Swerving Into Hard Times

This February, Modi Rubber Ltd (MRL) cut production by 10 per cent to cope with an inventory pile-up by keeping its plant closed on Sundays. Though the Rs 1,020-crore MRL has been the only company to formally announce a cutback, industry analysts say this is true for most manufacturers in the Rs 8,000-crore tyre industry.

The origins of the current crisis lie in a collective misreading of the market for 1996 -- projected demand has been far higher than actual offtake. This has had its inevitable effect in huge inventory build-ups and pinched margins. Worse, this is happening at a time when competition in the industry is growing with global big-timers like Michelin and Bridgestone setting base in India.

 

To understand how the industry skid, consider first the nature of the market. The tyre sector is considered a core industry because the demand-supply equation hinges on the state of the economy, automobile production and the ability to export.

This, in turn, determines the structure of the market. The tyre market has three segments -- the replacement market, the original equipment or OE market and the export market. The replacement market accounts for around 70 per cent of the market in value terms and the other two segments account for roughly 15 per cent each.

In the replacement market, signs of a slowdown were already evident. Here, demand is linked to economic growth. If goods are available, vehicles move. If the goods are not available, vehicles dont move. The industry is dependent on the movement of vehicles which is again dependent on the growth in the economy, says A K Virmani, chief marketing manager, MRL.

Between fiscal 1994 and 1995, demand in the replacement market dropped from 16 to four per cent. Even so, the tyre industry stayed upbeat.

Most of the optimism came from the outlook for the OE segment of the market, which is a function of the growth in automobile production. The automobile industry grew by 25 per cent and 32 per cent in 1994-95 and

1995-96 respectively. Automobile production growth in 1996-97 was estimated at 20 per cent and even the long-term prospects were bullish.

Riding on this boom, the OE market grew by 20 per cent in 1994-95 and 22 per cent in 1995-96. The rally in the OE segment was led by growth in the truck and bus segment by 55 per cent in 1994-95 and 27 per cent in 1995-96. Passenger cars also recorded a healthy growth of 26 and 27 per cent in 1994-95 and 1995-96 respectively.

Projections like these encouraged tyre makers to go in for large-scale capacity expansions. This was in spite of the overcapacity in the industry. In 1994-95, the capacity was 36.38 million units and production was only 28 million units. Since then, although exact figures are not available, capacity has possibly crossed the 55-million mark.

Production levels have increased more than demand levels, says E Krishnaiah, sales and marketing manager, Goodyear India. Demand did not keep pace with the industrys 1996-97 projections because of a major slowdown in the passenger car segment. The passenger car segment grew by only six per cent in 1996-97 and commercial vehicles by seven per cent.

As a result, most tyre companies were saddled with unutilised capacity. The industry still has 25 per cent more capacity than it needs and looking at the expansion plans, the situation is likely to persist for some time, says B K Modi, chairman and president, Modicorp. There is overcapacity primarily because the economy is not moving in tandem with what was predicted, adds O S Kanwar, vice-president and managing director, Apollo Tyres.

Excess capacity has, inevitably perhaps, increased the pitch of competition (see page 3). As companies went out of their way to grab marketshare, advertising costs went up substantially for the industry as a whole. For instance, Ceat increased its advertising and marketing outlay from Rs 18 crore in 1994 to Rs 51 crore in 1996.

But higher marketing costs were only the beginning of the industrys problems. Raw material costs have been increasing too (see page 3). Raw material accounts for 60 per cent of total production costs of which natural rubber accounts for 40 per cent.

The price of natural rubber rose sharply in 1995 and touched a high of Rs 62 per kg compared with Rs 26 per kg in April 1994. Prices have now settled at Rs 42 per kg. Like at Apollo Tyres, raw materials as a percentage of turnover increased from 45.94 per cent in 1990-91 to 55.42 per cent in 1995-96.

The overall affect of this is clear from the grow