Tough Terrain Ahead For Tyre Industry

Some weeks ago, newspaper reports suggested that the Indian tyre industry had finally succeeded in thwarting competition from imports. Indeed, the figures quoted by such reports substantiated such a contention. In spite of a reduction in import duty and the inclusion of tyres under the open general licence (OGL), domestic tyres continued to dominate the market, the reports argued.

Imports of radial tyres were insignificant at 1.2 lakh compared to domestic production of over 38 lakh radial tyres during 1999-2000. In fact, radial tyre imports last year witnessed a 50 per cent drop over 2.5 lakh imported two years ago. And domestic radial tyre production then was much lower at about 16 lakh. Thus, not only has domestic production jumped, imports too have dropped.

 

What happened? Did the domestic industry succeed in fighting competition? No, not really. Immediately after the entry of several foreign car manufacturers, import of radial tyres increased. Most of these companies imported tyres from either Korea or Japan, which were fitted in the cars rolled out by them as original equipment (OE) supplies. Cost-wise, it made sense. All imports used for OE supplies attract a lower rate of duty. This resulted in a sharp rise in radial tyre imports.

But simultaneously the sharp rise in the demand for radial tyres was seen by multinational tyre companies as a big opportunity. They decided to set up shop in India. In a year or two, imports fell. But all that happened was substitution of imports by domestic production, undertaken by new companies including some multinational firms.

There were good reasons why these multinational companies decided to set up manufacturing bases in India. Reduction in the import duty and inclusion of tyre imports under OGL did not necessarily mean that imports had become competitive.

According to estimates by the tyre trade and experts, the cost disadvantage because of duty was about 80 per cent for imported tyres. With such a substantial cost disadvantage, there was no chance for the imported tyres to compete with domestic tyres. No wonder, foreign tyre companies decided to set up manufacturing plants in India, instead of deluding themselves into believing that the Indian market has been opened up.

Most other consumer durable sectors present the same story. On paper, the import duty has been reduced to 40-50 per cent. But after taking into account the impact of countervailing duty and other imposts. The additional cost on imports provide adequate protection to the domestic industry. The short point is that in spite of import duty reduction and phasing out of quantitative controls on imports, domestic industry in India continues to enjoy a reasonable degree of protection.

The story of the tyre industry is a little more complex. The demand for creating a competitive environment in the tyre market was made long before economic liberalisation was launched in the nineties. And the demand came from none else than the tyre trade. This was during the eighties.

Most domestic tyre manufacturers operated in close consultation with each other. Prices were fixed by them in unison. Imports were restricted. The tyre trade wanted freedom from the control exercised by the industry on it.

So strong was the lobbying by the tyre trade that the government was forced to set up a committee to look into charges of cartelisation by the industry. The Bureau of Industrial Costs and Prices was entrusted with the responsibility of conducting a study to find out if indeed prices were fixed by the tyre industry in collusion. All the studies concluded that the tyre industry did operate in unison, although charges of cartelisation could not be levied against it. They also called for easier import of tyres.

The government recognised the merit in the demand. Much before imports were liberalised in other sectors, tyre imports were placed under OGL. But merely placing tyres under OGL was not enough. The rates of import duty on such imports were still very prohibitive to put the pressure of competition in the domestic industry. But thanks to the tariff reforms initiated by the Narasimha Rao government, import duties too were reduced gradually.

It is ironical, therefore, that even 10 years after initiating tariff reforms, the domestic tyre industry continues to enjoy a cost advantage to the tune of 80 per cent. Foreign tyre majors have understood the market mechanics in India.

Considering the huge size of the market and the government