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Neeraj Kanwar on Apollo Tyres' focus on sustainability, Make in India

Neeraj Kanwar on Apollo Tyres' focus on sustainability, Make in India

Neeraj Kanwar, Vice Chairman and Managing Director of Apollo Tyres, on his company’s focus on sustainability, de-risking as a strategy, Make in India, and much else

Neeraj Kanwar, Vice Chairman and Managing Director of Apollo Tyres Neeraj Kanwar, Vice Chairman and Managing Director of Apollo Tyres

London-based Neeraj Kanwar, the 50-year-old Vice Chairman and Managing Director of Apollo Tyres, has managed to turn the Gurugram-headquartered company into one of the most recognisable auto brands in the world. In the last five years, Kanwar has grown the company’s turnover from $450 million to $2.34 billion. He now has a new mission: sustainable development. But that won’t be a cakewalk, especially since he makes tyres, one of the most polluting auto parts. Tyres are the second-largest source of primary microplastic pollution in the ocean after single-use plastic and account for nearly half of the global road transport particulate emissions. The only way forward, therefore, is to focus on green manufacturing processes, as the industry jumps onto the electric bandwagon. In an interaction with Business Today’s Prerna Lidhoo, Kanwar opens up about his enhanced focus on sustainability, how de-risking worked for Apollo Tyres as a strategy, his belief in the ‘Make in India’ growth story and more. Edited excerpts:

Q: Electrification is set to be the next big disruption in the auto industry. Coming from an engine-agnostic business, do you worry about the future of mobility?

A: The entire journey of sustainability is very important to us. We aim to become a $5-billion company by 2026 keeping in mind EBITDA margins have to be higher than 15 per cent and return on capital employed (RoCE) is higher than 12 per cent. But we want to achieve that based on five key pillars: sustainability, digitisation of organisation, technology, brand and people.

Talking about sustainability, the manufacturing of tyres does lead to a lot of carbon emissions at our factories. Also, tyres are a non-sustainable product. We are looking at how we can use sustainable raw materials. We have set a target for 2030 [to develop] our raw material procurement strategy. We’re working with some universities around the world to try and come up with new products which would be sustainable.

Secondly, on the products themselves, we’ve come out with products which will be low in rolling resistance, which will make [the] cost per km much better. So, consumption of petrol or gas automatically becomes lower and vehicles will get more mileage out of these low rolling resistance tyres and that is what will [also] go into electric vehicles (EV). There’s a very clear focus on EVs for the company going forward. While India is slow in picking up on EVs, other markets have picked up very fast. Our focus is on North America and Europe in our EV journey, which has already begun. [Our journey in] India is a bit far away because of the infrastructure on EVs.

Obviously, it’s a big challenge for car [manufacturers] and original equipment manufacturers (OEM) but producing a tyre is not that simple too. We have to look after carbon emission norms within the factory. We do consume a lot of energy... [and] in India it’s all coal-based. We’re studying how to move away from coal-based energy to other sources like solar energy. This will require capital expenditure (capex). Coal has become very expensive and [is] not even available. We’re looking at that side of it as well. We also consume a lot of water. We’re trying to see how we can recycle water at all our plants. It is a highly engineering processes-driven industry. With the target of being carbon neutral going forward, sustainability is critical to business success, increasing the use of renewable materials and reduction in waste being the key goals.

With the global pandemic accelerating the pace of digitalisation, and several changes in the industry including electrification and autonomous driving, this is a key focus area for the company as it continues to grow. In addition, the increased focus on EVs, autonomous driving, virtual reality (VR) and use of artificial intelligence (AI) to improve safety and sustainability, will make technology a key pillar for Apollo Tyres. Multi-cultural and diverse teams have better business outcomes and are more likely to be innovative and agile, and hence people become one of the key pillars for the company. Brand will continue to be a key focus area for the company as it aims to further strengthen its two product brands—Apollo Tyres and Vredestein tyres.

