Low Cost Country Sourcing by International Tyre Industry

Summer Training

Project Report

On

“A Study on Low Cost Country Sourcing by

International Tyre Industry”

(As a partial fulfillment of MBA programme)

Submitted to

Mr. Amit Varma

President - Corporate Strategy

JK Organisation

Submitted by

Koondrapu Abhi Teja

Institute of Management

JK Lakshmipat University, Jaipur.

A Study on Low Cost Country Sourcing by International Tyre Industry

2

ACKNOWLEDGEMENT

My sincere thanks to Mr. Amit Varma (President - Corporate Strategy, JK

Organisation) for his valuable guidance, continuous encouragement and

tremendous patience in discussing my problems in bringing this project report

to shape. I am also thankful to Mr. Sameer Seth (Senior Strategic Officer, JK

Organisation) and Mr. Ankit Suri (Officer, Corporate Strategy, JK Organisation)

for their support, guidance and cooperation during my training.

I also express deep sense of gratitude to my institutional guide, Dr. Biraj

Kumar Mohanty (Professor) for providing me essential background to the

project. I also extend my thanks to all other employees of JK Organisation and

my University for providing me the platform to undertake this project.

(Koondrapu Abhi Teja)


3

Table of Contents

ACKNOWLEDGEMENT ......................................................................................... 2

Executive Summary............................................................................................. 5

Scope of the Project ............................................................................................ 6

OBJECTIVE ........................................................................................................... 7

Definitions: ......................................................................................................... 7

About The Tyre ................................................................................................... 8

Etymology and spelling ................................................................................... 8

History of the Tyre .......................................................................................... 9

Advancements of Tyres ................................................................................. 11

Technical advancement in Tyres ................................................................... 12

Tyre Manufacturing ...................................................................................... 13

Raw Materials Required ................................................................................ 13

Process Flow ................................................................................................. 13

Functional Characteristics of a Tyre .............................................................. 17

Construction of a Tyre ................................................................................... 18

World Tyre Industry .......................................................................................... 20

INDIAN TYRE INDUSTRY .................................................................................... 25

Background ................................................................................................... 25

Key Features ................................................................................................. 26

Evolutionary Phases of Tyre manufacturing in India ..................................... 29

INDUSTRY SIZE AND TRENDS OF GROWTH ........................................................ 30

Major Tyre Projects Completed/Scheduled for Completion during 2010-2011

...................................................................................................................... 32

Growth of Indian Tyre Industry ..................................................................... 34


4

Competitive analysis of major players of Indian tyre industry........................... 36

POSITION OF THE COMPANY......................................................................... 36

Financial Analysis .............................................................................................. 37

COMPANY PROFILE ........................................................................................... 47

Data Analysis and Interpretation ...................................................................... 50

CAPITAL EXPENDITURE from 1999-2011 ........................................................... 51

Capital Expenditure in LCC’s .............................................................................. 52

Yearly Percentage of Capital Expenditures in LCC’s ........................................... 53

Company wise Percentage spending in LCC’s .................................................... 54

CAPEX Country Wise ......................................................................................... 55

Percentage of investments in major countries .................................................. 56

Continent Wise CAPEX in LCC’s ......................................................................... 57

Continent wise share of CAPEX ......................................................................... 58

Company wise share of CAPEX in LCC’s ............................................................. 58

Segment wise Capacity Installments ................................................................. 59

Capacity installed at LCC ................................................................................... 60

Percentage of Sales in LCC’s .............................................................................. 60

Yearly Trend in Capital Investments in LCC’s ..................................................... 61

Preferred Countries for investments ................................................................. 62

Trend in selecting the destinations ................................................................... 62

Conclusion ........................................................................................................ 63

Observations: .................................................................................................... 64

Suggestions to India and JK Tyre ....................................................................... 65

Source of Information ....................................................................................... 66


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Executive Summary

The profitability of Tyre Industry has gained worldwide attention. The industry

has evolved from being strictly regulated to global outsourcing destination.

This report “A Study of Low Cost Country Sourcing by International Tyre

Industries” attempts to explore the trends of investments of International Tyre

companies in Low Cost Countries.

The facts identified through this report are

The companies which are sourcing from Low Cost Country are able to cut

the manufacturing costs.

Majority of the companies are choosing Asian countries for sourcing their

tyres.

Of the many Low Cost Countries China has emerged as a preferred

destination for all the companies.


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Scope of the Project

This project has a wide scope in understanding the broad features of World

Tyre Industry and sourcing from different countries and the trends of

investments in low cost countries.

The study is based mostly on the secondary data that includes Annual Reports

of the companies, Company Websites, and few other information sources.

The time frame considered for the study of companies is 13 years i.e. from

1999-2011.

The study examines the investments of the selected companies in Low Cost

Countries from 1999-2011.

The currencies of Bridgestone, Continental and Yokohoma are converted into

dollars w.r.t the conversion rates given in the company Annual Reports to make

accurate analysis.

Limitations

Owing to the constraints of time and resources it is proposed to restrict the

scope of study to some selected Companies which can represent the World

Tyre Industry.


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OBJECTIVE

This project is to explore the trends of investments of international Tyre

companies in Low Cost Countries during the period 1999-2011.

The other objectives of this project are to explore the reasons of outsourcing of

tyres from Low Cost Countries.

This project is also intended to find out the segments and countries which

attracted majority of investments from the International tyre Companies.

Definitions:

1. Low Cost Country

A country where the cost of manufacturing a particular product is less

compared to countries which produce the similar product at a very high

cost.

2. Sourcing

It is a term used to describe the practice of procuring goods and services

from the global market across geographical boundaries.

3. Low Cost Country sourcing

It is a procurement strategy in which a company sources materials, which it

cannot produce, from the host which has abundant supply of factor of

production with low labour and production cost in order to reduce operating

expenses.


8

About The Tyre

Etymology and spelling

The Oxford English Dictionary suggests that the word derives from "at

tyre", while other sources suggest a connection with the verb "to tie".

From the 15th to the 17th centuries the spellings tyre and tyre were

used without distinction; but by 1700 tyre had become obsolete and tyre

remained as the settled spelling. In the UK, the spelling tyre was revived

in the 19th century for pneumatic tyres, though many continued to use

tyre for the iron variety. The Times newspaper in Britain was still using

tyre as late as 1905. The 1911 edition of the Encyclopedia Britannica

states that "[t]he spelling 'tyre' is not now accepted by the best English

authorities, and is unrecognized in the US", while Fowler's Modern

English Usage of 1926 says that "there is nothing to be said for 'tyre',

which is etymologically wrong, as well as needlessly divergent from our

own [sc. British] older & the present American usage". However, over

the course of the 20th century tyre became established as the standard

British spelling.

http://en.wikipedia.org/wiki/Oxford_English_Dictionary

http://en.wikipedia.org/wiki/The_Times

http://en.wikipedia.org/wiki/Encyclop%C3%A6dia_Britannica_Eleventh_Edition

http://en.wikipedia.org/wiki/A_Dictionary_of_Modern_English_Usage

http://en.wikipedia.org/wiki/A_Dictionary_of_Modern_English_Usage


9

History of the Tyre

A tyre (in American English) or tyre (in British English) is a ring-shaped

covering that fits around a wheel rim to protect it and enable better

vehicle performance by providing a flexible cushion that absorbs shock

while keeping the wheel in close contact with the ground. The word

itself may be derived from the word "tie", referring to the outer steel

ring part of a wooden cart wheel that ties the wood segments together.

