Tyre industry faces roadblocks, needs policy support: Budhraja

The Rs 50,000-crore Indian tyre industry is facing challenges on many fronts. The raw material import hurdles, influx of Chinese tyres, low return on investments, lack of export price competitiveness are some of them, according to Rajiv Budhraja, Director

Q: What is the current scenario of the Indian tyre industry?

Budhraja: Tyre industry in India is facing 2 major challenges. One is on the raw material side, and the other on the finished product or tyre. Natural rubber is the principal input in the raw material-intensive tyre industry. In the tyre industry, 70% of the raw material cost is for rubber. The commercial vehicle tyres, bias or radial, consume more natural rubber than the synthetic rubber. For the passenger car tyres, it is the other way round. Until half a decade back, the demand and supply for natural rubber was almost matching. There was very little dependence on imports and exports, which was a very positive sign for the industry. We were the second largest consumer of rubber and third largest producer of rubber globally.

China is the largest consumer. China does not produce enough natural rubber to meet its demand. Thailand is the largest producer of rubber, but its own consumption is very insignificant.

India should have continued with that supply-demand balance. But rubber production did not grow with the automotive industry. From about a million tonne in 2010-11, rubber production declined to 5.6 lakh tonne now. At the same time automotive production soared to 20 million vehicles in 2015-16. Local rubber could not meet even 50% of the industry demand.

Import restrictions on rubber created a very peculiar situation. We have a very wide and growing gap between the domestic production and consumption of rubber, making the industry importdependent. Rubber, like any other commodity, is freely tradable. At face of it, there should not have been any problem for the industry if it was allowed to import its basic raw materials.

There is an inverted duty structure in the rubber industry. The custom duty on rubber is 25% or Rs 30 per kg whichever is lower. It is a fixed rate. The basic duty on tyres is 10% which is lower than in various trade agreements. You can import tyres from the ASEAN region, South Africa, South Korea, even China at rates between 0-5% and 8.6% depending upon the trade agreement.

Imports are against exports and any control on the import of an essential raw material is equal to discouraging exports. Import of rubber even at this higher duty rate has to be made before exports to qualify for the advance licence. Restriction of ports of import to Chennai and Navasheva (Mumbai) also added to the production cost of the tyre and rubber products industry.

Q: What kind of corrections are you seeking for the overall rubber and tyre industry from the government?

Budhraja: We are seeking correction in the inverted duty structure which is long overdue. This can be done either by reducing duty on rubber to 5-7% or increasing the duty on tyre to rate similar to that on rubber. As the gap between rubber production and consumption is widening, import should be permitted to meet the difference. For this, import can be allowed on a differential tariff similar to commodities like palm oil and corn. The gap assessment can be made by the Rubber Board (A Union Commerce Ministry extension) and import can be allowed to fill it.

On the tyre side additional capacities were created by investing over Rs 40,000 crore expecting big jump in demand for truck and passenger car radials. The expected growth did not happen. At the same time global players started setting up base with big volumes and latest technologies. Added to this was the cheap import of the Chinese tyres. China today has a capacity which is

almost two and half times of their current consumption. Their local consumption is also not growing. As the major countries like US has already put in anti-dumping duties on Chinese tyres, the Chinese are dumping tyres into India at a price which does not even cover the raw material cost in India.

In the last 4 years, the import of the Chinese truck radials in India has gone up from 40,000 a month 3 years ago, to 1.5 lakh a month now. Chinese tyres go to the aftermarket and take away the potential market growth of the Indian industry that had created new capacities. There has to be a quick government intervention to check this alarming trend.

Q: To what extent do the Chinese tyres make a dent on the Indian tyre industry?

Budhraja: The Indian tyre manufacturers are active both in the domestic and export markets. The development here is at a horizontal level. In China tyre production is at 3 levels by 3 distinct types of players. They are: The Chinese joint ventures with multinationals having plants in South East Asian countries; the companies with very strong presence in the home market, and the tier-3 companies driven by traders and exporters.

The first 2 types of manufacturers follow international quality standards. The last group follows no norms and they dump their products in the Indian markets. There were over 1000 such companies earlier. The numbers have come down to 250 now. We are largely concerned about such companies whose brands are not known, pricing is not competitive, and the selling strategies are not as peer market standards. They evade taxes and duties.

Q: Natural rubber prices going down. But the effect has not reflected in the tyre prices? What according to you is the real cause?

Budhraja: The rubber prices in India are 20% higher than in the international market. So the 65% rubber that you are sourcing domestically is at a higher price than the international market rate and for import the industry pay high duty rates.

Q: Will the recent anti-dumping duties on steel impact the tyre industry?