Q: You plan to become a $5-billion company by 2026. What will be your growth focus from here on?

A: India and Europe are our two home markets. Our third market, the US, is going to be our next growth market. In 2020, we launched the Vredestein brand for passenger cars [in the US] and six months back, we launched Apollo truck radials in the US. I’m happy to say that the demand [has been good] and the brand that is being sold in the US has a good name and technology products that have gone in have achieved podium positions. So, we’re getting good traction from US customers and now the game is to build the brand and the distribution. We have tied up with two big distributors in the US. We’re seeing traction coming in so the demand is picking up and that’s my next growth area. In India, we will focus on attaining leadership; in Europe, attaining premiumisation; and we will go for growth in the US.

Q: You had acquired Vredestein, a premium European brand, to focus on luxury brands. How will the dual brand positioning of Apollo and Vredestein work?

A: We have recently launched Vredestein— our top European premium brand—in India. The volumes are very low but the margins are much higher for this brand. We are targeting the luxury market in India with our 100 per cent localised Vredestein products. Today, a lot of cars are being upsized and a lot of customers are going in for upgrades. Instead of using a 13-14-inch tyre, they are going in for a 15-17-inch tyre. That’s where Vredestein comes in. There’s nearly a 10-15 per cent price difference between Apollo and Vredestein. These brands will not cannibalise each other. People who buy a Mercedes-Benz S-Class/E-Class or a BMW 7 Series/5 Series like a European brand. Instead of Bridgestone or Michelin [tyres], they might use Vredestein [tyres]. They’re the ones we’re targeting. The other segment we’re targeting is motorcycles, where we’re fighting Pirelli, the top motorcycle radial tyre. Apollo Radial will fight the lower end of the segment and Vredestein will fight the higher end.

Q: The increase in raw material costs has hit auto parts makers hard. How are you coping with this?

A: There’s a huge increase in the cost of raw materials. We’re not seeing any signs of it softening. We’ve already seen a 23 per cent increase [in the cost] of raw materials in this financial year. We’ve only been able to increase prices by about 9-10 per cent. Even then our profitability and EBITDA margins have come down to close to 10.5 per cent.

What has helped us is de-risking our strategy, and Europe has shown a 17.5 per cent growth. So, our consolidated levels have been close to 12.5 per cent. Europe has been able to take price increases faster than India. India is lagging by two quarters. We are again doing price increases in this quarter [which are] close to 5 per cent in various product categories. But still, we have a long way to go because we’re again seeing input prices go up by nearly 13-14 per cent in Q3. Again, it’s going to be a fight to increase prices, because we have to be profitable, we have to reinvest back into the organisation, into our factories. But there’s a very clear focus on EBITDA margins, on free cash flows, on taking our RoCE higher than what it is today.

We don’t know how raw materials will behave because all of a sudden oil prices have gone up. External costs have gone up but what we’re trying to do is internally apply what we learnt through Covid-19, which was bad costs versus good costs. We’re continuing to keep our fixed overheads at the levels of Covid-19. Our fixed overheads had gone down by 14 per cent and now when the economy has opened up, that 14 per cent has come down to 10 per cent. So, it’s more sustainable. We’re going forth with practices like digital product launches, cutting down on unnecessary travel, etc., that we incorporated during the pandemic.

Q: How does one become crisis-proof in such unpredictable times?

A: Apollo has been very good at that. For the past 15-20 years, we have de-risked ourselves from India and we have opened our markets outside of India. Today we have Europe which is our second home market; then in South-East Asia, we have Thailand and Malaysia. And then we have MEA which is the entire Middle-East-Africa region. We have an office in Dubai, [one] in South Africa and then obviously [one] in the US. We also have offices in South America, Brazil and Mexico. Given that we have all these different new markets, when the India OEM is down, exports take over.