The fundamental materials of modern tyres are rubber and fabric along

with other compound chemicals. They consist of a tread and a body. The

tread provides traction while the body ensures support. Before rubber

was invented, the first versions of tyres were simply bands of metal that

fitted around wooden wheels in order to prevent wear and tear. Today,

the vast majority of tyres are pneumatic, comprising a doughnut-shaped

body of cords and wires encased in rubber and generally filled with

compressed air to form an inflatable cushion. Pneumatic tyres are used

on many types of vehicles, such as bicycles, motorcycles, cars, trucks,

earthmovers, and aircraft. In today’s world of intense competition and

rapid dynamism, all the companies worldwide are tuning their focuses

on the customer. Suddenly, the customer had succeeded in capturing all

the attention of the companies towards him, so much so, that the once

famous maxim, “customer is the god” has become so true and relevant

today. There has been a “paradigm shift” in the thinking of these

companies and none other than the customer has brought this about.

Earlier there was a sellers’ market, since goods and services were in

http://en.wikipedia.org/wiki/American_English

http://en.wikipedia.org/wiki/British_English

http://en.wikipedia.org/wiki/Rim_%28wheel%29

http://en.wikipedia.org/wiki/Traction_%28engineering%29

http://en.wikipedia.org/wiki/Pneumatic

http://en.wikipedia.org/wiki/Vehicles

http://en.wikipedia.org/wiki/Bicycle

http://en.wikipedia.org/wiki/Motorcycles

http://en.wikipedia.org/wiki/Cars

http://en.wikipedia.org/wiki/Truck

http://en.wikipedia.org/wiki/Earthmover

http://en.wikipedia.org/wiki/Aircraft


10

short supply and the sellers use to call the shots. But, ever since the

advent of the era of globalization, there has been total transformation in

the way the customers being perceived. Today, marketers are directing

their efforts in retaining the customers and customers’ base. Their focus

has shifted towards integrating the three elements people, service and

marketing.

In the past, after sales service was consider as a cost center,

Companies were lethargic in attending to customers complaints.

Availability of trainee service personal and quality genuine spare parts

posed serious problems. However, with the rising competition, there

could not be much product differentiation, as price and quality were

comparable and latest technology was to each and every company in the

field. Since, there could not be much differential a tangible assets, the

companies concentrated on the “intangible assets”, namely the “service

factor”, which served as a major differentiator. Today after sales service

is an important aspect of every company, and it is no more considered

as a cost center, but considered as a profit center. Every organization

strives hard to retain its existing customers at any cost since it is five

times costly to get a new customer, then to retain an existing customer.

Most of the industries today use of information technology to best

services to their customers.


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Advancements of Tyres

Iron tyres

The earliest tyres were bands of iron (later steel), placed on wooden

wheels, used on carts and wagons. The tyre would be heated in a forge

fire, placed over the wheel and quenched, causing the metal to contract

and fit tightly on the wheel. A skilled worker, known as a wheelwright,

carried out this work. The outer ring served to "tie" the wheel segments

together for use, providing also a wear-resistant surface to the

perimeter of the wheel. The word "tyre" thus emerged as a variant

spelling to refer to the metal bands used to tie wheels.

Rubber tyres

The first practical pneumatic tyre was made by John Boyd Dunlop, a

Scot, in 1887 for his son's bicycle, in an effort to prevent the headaches

his son had while riding on rough roads (Dunlop's patent was later

declared invalid because of prior art by fellow Scot Robert William

Thomson). Dunlop is credited with "realizing rubber could withstand the

wear and tear of being a tyre while retaining its resilience. Pneumatic

tyres are made of a flexible elastomeric material, such as rubber, with

reinforcing materials such as fabric and wire. Tyre companies were first

started in the early 20th century, and grew in tandem with the auto

industry. Today, over 1 billion tyres are produced annually, in over 400

tyre factories, with the three top tyre makers commanding a 60% global

market share.

http://en.wikipedia.org/wiki/Iron

http://en.wikipedia.org/wiki/Steel

http://en.wikipedia.org/wiki/Wheel

http://en.wikipedia.org/wiki/Cart

http://en.wikipedia.org/wiki/Wagon

http://en.wikipedia.org/wiki/Forge

http://en.wikipedia.org/wiki/Wheelwright

http://en.wikipedia.org/wiki/John_Boyd_Dunlop

http://en.wikipedia.org/wiki/Scottish_people

http://en.wikipedia.org/wiki/Bicycle

http://en.wikipedia.org/wiki/Headache

http://en.wikipedia.org/wiki/Robert_William_Thomson

http://en.wikipedia.org/wiki/Robert_William_Thomson

http://en.wikipedia.org/wiki/Elastomer

http://en.wikipedia.org/wiki/Rubber

http://en.wikipedia.org/wiki/Automobile


12

Technical advancement in Tyres

Radialisation

A radial tyre is a particular design of automotive tyre in which the cord plies are

arranged at 90 degrees to the direction of travel, or radially.

Radial Tyres were invented in 1900’s. Radial tyres have advantages over cross-

ply tyres. Rate of radialisation is an index of the status of road development. In

spite of the superior qualities of radial tyres, it took 10-25 years for developed

countries to switch to these tyres.

In Europe, and in the US, they gained popularity by the late 1980s. In 1995,

radial tyres constituted 98 per cent of the total tyres produced in Europe, 80

per cent of the tyres in the US, and 70 per cent of the tyres in other developed

countries.

The high investment requirements of a radial capacity have been responsible

for the slow rate of switchover to radial tyres.

In India, JK Tyres introduced radial tyres for passenger cars in 1979. Initially,

radial tyres were used in the replacement market for passenger car tyres. In the

early 1990s, radial capacities were added, and producers intensified their

marketing efforts.

With the launch of new models by Maruti Udyog (Zen and Esteem), Hindustan

Motors and Premier Automobiles in the late 1990s, radial tyres were

introduced in the original equipment market for passenger cars.

In India, the penetration of radial tyres has increased significantly in the

passenger car tyres segment to 63 per cent. However, penetration is low in the

light truck and MUV (eight per cent) and MHCV tyres (one per cent) categories.


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Tyre Manufacturing

Raw Materials Required • Natural rubber - Imparts heat resistance

• Poly Butadiene Rubber (PBR) -Imparts abrasion resistance

• Styrene Butadiene Rubber (SBR) - Imparts road grip

• Nylon Tyre Cord (NTC) fabric - Imparts reinforcement strength

Process Flow

Mixing the material

The tyre manufacturing process begins with the preparation of a rubber

compound. A pre-defined raw material mix of elastomers, carbon black, rubber

chemicals and processing oils is mixed in a Banbury mixer. Processing oils

ensure that the raw materials are properly mixed.