Budhraja: It is difficult to say that it will have an effect on tyre market. I don’t know what exact grade of steel goes into the making of the steel tyre cords. If it is of the same grade as used by the industry, then yes. The prices have already bottomed out in the commodity cycle, the industry is bracing for the new wave of growth. Where exactly the prices will settle down is the big question mark.

Q: Does the expansion in slowdown period make sense?

Budhraja: Let us not forget that when we talk about expansion, some units have not gone out of the system. The inherent demand of the country was on the increase in sales volumes when the industry planned for expansion. So if certain capacity which is going out of the system is for any reason, the other players are able to step in and increase their market share and also meet the requirements in the normal course of growth of capacity. That is why the companies are expanding.

Q: Can exports be a segment that can play a vital role in capacity expansion sustainability?

Budhraja: Exports are always factored. On an average, the exports have been 20%. If the industry turnover is Rs.50,000 crore for tyre sector, Rs 10,000 crore is form the exports. Exports are also not very easy to step in and step out. While planning, on an average I would say an industry or a company would benchmark the existing level of imports to continue and accordingly drop their own plans. It may be difficult if it is new product altogether, but exports play a definite role. Since India is a domestically strong economy, companies would not set up on the basis of exports alone.

Q: What is the replacement market size in India?

Budhraja: For passenger, farm and two-wheeler, it would be 50% between OEM and replacement market. For CV, it is 35-65% between OEM and replacement.

Q: Radialisation has been long talked about. What is the current situation and by when do you see a transformational change in the tyre industry?

Budhraja: Today we are at a level of 38-40% in CV segment, and almost 100% in passenger car segment. Every year we have been rising at a rate of 4-5%. I personally think that this trend is going to continue until we reach a level of 70% which should happen in the next 3-4 years. OEMs will definitely play a major role in this where the current radialisation is hovering already around 70%.

Barring some specific applications in mining and farm equipment, all others should convert to radials. We are looking at 90-95% OE radialisation over the next 3 to 4 years. Bias is on the decline and facing negative growth for the last 2 years. A small percentage of bias tyres will continue, which is also a global phenomena. Once the radialisation reaches 70%, the remaining 30% will be the bias market, which will stay like that.

Q: How is the dumping of waste tyres undertaken in India?

Budhraja: There is no organised collection and disposal system. This is because earlier the commercial vehicle bias tyres were retreaded. Now the companies are retreading and regrooving the tyres and taking a longer ownership of the complete lifecycle. Once that happens, it will lead to an organised collection not only for commercial tyres but also for smaller tyres. Retreading is also being impacted by the cheaper Chinese imports. You can get a completely new tyre rather than opting for retreading. The Chinese tyres also are getting retreaded at least once if not twice. I think it is bringing in a stable kind of scenario growing at 4-6%. On the whole if the economy really gains traction, we could see double digit growth in the passenger segment, mid-single digit growth in CV segment and high single digit growth in the twowheeler segment.

Q: How is demand for two-wheeler tyres for both radial and bias tyres?

Budhraja: Radials are pushed in by the OEMs in the high-end models which is also a high growth segment. How long will it take to widen the base is a big question as it will fuel the penetration into the next lower level. We saw it happen in the passenger radials also. It may happen faster than the passenger cars, as the replacement for the radial tyres in two-wheelers will be much higher thanks to better infrastructure and a lot of genuine biking interest growing in India.

Q: Do you see the demand rising due to good monsoon?

Budhraja: Yes, it can play a vital role across the board. Even for twowheelers now, 50% of the demand is from the rural sector. If that 50% is growing at 8%, that means the total is growing at 4%. Secondly, the food grain production has dropped significantly. If you see the growth that is going to take place now in India, the demand gets generated when the income levels increase. We also have a lot of cross-state movement of food grains, which means great demand for CV segment. With an improvement in infrastructure, disposable income, and improvement in mobility, there will be a support for the tyre industry. Proposed vehicle replacement will also push demand, but there has to be a well-structured policy on that.

Q: How can ATMA play a role in the ecosystem to tackle overloading practices?

Budhraja: Overloading not only impacts the vehicle, but also the related infrastructure like the road. States have found ways of bypassing these laws which are not in favour of the actual road transport industry. Our role is in creating awareness by way of various safety camps, tyre companies are directly connecting with the consumers, and changing their mindset to a cost per kilometre basis. If they know that they are depleting their asset faster than its economic life, then they will reconsider. About 80% of the transport sector in India is highly unorganised. This segment has to understand that overloading is not only bad for others but for themselves as well.

Q: Can GST play a role in this?

Budhraja: I sincerely hope it does, by way of reducing the check posts and barriers. There is also a possibility that local taxes will go away. But this may push for unwanted activities like baseless checking and harassment of the drivers. This should be avoided as this will dilute the effect of GST on the economy.