower pace of radialisation in the truck segment.
That explains why the company has announced that it will initially manufacture passenger car radials at the Rs 900-crore green field radial tyre facility it is setting up in Tamil Nadu. Any misstep on the truck radial front could cost the company dear.
MRF also faces challenges from within—its mindset. For instance, the company’s aversion to expanding its equity base is legendary. Its share capital appears to be cast in stone and has remained at just Rs 4.24 crore for at least a decade now. In comparison, Apollo Tyres’s equity stands at Rs 48.85 crore and JK Tyre’s at Rs 30.79 crore. “MRF’s cash accruals of over Rs 350 crore a year are enough to handle its current expansion plans with some borrowings, but its ability to further leverage debt for future expansion or acquisition is limited,’’ notes Rishabh Bagaria, research analyst, Pinc Research.
Over the recent years, Indian tyres companies have forayed overseas aggressively. Apollo Tyres acquired Dunlop South Africa in 2006 for Rs 290 crore. It has also announced a Rs 1,160-crore green field project at Hungary. JK Tyre acquired Tornel, a Mexican company, for Rs 270 crore in April this year. “Uncertainties over India’s continued competitiveness are forcing the players to set up bases in other low-cost countries. The increasing wages, energy and transportation costs are slowly dismantling India’s low-cost model,’’ says Chowdhary.
MRF, on the other hand, has preferred to expand within India. “We firmly believe in having a global presence. But you don’t need to have a factory abroad. Our seven factories in India will cater to our export demand,’’ says Varghese, adding: “if opportunity arises anywhere in the world that is a strategic fit, we are open to acquisition.’’ MRF takes pride in doing things differently. But the next couple of years will reveal who is right on these crucial issues—MRF or rest of the industry.