Raw materials are mixed at a high temperature in the first stage and

temperatures are lowered in the second. In the third stage, sulphur is added at

a specified temperature and time parameters. These specifications vary for

different tyre categories.

The rubber compound obtained from the mixer is in the form of rubber sheets,

which enables easy handling of the compound. The rubber sheets are used to

make the tread, ply/band and bead.

Side-wall making

Rubber sheets are extruded through a die opening, at a specified pressure and

temperature. The extruded sheets are cut to obtain treads, with a specific

profile and gauge.


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Calendaring

The fabric is subsequently passed through a calendaring unit, where the dipped

fabric is coated with the rubber compound (obtained from the Banbury mixer)

on both sides. While coating the dipped cord fabric with rubber compound, it is

ensured that the rubber compound and tyre cord fabric are well adhered to

each other, with a uniform thickness of rubber coating on the fabric surface.

Ply/Band making

Dipping

Nylon or rayon cord fabric is used as a reinforcement material in tyres.

The fabric sourced from vendors is called undipped fabric. As this fabric

has a low affinity for rubber compounds, it is immersed in a solution of

latex, resorcinol and formaldehyde resin.

Simultaneously, the fabric is stretched at a high temperature using

rollers. This improves its dimensional stabilityand braking strength

(strength required to tolerate a sudden halt), eliminating contraction due

to the presence of moisture in the fabric.

Bias cutting (cross-ply tyres)

The rubber-coated fabric (calendared roll) is mounted on a bias cutting

machine, where it is cut into plies of the required width and angle.

Band building

Two or more plies can be used to make a band, depending upon the size

and the required strength of the tyre.


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Bead making

Five-seven steel wires are coated with the rubber compound to make a bead.

The rubber compound acts as a filler and removes air gaps in the bead.

A flipper cover of calendared cord fabric covers the bead, to protect it from

dust and oxygen.

Tyre building

The components listed above are used to make a green tyre.

The band is mounted on a rotary drum (one or more bands are used, depending

upon the required strength of the tyre). The bead is then inserted within the

band.

After building the components together, a compact cylinder is obtained, this is

known as a green tyre.

Tyre curing

In this process, the individual properties of every component (such as tensile

strength, heat resistance, modulus ofelasticity for dimensional stability, braking

strength, and grip) are combined by vulcanisation.

The two main types of tyre-curing processes are the conventional process (air

bag curing process) and the Bag-o-Matic process. In the conventional process,

air bags are used, while the Bag-o-Matic process uses bladders. TheBag-o-Matic

process is widely used due to the shorter curing cycle, low labour requirements

and lower costs.


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In the Bag-o-Matic curing process, the unvulcanised green tyre is moulded into

the required size and shape at ahigh temperature and pressure. The green tyre

is mounted onto the press, and placed on one of the open sides. Hotsteam is

passed from the top through the other open side of the green tyre.

Simultaneously, radial pressure is applied on the tyre expanding the steam and

exerting a force on the tyre from within. This changes the green tyre’s shape –

making it conical at its two open sides (as a result, the diameter at the centre of

the green tyre becomes longer than that at its open sides).

The green tyre is kept in a mould, and heated using steam (a specific mould is

used for each tyre category).Molten rubber from the tread flows into the

mould, and results in the formation of grooves on the tread.

Subsequently, the green tyre is allowed to cool in an inflated condition, which is

called 'post cure inflation'. This is done to overcome the shrinkage properties of

nylon tyre cord.

Final inspection

A final quality inspection is conducted on the cured tyre for air pockets and

other defects.


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Functional Characteristics of a Tyre

The desired functional characteristics of tyres include the following:

• Shock absorption

• Elasticity, in terms of regaining its original shape with minimum delay

• Road grip

• Response to the steering force with minimum delay

• Ability to accelerate rapidly, and sustain uneven and rough terrain

• Durability

• Lower aspect ratio. (Aspect ratio is the height to width ratio of the tyre. If

the aspect ratio is lower, the centre of gravity is lower; the

maneuvrability and steering capacity of the tyre is higher.


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Construction of a Tyre

Ply and band:

Ply is a continuous layer of parallel rubber coated cord fabric. The cords are

bias-cut into plies, by a bias cutting machine. A ply has a specific angle and

width.

Bias-cut plies are used to make bands. The bias-cut plies that are joined in a

cross angle, form a band.

Tread:

It comes in direct contact with the road surface.

Sidewall:


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It lies between the bead and the tread, and controls the ride and offers

support. The rubber compound for the sidewall makes the tyre flexible and

weather resistant.

Bead:

It is located at the bottom of the sidewall, near the rim of the wheel. 5-7

bronze-coated steel wires are coated with a rubber compound.

The bead is the strongest component of a tyre, as it helps mount the tyre firmly

on the rim of the wheel. It imparts stiffness to the tyre


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World Tyre Industry The Tyre companies started from the year 1870. The turnover of the World Tyre

Industry is $ 126.5 billion in 2009 with a CAGR of 34%.

The World Tyre Industry is dominated by 10 major players. They are

represented in the following table.

Rank as

per

Turnover

Company Turnover

In 2010

(Billion $)

5 year

CAGR (%)

Market

Share (%)

No of

Brands

1 Bridgestone 38.9 3.7 16.2 11

2 Michelin 28.8 2.9 15.5 16

3 Goodyear 22.7 4.5 12.4 28

4 Continental 12.2 5 5.1 22

5 Sumitomo 7.9 6.8 3.7 6

6 Pirelli 6.8 8 4.4 7

7 Yokohama 5 5.8 3.1 2

8 Hankook 4.6 4 3 4

9 Cooper 3.4 12 2.2 12

10 Toyo 3.1 5.5 1.8 2

92 100

115

140 126.5

0

20

40

60

80

100

120

140

160

2005 2006 2007 2008 2009

Bill

ion

$

Turnover of World Tyre Industry


21

The overview of the major companies is as follows

1. Bridgestone

Bridgestone is the world leader of Tyre Industry, headquartered at Tokyo,

Japan. Revenue of the company is $38 billion in 2010.It has sales CAGR of

3.7%.

It has 47 Tyre manufacturing plants and sells over 150 countries.

It manufactures tyres for all kind of vehicles such as passenger cars,

construction and mining vehicles, commercial vehicles, aircraft,

motorcycles and scooters, racing cars, karts, utility carts, subways,

monorail.

2. Michelin

Michelin was established in 1905 in London. It is active on all continents

and in more than 170 countries. Revenue of the company is $28.8 billion

in 2010. It is growing with sales CAGR of 2.9%.

Michelin manufactures and sells tyres for all kinds of vehicles, including

cars, vans, 4X4, SUV and many more.

The famous icon 'The Michelin Man' has been the driver’s companion

since 1898 and was voted as the "Best Logo Symbol of all time" in 2000,

by a worldwide panel for the Financial Times.


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In 2009, the Michelin Group produced more than 150 million tyres and

continues to provide industry with leading technologies.

