The rising status of the Indian tyre industry needs to be seen in the wider perspective of the changing status of India, China and the US in global trade.
According to Augus Maddison, distinguished British economic historian, India and China accounted for 59% of the global economy more than 2000 years ago of which India’s share was a staggering 33%. In the 17th century India, China and Europe had similar shares of global income – around 23% each. In 2011 India’s share of global trade was around 1.5% while that of China around 10%. The US share stood at 11.3%.
The decline and fall of India and China have been dramatic. While several reasons could be attributed to this downfall, one of the main factors is the lack of economic and political freedom – something the US always enjoyed and hence its status flourished. The US emerged as a land of opportunities, attracting the best talents from all over the world. In fact, the growth of the US as a global technology leader is largely because of the valuable support from expatriate professionals.
However, things are changing drastically. There is more economic and political freedom in most of the developing countries than in the past. With faster economic growth, most developing countries now provide immense opportunities of employment to the skilled and the intelligent. Their confidence level is very high. For instance, about 125 Fortune 500 companies have their R&D centres in India.
The rise of India and China as global economic powers after having been on the sidelines for centuries has to be seen in this context. According to a Goldman Sachs study, by 2050 India will become the third largest economy in the world after China and the US. A Morgan Stanly study says India will overtake China as the world’s fastest growing economy by 2015.
Today the Indian economy is set for a quantum leap. A largely young population (more than half the population is below 26 years of age), a growing middle class that earns and spends well, mounting domestic consumption and rising literacy have put the Indian economy on a roll. Even during the 2008 global slowdown period the growth rate was over 8%. Despite the recent dip in the graph, it continues to be the second fastest growing major economy in the world. With the advent of economic liberalisation in the early 1990s, there has been an exponential growth in the services, industry and agriculture sectors. With increasing rural and urban income, consumer spending is likely to grow nearly four times to touch 3.6 trillion by 2020.
India has emerged as the second fastest growing automobile market in the world. It is the 6th largest after China, the US, Germany, Japan, Brazil. In the small car segment, India is the largest market in the world. The country has redefined this sector through remarkable innovation, a typical example being Tata’s small car Nano that costs a mere $2000.
The low vehicle penetration is an indication of the tremendous growth potential in this segment. Against 765 in the US, 600 in Germany and Japan, 59 in China, it is only 18 in India.
The substantial increase in infrastructure investments in the Five-Year Plan is accelerating the development of different regions. In fact, the 12th Plan (2012-2017) aims to double infrastructure investment to more than $1000 billion.
The economic liberalisation has opened the gates for investors at a pace unprecedented in past history. With tariffs and tax rates slashed, Government control in many sectors dismantled and public sector monopolies undone in many sectors including insurance and telecom, major multinational companies have been investing in a big way in the country.
Tyre industry scene
It is in this backdrop that India’s tyre industry found its opportunities opening up. Obviously, it has piggy-backed on the incredible growth of the auto sector. Almost 13 to 17% annual growth in auto sales has provided tremendous boost to tyre sales.
Another major driver of growth for the sector is the great stride India has been able to make in infrastructure development. It has the second largest road network with around 4.32 million kilometres of roads.
The country has 39 tyre companies with 60 plants with an annual growth rate of over 10%, one of the highest in the world. The annual turnover from the sector is $6.5billion and export worth $800 million. Among them, 10 large companies account for 95% of tyre production in India.
The Indian tyre industry today is a gallery of premier global names such as Bridgestone, Michelin, Goodyear, and Continental among others, along with domestic majors, including MRF, Apollo, J.K. and Ceat. Currently, over $2.5 billion investments are in the pipeline and more are in line to join the league. With the market throwing up exciting opportunities, all companies are on an expansion mode. Apart from the attractive domestic market, India has also immense potential as an export base.
The challenge from the multinational majors has been a very good catalyst for the Indian companies to innovate and grow. The investment in research and development has increased manifold. The result: Out of top 75 global tyre companies, 10 are from India and 23 from China.
India is today the largest tractor manufacturer, the second largest bus manufacturer, the 6th largest car maker, the 8th largest commercial vehicle manufacturer and is No.1 in three-wheeler and the second biggest in two-wheeler manufacturing.
The industry has been quick to adopt new trends and changes. Radialisation is almost complete in passenger car tyre segment. However, it is not as good in the light commercial vehicle and TBR segments where the rate is less than 20%.
Despite this immense potential for growth, the tyre industry today faces several challenges.
Infrastructure challenge: Although the country has a wide network of roads, the quality of Indian roads remains poor. Except for the national highways and city roads, pot holes and poor maintenance make most of the rural roads unusable. This has also impacted traffic management.
Also, in spite of India being the land of the monsoon, power production and supply are highly inadequate to meet the demand both from the industrial sector and domestic consumers. This has made power distribution management practically a tightrope walking, leading to power shutdowns lasting many hours. Although alternate power sources compensate the losses to some extent, this has affected industrial production lines badly.
The congestion at the Indian ports and the resulting delay in goods movement lead to rising costs as well as slowing the supply chain.
Raw material challenge: High price of natural rubber and the prospects of continuing NR shortage are a major worry of manufacturers.
Technology challenges: The Indian companies are at a disadvantage when it comes to technology. They find it hard to take on the multinational giants in R&D facilities. A more practical way out for them has been through takeovers and tie-ups. Apollo’s take-over of Vredestain in the Netherlands and JK Tyre’ take-over in Mexico are examples of this strategy.
Governance challenges: Large scale corruption, slow decision making, lack of transparency are rampant at the Government level. This adds to the cost of production. Also, the thin majority that the ruling United Progressive Alliance Government which depends on the support from the Left Front, it is unable to take bold initiatives to streamline the economy. Many major plans announced earlier are still pending.
Chinese challenge: China’s phenomenal growth has sent ripples across India as well. The market is now flooded with the Chinese goods, cheaper by over 15% to 20%. Rising import from China has become a major worry. Though anti-dumping duty has been in force, on TBR, there is strong lobbying to scrap it.
High inflation, interest rates: This has adversely affected auto sales and, consequently, tyre sales also. The cost of ownership of vehicles has gone up substantially.
In the midst of all these negative factors, the future holds great potential for growth of Indian tyre industry. The emerging socio-economic scenario presents a fascinating picture. In a list of the top 10 countries based on population, land and GDP, the US, Brazil, India, China and Russia will fit into all categories.
Currently, China remains the largest populated country -- three times the combined population of Brazil and Russia. According to a UN study, India will overtake China in population by 2030. That will be almost 17.5% of the world population. Indications are that, by 2015, India would overtake China in GDP growth too.
In his best seller, The World Is Flat, Thomas Friedman talks about a possible scenario -- a time when the Indians and the Chinese buy automobiles the way the Americans and the Europeans are buying. According to him, it would be an environmental nightmare. However, for tyre makers it would be a great dream.
*(The article is based on the paper presented by Kurian Abraham, Editor, Rubber Asia and Polymers & Tyre Asia, on the Indian tyre industry at the Global Tyre Industry Conference organised by Clemson University in South Carolina, US, on April 18, 2012.)