India for Apollo has become an export hub. The Make in India story for us is very true because we’re supplying close to 2-2.5 million passenger car tyres per year to markets outside of India and that’s what’s helping. Today, our passenger car tyre plants are running at over 100 per cent capacity. In fact, we’re losing sales in a few countries because of a shortage of supplies—because we do not have the production capacity. This is even when OEM in India is down. Because Apollo has de-risked itself from one market, we have exposures in all these markets and therefore today our plants are running at full capacity.

Q: For FY22, you had announced a capex of Rs 1,800 crore. Do you have similar growth and expansion plans for the next few years?

A: In the past 10-11 years, we’ve put up three big plants. One is in Chennai which is one of the largest [plants] in South-East Asia; then we put one up in Budapest, Hungary; and last year in May we put one up in Chittoor, Andhra Pradesh. So, there’s been heavy capex in the past decade.

Now, the time has come when we need to do internal consolidation. We need to look at these plants, keep on doing small capex, [but] there’s no major capex going in. All organic growth will happen through these plants. De-bottlenecking will happen and production will go up at these plants. At the Andhra plant, things are going according to plan and the ramping up is happening very well because of all the learnings we had from Budapest and Chennai. It’s a state-of-the-art plant, and it is supplying not only to India but also to the US and Europe. It is one of the best technology plants that we have. While there’s been no deviation from our [growth] plans, we continue to look at de-bottlenecking our plants. We have no major growth in capex coming in. We’ll be focussed on churning out more tyres from the same assets that we have.

Q: What about rural penetration and what are your expectations from growth in domestic demand?

A: We had been focussing on the rural markets but when Covid-19 hit, we went strong on them. Today, we have a network of nearly 1,500-2,000 rural market distributors and that has helped Apollo’s growth. We never had a two-wheeler tyre. But three-four years ago, we launched a two-wheeler tyre because the dealer in the rural market wants all the way from two-wheeler [tyres] to farm and truck [tyres].

Growth going forward is also focussed on the rural market. Overall, commercial vehicles (CV) have shown a light in Q3. We’ve already started getting good demand. Passenger vehicles (PV) have started seeing slow demand. [Demand for] CVs will go up first because of the infrastructure movement that’s started. We’re the first ones to know that the GDP is growing; if trucks are moving, tyres are moving. PVs will grow once the semiconductor issue is sorted. Third, I see the farm segment coming up.

Q: While domestic demand is coming back, you’re now facing export-related challenges. How do you tackle them?

A: In this quarter, exports have gone up to at least 1.5 times of what we were exporting last year. But today freight has become very expensive, and that is if you get the containers. Ports are jammed and blocked. We’re losing sales in the US and Europe because of port congestion. And the rates are four-five times of what they were last year. In our business, moving tyres actually means we’re moving air within the containers. We cannot fill up the container as others can because you cannot de-shape the tyre. Therefore, it is logically better to be close to the market and manufacture close to the market. That’s why we have set up our Hungary plant. It was set up to cater to the European market while the Dutch plant is still there. Both of them cater to Europe along with India. Our overall strategy in the long term is that we need to be closer to the market.

On the domestic demand side, the CV cycle is still not seeing pre-Covid-19 levels but it’s better than last year. For OEMs in India in the passenger car segment, a shortage of semiconductor chips is a big issue we’re facing. So, OEM is down by nearly 30-40 per cent in passenger cars [compared to pre-Covid-19 levels]. As far as CVs are concerned, they are also down but we’re seeing an upswing coming in as far as OEMs are concerned. As far as Apollo is concerned, we’ve had a growth of 18 per cent on revenue quarter on quarter. We’re not seeing a big surge of demand coming in truck retail but Apollo has grown nearly 6 per cent in the CV market in India. However, our handsome recovery has come in the passenger car segment because post-Covid-19, people have started driving a lot and [people have moved from] public transport to private [transport] because of social distancing. So, we’ve seen a close to 30 per cent jump in India. Slowly, things are coming back now.

We expect H2 to be much better than H1. While the semiconductor issue is still there, we’re seeing a little bit of demand pick-up in high-volume players like Maruti and Hyundai .