3. Continental

Continental was founded in 1871 in Germany. It is the fourth largest Tyre

manufacturer in the world. Revenue of the company was 10.1 billion $ in

2010. It has sales CAGR of 5%.

Continental is a trusted Original Equipment supplier to European

passenger car manufacturers. Since 2003, 1 in 4 of all cars produced in

Europe has rolled off the assembly line with tyres developed by

Continental.

4. Cooper

It is a US based company with a revenue of 3.4 billion $ in 2010 with sales

CAGR of 12%. It has 9 manufacturing locations in USA, Mexico, Serbia,

China, and United Kingdom.

It is the ninth largest Tyre manufacturer in the world and second largest

in USA.

5. Goodyear

It is the largest tyre manufacturer in USA. Its revenue is 18.8 billion $ in

2010 with sales CAGR of 4.5%.

Goodyear production began on the 21st November 1898. Today, It is one

of the world's leading tyre companies; No. 1 tyre manufacturer in North


23

America and Latin America, Goodyear is also Europe's second largest tyre

manufacturer.

It has 47 manufacturing plants in all the continents.

The company manufactures and markets tyres recognised by the famous

winged foot logo. The Goodyear tyre range includes car, van, 4X4, and

SUV tyres.

6. Hankook

It is a South Korean company with revenue of 4.6 billion $ in 2010. It has

sales CAGR of 13.9%. It is the fifth largest tyre manufacturer in the world

with a market share of 5%.

It has 5 production facilities located in China, Hungary and Korea.

7. Pirell

Pirelli Tyre is the world's fifth largest operator in the tyre market with

revenue of $6.8 billion with sales CAGR of 8%.

Pirelli is one of the world’s best known Italian brand names. It has 24

manufacturing plants in 12 countries and a commercial presence in more

than 160 countries.

8. Sumitomo

A Sumitomo Rubber industry is the second largest Japanese with revenue

of $7.9 billion in 2010. Sumitomo Tire is a premium tire brand in Asia.

Sumitomo is known for innovative design and superior quality.


24

9. Toyo

It is a Japanese company with 16 plants across Japan. It is expanding in

North America, China and Malaysia. It is growing with a CAGR of 5.5%

10.Yokohama

It is a South Korean company with revenue of 5 billion $ in 2010. It grows

with a CAGR of 3.3%

It has 5 manufacturing locations in Japan, 3 in China, 2 in Thailand, 1 in

USA, South Korea, Philippines, and Vietnam.


25

INDIAN TYRE INDUSTRY

Background

Tyres and tubes, the strategic rubber products and basic supplements to the

automotive vehicles are of utmost importance to the country's economy. The

tyre industry sector is providing direct employment to more than 50,000 people

and indirect employment to lakhs of people. This industry sector is now being

considered as a core industry sector.

The origin of the Indian Tyre Industry dates back to 1926 when Dunlop Rubber

Limited set up the first tyre company in West Bengal. MRF followed suit in

1946. Since then, the Indian tyre industry has grown rapidly.

Transportation industry and tyre industry go hand in hand as the two are

interdependent. Transportation industry has experienced 10% growth rate year

after year with an absolute level of 870 billion ton freight. With an extensive

road network of 3.2 million km, road accounts for over 85% of all freight

movement in India.

Technology generation in the Indian tyre industry has witnessed a fair amount

of expertise and versatility to absorb, adapt and modify international

technology to suit Indian conditions. This is reflected in the swift technology

progression from cotton (reinforcement) carcass to high-performance radial

tyres in a span of four decades. Globalization has led to the linking of the

economies of all the nations and therefore major Indian players in the tyre

industry are pursuing global strategies to enhance their competitiveness in

world markets. The present section broadly undertakes an overview of the

Indian tyre industry through an examination of its growth trends with respect

to production, exports and acquisition of technological capabilities.


26

Key Features At present there are more than 40 listed companies in the tyre sector in

India.

Major players are MRF, JK Tyres, and Apollo Tyres & CEAT, which account

for 63 per cent of the organized tyre market. The other key players

include Modi Rubber, Kesoram Industriesand Goodyear India, with 11 per

cent, 7 per cent and 6 per cent share respectively. Dunlop , Falcon, Tyre

Corporation of India Limited (TCIL), TVS-Srichakra, Metro

Tyres and Balkrishna Tyres are some of the other significant players in

the industry.

While the tyre industry is largely dominated by the organized sector, the

unorganized sector is predominant with respect to bicycle tyres.

The industry is a major consumer of the domestic rubber market. Natural

rubber constitutes 80% while synthetic rubber constitutes only 20% of

the material content in Indian tyres. Interestingly, world-wide, the

proportion of natural to synthetic rubber in tyres is 30:70.

The sector is raw-material intensive, with raw material accounting for

70% of the total costs of production

Current level of radialization includes 95% for all passenger car tyres, 12%

for light commercial vehicles and 3% for heavy vehicles (truck and bus)

Restrictions were placed on import of used /retreaded tyres since April

2006

Import of new tyres & tubes is freely allowed, except for radial tyres in

the truck/bus segment which has been placed in the restricted list since

November 2008

The major factors affecting the demand for tyres include the level of

industrial activity, availability and cost of credit, transportation volumes

and network of roads, execution of vehicle loading rules, radialization,

retreading and exports.

http://www.mrftyres.com/

http://www.jktyre.com/

http://www.apollotyres.com/

http://www.ceatyres.com/

http://www.modigroup.net/modityre/

http://www.kesocorp.com/

http://www.dunloptires.com/

http://www.falcontyres.com/

http://www.tcilcorp.gov.in/

http://www.tvstyres.com/

http://www.metrotyres.com/

http://www.metrotyres.com/

http://www.bkt-tires.com/Home.aspx


27

PORTER’S FIVE FORCES

Entry Barriers: High

The entry barriers are high for the tyre industry. It is a highly capital

intensive industry. A plant with an annual capacity of 1.5 million cross-ply

tyres costs between Rs.4,000 and Rs. 5,000 million. A similar plant

producing radial tyres costs Rs. 8,000 million.

Bargaining Power of the Buyers: High

The OEMs have total control over prices. In fact, the OEMs faced with

declining profitability have also reduced the number of component

suppliers to make the supply chain more efficient.

Inter Firm Rivalry: Low

The tyre industry in India is fairly concentrated, with the top eight

companies accounting for more than 80% of the total production of

tyres.

Threat of Substitutes: Low but Increasing,


28

Over 1,10,000 passenger car tyres were imported. This constitutes over

2% of total radial passenger car tyre production in the country. However,

with the reduction of peak custom duty, the import of tyres is likely to

increase.

Bargaining Power of the Suppliers: High

The tyre industry consumes nearly 50% of the natural rubber produced in

the country. The price of natural rubber is controlled by Rubber Control

Board and the domestic prices of natural rubber have registered

significant increase in recent times.


