Tyre Industry: Microeconomics

Research Question-

What are the current trends in the factors affecting the demand and supply of Tyre Industry in India?

Review of the Industry-

Oligopolistic Market Structure:

The industry is estimated to have a worth of around Rs 382 billion as of 2013-14, export being around Rs. 48 billion. This industry is dominated by the truck and bus segment with around 49% of total demand.

The following factors make the tyre industry an oligopoly-

• Few key players

There are seven main players in the domestic tyre industry that account for a major stake of 80 per cent of the market. As few large players control majority of the market in India, the market becomes oligopolistic in nature.

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• Product Differentiation

Tyre manufacturers differentiate their products and brands based on the functional characteristics, technology and the use of tyres. The main differentiating characteristics are shock absorption, elasticity in regaining original shape, road grip, steering response and durability.

• Barriers to Entry and Exit

There are significant barriers due to high capital requirements in this industry to set up a manufacturing plant. As per an ICRA Report, a plant with an annual capacity of 1 million of truck and bus tyres costs around 6 billion.

• Advertisement

The industry usually does heavy marketing activities to promote their specific products. Many of them have associated with sporting icons, motor car racing and sponsor teams to promote performance and safety.

Questions being addressed-

1. What are the factors affecting demand of tyres in the Indian market and what are their current trends?
2. What are the factors affecting supply of tyres and analysis of those factors?

Factors affecting DEMAND-

Tyre demand arises mainly from original equipment manufacturers (OEMs) and the replacement segment. Demand from OEMs typically mirrors the trend in vehicle production, while that from the replacement market is linked to economic growth, usage characteristics and replacement cycles.

In 2015-16, CRISIL Research expects demand for tyres from OEMs to improve by a modest 4-6 per cent y-o-y, mainly driven by higher sales in medium & heavy commercial vehicle (MHCV), passenger car and two-wheeler categories, as vehicle sales pick up post recovery in the economy and consumer sentiments. We expect the weak monsoon outlook (88 per cent of LPA) to drive down demand for segments such as light commercial vehicles (LCVs), tractors and two wheelers - significantly driven by rural demand.

Demand for tyres from the replacement segment is expected to grow 6-9 per cent, aided by better freight availability, along with moderation of replacement cycles, i.e. passenger vehicle tyre sales in the replacement segment will grow at a tepid pace as car sales in 2012-13 moderated (cars & UV tyres are replaced every 3-4 years and two-wheelers are replaced every 2-3 years).

Over 2014-15 to 2019-20, tyre sales are projected to record 10-12 per cent CAGR, backed by higher auto sales and recovery in the economy.

Cars & UV sales are expected to rise by 7-9 per cent, while two-wheeler sales would grow by 4-6 per cent

Replacement demand to improve on better economic activity

In 2015-16, improvement in MHCV tyre sales and higher passenger vehicle sales during the 2011 to 2013 period is expected to result in 6-9 per cent growth in tyre sales in the replacement market (please refer to 'Typical replacement periods for tyres' table). Further, CRISIL Research expects road freight (in BTKM terms) to grow 7-8 per cent, as compared with 6 per cent growth in 2014-15, as industrial GDP improves (6.5 per cent growth vis-a-vis 6.1 per cent in 2014-15) and infrastructure project awarding/execution gains speed. Consequently, demand for MHCV tyres are expected to improve.

However, replacement demand for MHCV tyres may not increase significantly, due to sharp growth in OEM sales since H2 2014-15. (Typically, when OEM sales improve significantly, usage of older trucks reduces over subsequent quarters, thereby moderating replacement demand).

Replacement sales in passenger vehicles are largely dependent on replacement cycles. While cars & UV tyres are replaced every 3-4 years, two-wheeler tyres are replaced every 2-3 years. During 2011-2013, the passenger vehicles segment recorded slightly lower growth compared to the 2010-2012 period, due to weak sales in 2012-13. Hence, replacement sales in these segments are expected to grow at a slightly lower pace.