29

Evolutionary Phases of Tyre manufacturing in India

Phase Period Characteristics Policy Regime

(inception)

Phase I

1920-35 No domestic production. Demand

met through imports. Key players

included Dunlop (U.K), Firestone

& Goodyear (USA)

Liberal imports

(development)

Phase II

1936-60 Domestic production begins by

erstwhile trading companies:

Dunlop, Firestone, Goodyear and

India Tyre & Rubber Company

Imposition of tariff & non-

tariff barriers on imports

(restriction)

Phase III

1961-74 Indian companies-MRF, Premier &

Incheck- enter manufacturing

sector with foreign technology;

licensing of additional production

capacity

Regulation on capacity

expansion and repatriation

of profits of foreign

companies; enforcement of

export obligation on MNC;

protection from external

competition

Phase IV 1975-91 Entry of large Indian business

houses like Singhania & Modi &

technical collaborations with

MNCs, introduction of radial tyres,

vertical integration and exponential

growth in tyre production &

exports

Delicensing of production,

placing of imports under

OGL with tariff & non-

tariff barriers

(modernization)

Phase V

1992

onwards

External trade liberalization &

reduction in import duty; re-entry

of MNCs either independently or

in collaboration with Indian capital

Progressive reduction in

import duty; liberalized

imports


30

INDUSTRY SIZE AND TRENDS OF GROWTH

Financial Year 2010-2011 (Est.)

Turnover of Indian Tyre Industry Rs. 25,000 Crores

Tyre Production (Tonnage) 13.50 lakh M.T.

Tyre Production – All Categories

(Nos.)

971 Lakh

Tyre Export from India (Value) : Rs. 3625 crores

Number of tyre companies: 36

Industry Concentration 10 Large tyre companies account for

over 95% of total tyre production.

Radialisation Level - Current

(as a % of total tyre production)

Passenger Car tyres: 98%

Light Commercial Vehicles: 18%

Heavy Vehicles ( Truck & Bus ): 12%

ICRA estimates the total installed domestic tyre capacity to increase by more

than 47% from 122 million tyres in 2009-10 to around 180 million tyres by

2012-13 In line with demand trends, the TBR segment is expected .to attract

the highest share of investments (over 50%) over the next three years followed

by the PCR segment. Given the strong demand expectations from the domestic

auto industry and the possibility of some delays in project implementation, we

expect utilisation levels to remain high over the medium term, especially in the

TBR segment. This incremental domestic capacity is, however, expected to


31

reduce imports, especially in the TBR segments, over the medium-to-long term.

However, coupled with the expected margin pressure from raw material

inflation, these expansion projects are likely to result in depressed cash flows,

higher leverage and subdued RoCE over the next few years.

With over 39 tyre manufacturers and 60 manufacturing plants, the Indian tyre

industry enjoyed a turnover of about Rs. 25,000 Crores in 2009-10. India has

the technical capability to manufacture the entire gamut of tyres for catering to

its domestic requirements but still imports about Rs. 1,430 crores worth of

tyres, largely low cost passenger car tyres and T&B tyres from China due to

capacity constraints and cost advantage. India also exports Rs. 3,000 crore of

tyres, largely CV tyres, to over 60 countries. The ten largest tyre companies

(MRF India Limited, Apollo Tyres Limited, JK Tyre & Industries Limited, CEAT

Limited, Balakrishnan Industries Limited, Goodyear India Limited, TVS Srichakra

Limited, Falcon Tyres Limited, Kesoram Industries Limited (Birla Tyres)) in India,

account for over 85-90% of the industry by value. Apollo India Limited (MRF) is

the largest tyre manufacturer in India with a market share (value) of about 21-

22%, followed by MRF with about 20-21% and JK tyres with about 15-16%.


32

Major Tyre Projects Completed/Scheduled for Completion during

2010-2011

Company Project Product Capacity Unit Investment (in crore)

Expected comp. dt

MRF Medak Pcr+2w 26.7 Lac/annu

m

472 Sep11

Trichy PCR 7.0 Lac/annu

m

900 Jan11

CEAT vadodara PCR+UV 50 Tons/day 600 Oct10

Vadodara TBR 40 Tons/day

Nasik TBR 1.7 Lac/annu

m

Oct10

Ambeanath SPECIALITY

TYRES

200 Tons/day 140 Dec12

APOOLO Orangadam TBR 6000 No/day 2300 Apr11

Orangadam PCR 8000 No/day Dec10

FALCON Mysore 2W 60 Lac/annu

m

300 Jul11

Uttranchal 2W/3W 5 Lac/annu

m

570 May12

KEZORAM Haridwar TBR 85 Tons/day 350 Sep11

Balasore PCR 80 Tons/day 450 Sep11

Haridwar TYRES 1000 Mar13

JK Tamil nadu TBR PH-1 4 Lac/annu 1000 Mar12


33

m

Tamilnadu PCR PH-1 25 Lac/annu

m

Tamilnadu TBR PH-2 2 Lac/annu

m

500 Mar13

Tamilnadu PCR PH-2 25 Lac/annu

m

Karnataka TBR 2 Lac/annu

m

315 Jan11

BRIDGEST

ONE

Pithampur TBR 400 No/day 180 Dec10

Pithampur RADIAL

TYRE

6000 No/day 260 Mar11

Pune TBR 2600 Jun13

pune PCR Aug13

BALKRSIH

NA

Bhuj SPEC. 110000 Tons/an

num

1200 Dec11

DUNLOP Guwahatii OTR 50 Tons/day 450 Dec12

MICHELIN Chennai TBR 4000 Dec11


34

Growth of Indian Tyre Industry

CATEGORY 2003 -

04 2004 - 05 2005 - 06 2006 - 07

2007 -

08

2008 –

09

2009 -

10

Truck & Bus 10821 11092 11941 12367 13137 12839 14811

Passenger

Car 9959 11862 13605 14264 16437 16571 20047

Jeep 1440 1462 1272 1368 1467 1469 1402

Light Comml.

Veh. (L.C.V.) 3271 3945 4529 4820 5320 5298 5739

Tractor Front 1148 1311 1383 1754 1814 1842 2386

Tractor Rear 842 1096 1134 1296 1234 1315 1634

Tractor

Trailer 415 408 596 823 886 758 903

A.D.V. 295 197 325 381 409 281 294

Scooter 9274 9992 9519 9643 11604 10882 13558

Motor Cycle 16688 18127 21053 26079 27921 30148 35664

Moped 168 124 55 0* 0* 0 0

Industrial 295 377 514 635 733 568 538

O.T.R. 74 89 106 115 141 136 161

Aero 0 0 0 0 0 0 0

TOTAL 54690 60082 66032 73545 81103 82107 97137

(Production in india in 1000 no.s)


35

The Indian Tyre industry is expected to show a healthy growth rate of 9-10%

over the next five years, according to a study by Credit Analysis and Research

Limited (CARE). While the truck and bus tyres are set to register a compounded

annual growth rate (CAGR) of 8%, the light commercial vehicles (LCV) segment

is expected to show a CAGR of about 14 %.


36

JK 16%

apollo 22%

ceat13% 13%

MRF 21%

birla 14%

others 2% 2%

Market share in 2010-11

Competitive analysis of major players of Indian tyre

industry

POSITION OF THE COMPANY

In terms of sales JK stood at the third position after Apollo and MRF with 16% of

total market share of Indian tyre industry.

Percentage share of the various companies in different tyre segments by

production

Company T&b Pass. Lcv Tractor

rear

Tractor

front

Tractor

trailor

otr 2w/3w Motor

cycle

Apollo 21 24 23 16 10 7 1 0 0

Birla 18 1 8 8 6 0 6 0 7

Bridgestone 0 19 0 0 0 0 0 0 0

Ceat 13 2 13 7 8 9 25 9 8

Falcon 0 0 0 1 4 0 0 14 19

Goodyear 0 13 0 35 22 0 4 0 0

Jk 22 14 18 7 6 5 28 0 0

Metro 0 0 0 0 0 0 0 2 2

Modi 4 0 0 0 0 0 0 0 0

Mrf 21 24 27 25 26 8 27 29 27

Tvs 0 0 0 0 0 0 0 22 24

Others 1 3 11 1 17 71 9 23 13


37

Financial Analysis

The following Liquidity ratios, Activity ratios and Profitability ratios are

explained under –

1. Liquidity ratios

Current ratio

Quick ratio

Inventory turnover ratio

2. Profitability ratios

Net Profit Margin

Gross Profit Margin

Return on long term funds

3. Coverage & Leverage ratios

Debt to Equity

Owners fund as % of total source

Fixed asset turnover ratio


38

Liquidity ratios-

Liquidity ratios provide information about a firm's ability to meet its short-term

financial obligations. They are of particular interest to those extending short-

term credit to the firm. We will be here seeing three of the liquidity ratios for

the company and analyzing them.

Current Ratio

Current ratio is a financial ratio that measures whether or not a company has

enough resources to pay its debt over the next business cycle (usually 12

months) by comparing firm's current assets to its current liabilities.

Current ratio = current assets / current liability

2010 2009 2008

JK 0.98 1.18 1.16

APOLLO 1.10 1.30 1.28

If current ratio is bellow 1 (current liabilities exceed current assets), then the

company may have problems paying its bills on time. However, low values do

not indicate a critical problem but should concern the management

As we can see that JK’s current ratio is below 1 at 2010 it means they don’t

have enough current assets to meet its current liability. On the other hand

Apollo performed well at every year having the current ratio above 1.

0

0.5

1

1.5

2

2010 2009 2008

apollo

jk tyres


39

0

0.2

0.4

0.6

0.8

1

2010 2009 2008

APOLLO

JK TYRES

Quick Ratio

The quick ratio is an alternative measure of liquidity that does not include

inventory in the current assets. The quick ratio is defined as follows:

Quick Ratio is an indicator of company's short-term liquidity. It

measures the ability to use its quick assets (cash and cash equivalents,

marketable securities and accounts receivable) to pay its current liabilities.

Quick ratio formula is:

Quick ratio = {current assets – (inventories- prepaid expenses)} / current

liabilities

2010 2009 2008

JK TYRES 0.60 0.72 0.61

APOLLO 0.74 0.91 0.82

Both the companies are not performing well in the case of quick ratio because

it should be in the ratio of 1:1. . A quick ratio higher than 1:1 indicates that the

business can meet its current financial obligations with the available quick


40

funds on hand, a quick ratio lower than 1:1 may indicate that the company

relies too much on inventory or other assets to pay its short-term liabilities.

Inventory turnover ratio- A ratio showing how many times a

company's inventory is sold and replaced over a period.

Formula for inventory turnover ratio is-

Cost of goods sold/avg. inventory

2010 2009 2008

JK tyres 9.11 14.03 6.53

Apollo 10.47 11.77 8.72

This ratio should be compared against industry averages. A low turnover

implies poor sales and, therefore, excess inventory. A high ratio implies

either strong sales or ineffective buying.

Profitability Ratios

These ratios, much like the operational performance ratios, give users a

good understanding of how well the company utilized its resources in

generating profit and value.

The long-term profitability of a company is vital for both the

survivability of the company as well as the benefit received by

0

5

10

15

2010 2009 2008

JK tyres

Apollo


41

shareholders. It is these ratios that can give insight into the all-important

profit.

Net Profit Margin

Often referred to simply as a company's profit margin, the so-

called bottom line is the most often mentioned when discussing a

company's profitability? While undeniably an important number,

investors can easily see from a complete profit margin analysis that there

are several income and expense operating elements in an income

statement that determine a net profit margin. It behooves investors to

take a comprehensive look at a company's profit margins on a systematic

basis.

Net profit ratio = (net profit / net sales) * 100

2010 2009 2008

JK tyres 4.42% 0.38% 2.37%

Apollo 8.19% 2.63% 5.89%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2010 2009 2008

JK tyres

Apollo


42

0.00%

5.00%

10.00%

15.00%

2010 2009 2008

JK tyres

apollo

Net profit margin measure how much profit company is earning in

relation to its sales, above graph shows Apollo profit is increasing higher

rate year on year bases in comparison with JK tyres.

Gross Profit Margin

By subtracting selling, general and administrative (SG&A), or operating,

expenses from a company's gross profit number, we get operating income.

Management has much more control over operating expenses than its cost of

sales outlays. Thus, investors need to scrutinize the operating profit

margin carefully. Positive and negative trends in this ratio are, for the most

part, directly attributable to management decisions.

A company's operating income figure is often the preferred metric (deemed to be

more reliable) of investment analysts, versus its net income figure, for making

inter-company comparisons and financial projections.

Gross profit margin = (Gross profit / net sales) * 100

2010 2009 2008

JK tyres 10.14% 4.72% 6.58%

Apollo 13.76% 6.31% 10.85%


43

0.00%

10.00%

20.00%

30.00%

40.00%

2010 2009 2008

JK tyres

Apollo

Gross profit margins are fluctuating due to the change in the selling prize

and the cost. It also affected because of wrong evaluation of stocks.

Coverage and Leverage ratios

Return on long term funds- It tells about the return of the company on

the total capital employed or long term funds. Having a high return

shows that company is operating in a good condition.

2010 2009 2008

JK tyres 30.48% 21.94% 18.55%

Apollo 26.75% 13.95% 29.74%

We can see that for this ratio JK is performing well as compared to the

Apollo. It means that the JK is operating in a very good condition.

2. Leverage Ratio

Financial leverage ratios provide an indication of the long-term solvency

of the firm. Unlike liquidity ratios that are concerned with short-term

assets and liabilities, financial leverage ratios measure the extent to

which the firm is using long term debt.


44

0

0.5

1

1.5

2

2.5

2010 2009 2008

JK tyres

Apollo

Debt to Equity Ratio

This Debt/Worth or Leverage Ratio indicates the extent to which the

business is reliant on debt financed money versus owner's equity):

Debt equity ratio = total debt / total equity

2010 2009 2008

JK tyres 0.537 0.459 0.356

Apollo 1.24 1.91 1.71

Generally, the higher this ratio, the more risky a creditor will perceive its

exposure in the business, making it correspondingly harder to obtain credit.

By this ratio we can see that JK’s debt equity ratio is increasing year to year and

Apollo’s debt equity ratio is high so Apollo is more risky than JK.

Owner’s fund as % of total source- owner’s fund in source shows that

how much of this fund is involved in the total capital generated for

company.

It can be calculate as –


45

0.00%

20.00%

40.00%

60.00%

80.00%

2010 2009 2008

jk tyres

apollo

Owner’s fund/total fund*100

2010 2009 2008

JK tyres 44.63% 34.32% 36.85%

Apollo 60.33% 66.04% 72.68%

We can see that Apollo have more share of its owner whether JK has

comparatively low.

Fixed asset turnover ratio-

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio

measures a company's ability to generate net sales from fixed-asset

investments - specifically property, plant and equipment (PP&E) - net of

depreciation. A higher fixed-asset turnover ratio shows that the company

has been more effective in using the investment in fixed assets to generate

revenues.

It can be calculated as-

Net sales/net property, plant and equipment

2010 2009 2008

JK tyres 1.44 2.18 1.16

Apollo 2.10 2.24 2.38


46

0

0.5

1

1.5

2

2.5

2010 2009 2008

JK tyres

apollo

This ratio is often used as a measure in manufacturing industries, where major

purchases are made for PP&E to help increase output. When companies make

these large purchases, prudent investors watch this ratio in following years to

see how effective the investment in the fixed assets was.


47

COMPANY PROFILE

JK Tyre & Industries Ltd is one of the leading automotive tyre

manufacturers in India. The company is engaged in manufacturing of

automobile tyres, tubes and flaps. They manufactures Radial and Bias 4-

wheeler tyres for trucks, buses passenger cars, LCVs, tractors etc. They sell their

products under the brand name 'JK Tyre'. They have four plants located in

Rajasthan, Madhya Pradesh and Karnataka. The company has 134 sales, service

and stock points located throughout the country. They have over 3,500

dealerships across India. The company's customer base covers virtually the

entire Original Equipment Manufacturers in India together with Replacement

Market for four wheeler vehicles, Defence and State Transport Units. Besides

India, they have a worldwide customer base in over 45 countries across all six

continents.

JK Tyre & Industries Ltd was incorporated in the year 1951 as a private

limited under the name JK Industries Pvt Ltd. Until March 31, 1970, the

company was engaged in the managing agency business. Thereafter the

company decided to undertake manufacturing activities and obtained a letter

of intent in February 1972 for the manufacture of automobile tyres and tubes

The company name was changed into JK Industries LTD with effect from

May 24, 1974 consequent upon conversion of the company into a public limited

company. In the year 1974, the company entered into a technical collaboration

with General Tire International Co, USA, a subsidiary of General Tire & Rubber

Co, USA for technical services and sales agreement for the supply of technical

knowhow engineering and documentation for operational facilities. In the year

1989, the company introduced several new patterns and sizes of tyres including

a semi-lug Nylon Truck tyre. In the year 1991, the company set up Banmore

Tyre Plant with a capacity of 5.7 lakh tyres per annum. They launched radial

tyres for tractors. In the year 1992, the company's international division

expanded their activities by opening their office in Moscow. In addition, they

set up a Research and Development center at HASETRI.


48

In the year 1993, they introduced new radial tyres namely, Brute and

Ultima and in the next year, they launched 'Jet Track-39' to meet the need of

the heavy load market. In June 1997, the company acquired 51% stake in

Vikrant Tyres Ltd from Karnataka Government. They launched India's first H-

Rated tyre. During the year 1998-99, as per the Scheme of Arrangement

between the company and JK Drugs & Pharmaceuticals Ltd, the pharmaceutical

undertaking of the company was transferred to and vested in JK Drugs &

Pharmaceuticals Ltd with effect from appointed date July 1, 1996. During the

year 2002-03, as per the Scheme of Arrangement and Amalgamation between

the company, JK Agri, JK Sugar and Vikrant Tyres Ltd, the agri-genetics

undertaking of the company was transferred to JK Agri, the sugar undertaking

was transferred to JK Sugar and Vikrant Tyre Ltd was amalgamated with the

company.

During the year 2004-05, the expansion of capacity of Truck/ Bus Radials

by 50% was completed. In addition, the expansion of the passenger radial

capacity was completed. In December 2006, as per the Scheme of Arrangement

and De-merger between the company and Netflier Technologies Ltd (name

since changed to Netflier Finco Ltd), the business of holding and dealing in

investments and some other assets and properties of the company and

liabilities and obligations thereof stood transferred to and vested in Netflier

Finco Ltd. In addition, Hansdeep Investment Ltd, Hidrive Finance Ltd,

Panchanan Investment Ltd and Radial Finance Ltd ceased to be the subsidiaries

of the company. During the year 2006-07, the company introduced a new tyre,

offering high mileage 'Jet One' and launched new Semi-Lug and Rib pattern

Truck Radial tyres. They also diversified into Special Application Tyres and

commenced their exports. In order to capture the brand 'JK Tyre' and their

value in the name of the company, they changed their name to JK Tyre &

Industries Ltd with effect from April 2, 2007. The company entered into an

arrangement with BEML for supply of OTR tyres on a long-term basis. In June

2008, the company acquired the controlling interest in Empresas Tornel, S A de

C V (Tornel), a company incorporated under the laws of Mexico, by acquiring

100% of their equity capital for a consideration of USD 28.75 million. Tornel has

three tyre manufacturing plants in Mexico with a combined capacity of 6.6

million tyres per annum During the year 2008-09, the company doubled the


49

capacity of Truck/Bus Radial plant to 8.00 lakh tyres from 3.67 lakh tyres per

annum at an estimated project cost of Rs. 315 crore. This has further

strengthened JK Tyre's commanding position in the fast growing Truck/Bus

segment


50

Data Analysis and Interpretation The list of companies considered for study is

1. Michelin (Europe)

2. Bridgestone (Asia)

3. Yokohama (Asia)

4. Goodyear (America)

5. Continental (Europe)

The above companies are shortlisted based on their global presence and their

host continent.

The Low Cost Countries that attracted investments from the above companies

are

1. Asia

a. China

b. India

c. Russia

d. Indonesia

e. Philippines

f. Malaysia

g. Thailand

h. Turkey

2. Eastern Europe and Africa

a. Slovakia

b. Portugal

c. Czech Republic

d. Romania

e. Hungary

f. Poland

g. South Africa

3. Latin America

a. Brazil

b. Mexico


51

CAPITAL EXPENDITURE from 1999-2011

The trend of Capital Expenditure (CAPEX) of the companies from 1999-2011 is

as follows:

The total CAPEX of the companies during 1999-2011 is $ 55.9 billion. Michelin

and Bridgestone are the companies with high Capital Expenditure of $19 billion

and $21 billion and together constitute 71% of total CAPEX from all the

companies.

The Capital Investments for most of the companies started rising from the year

2002-03.This trend continued till 2008-09.

During the year 2009 the Capital investments of all the companies fell due to

Global recession and from the year 2010 there was a sharp increase in Capital

investments as there was an expected demand rises for automobiles sector in

the developing countries.

-

500

1,000

1,500

2,000

2,500

3,000

1,999 2,000 2,001 2,002 2,003 2,004 2,005 2,006 2,007 2,008 2,009 2,010 2,011

Mill

ion

$

Capital Expenditure Good year Michelin ContinentalYokohama Bridgestone


52

873

740

1114

114

1880

512 415

316

601

159

41

420 1092

528

1284

264

604

251

307

745

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Michelin Continental Yokohama Bridgestone Good Year

Mill

ion

$

Company Wise Capital Expenditure Mexico,Poland,South Africa

Romania, Mexico,Czech,Portugal, MalaysiaRomania, Mexico, Hungary,TurkeyRussia, China

Portugal, Czech

Asia Pacific

Middle East Europe, Africa

Latin America

Thailand

Russia

Philippines

Slovakia

China

Brazil

Mexico

Indonesia

India

Capital Expenditure in LCC’s

The following chart shows the company wise Capital Expenditures in LCC’s

during 1999- 2011.

Of the total LCC CAPEX $12.2 billion, Michelin and Goodyear invested $4.8

billion and $2.9 billion that constitute to 38% and 24% of investments by all the

companies in LCC’s.

Almost all the Companies have their majority investments in Asian LCC’s as they

have attracted 55% of total investments followed by Latin America with 25%

and Middle East, Africa and Eastern Europe collectively with 20 % of total

investments.


53

Yearly Percentage of Capital Expenditures in LCC’s

The percentages of capital expenditures in LCC’s have been steady during 2005-

07 and increasing from 2010 onwards, this indicates the tyre companies are

looking for LCC’s to invest.

% in…0%10%20%30%40%50%60%70%80%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total

7% 11%

0% 0% 0% 4%

26%

15% 18%

1% 0%

13%

75%

17%

% of Capital Expenditures in LCC's


54

0%

20%

40%

60%

80%

Good year Michelin Continental Yokohama Bridgestone

56%

12% 15%

61%

14%

% of CAPEX spent in LCC's % CAPEX inLCC

Company wise Percentage spending in LCC’s

The above chart shows the companies percentage spending on LCC’s.

From the above chart we can observe that Yokohama and Goodyear invests

majority of their CAPEX in LCC’s.

It can also be noticed that though the magnitude of CAPEX of Michelin and

Bridgestone high, their percentage spending in LCC’s is less. This shows that

Michelin and Bridgestone are investing more in non LCC’s.


55

1,880

1,114 873 740

2

512

114

822 604 316

16

601

41 159

415

745 420

1283.6 1092.3

528.4 -

500

1,000

1,500

2,000

2,500

3,000Country Wise LCC CAPEX

Good Year

Bridgestone

Yokohama

Continental

Michelin

CAPEX Country Wise

The country wise Capital Investments of the companies are given in the

following chart.

From the above chart it can be observed that Brazil, Russia, India, China

attracted major proportion of Investments as it was estimated that the

automobile sales in BRIC nations would be 15 million units by 2010 with a

growth rate of 10% per year.

Among these China has been the preferred destination due to its abundant

resources, low labour and manufacturing costs, and abundant resources.


56

7%

6%

10%

(23-25)%

3% 5%

(1-5)%

% of total Investments

India

Mexico

Brazil

China

Slovakia

Philippines

Russia

Thailand

Percentage of investments in major countries

The major countries considered are India, Mexico, Brazil, China, Slovakia,

Philippines, Russia and Thailand.

Out of the total CAPEX of $12.278 billion the major countries like India, Mexico,

China, Brazil, Slovakia, Philippines, Russia, and Thailand have got a $ 7.8 billion

investment which is 63% of the total CAPEX in LCC’s.

China has the highest investments with 23% followed by Brazil, India and

Mexico with 10% and 7% respectively.


57

2755 1854

1116

1137

114

817 835

745

1284

528 1092

0

1000

2000

3000

4000

5000

6000

7000

8000

Asia EasternEurope,Middle East

& Africa

Latin America

Mill

ion

$

Company wise CAPEX in Continents

Good Year

Bridgestone

Yokohama

Continental

Michelin

Continent Wise CAPEX in LCC’s

The continents with LCC’s are Asia, Latin America and East Europe with Africa.

The continents are considered because there are joint investments in the

countries that could not be segregated. The following chart gives the continent

wise break up of investments.

From the above chart it can be observed that Asia has investments from all the

companies and Continental and Michelin have invested in all the continents.


58

55%

20%

25%

% of CAPEX in LCC's Continent wise

Asia

Eastern Europe,MiddleEast & Africa

Latin America

37%

19% 7%

13%

24%

Contribution of all Companies to LCC's

Michelin

Continental

Yokohama

Bridgestone

Good Year

Continent wise share of CAPEX

The following chart gives the percentage share of all the continents in the

investments.

We can observe that Asian LCC’s are mostly preferred for Tyre Sourcing with an

investment of $6.8 billion (55%) out of a total $12.3 billion.

Company wise share of CAPEX in LCC’s

Michelin and Goodyear are expanding vigorously in LCC’s compared to other

companies.

They together contribute 61% of total CAPEX in LCC’s.


59

60%

31%

9%

Magnitude of Capacity installments in LCC's - Segment wise

Commercial VehicleTyres(Truck,Earth Movers & Bus )

Passenger Car Tyres

Run Flat Tyres

Segment wise Capacity Installments

The capacity installments have fallen broadly under three categories, namely

1. Commercial Vehicle Tyres

2. Passenger Tyres

3. Run Fat Tyres

From the above chart we can conclude that majority of expansions took place

in Commercial Tyre segment and most of the expansions took place in few

countries like Thailand, China, and Brazil.

The Passenger Car Tyre capacity is expanded in all the developing countries of

Asia, East Europe and Latin America.


60

47% 47% 49%

52% 53% 55% 56%

59% 61% 62% 63% 63%

30%

40%

50%

60%

70%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

% Units sold at LCC's

27% 28% 29%

36% 43% 45% 46% 47%

0%

10%

20%

30%

40%

50%

2004 2005 2006 2007 2008 2009 2010 2011

% of Capacity at LCC to total Capacity

Capacity installed at LCC

During 1999-2011 the cumulative percentage of capacity at LCC to the total

capacity is as follows

From this it is observed that the companies are gradually increasing their

capacity at LCC’s. This is also contributed by the ceasing of plants at high cost

European and American sites.

Percentage of Sales in LCC’s

During the period 1999-2011 the percentage of units sold in LCC’s are as

follows

This shows that the productions at LCC sites are mostly for the consumption in

that LCC country.


61

Yearly Trend in Capital Investments in LCC’s

Year Total Investment(Million $)

1999 264

2000 316

2001 0

2002 0

2003 0

2004 153

2005 1160

2006 727

2007 991

2008 57

2009 0

2010 671

2011 5035

Till 2003 there were very less investments in LCC’s. From 2005 the investments

rushed to LCC’s because of increasing competitiveness in the industry, increase

of raw material, labour and mantainence costs in high cost countries.

This was also attributed by the potential markets in growing countries like

Brazil, China, Mexico, India and other African and East European countries.

The year 2009 hit the global tyre industry as there was recession worldwide

that led the companies to rationalize their activities at plants to reduce the

costs.


62

0

1

2

3

4

5

No

of

co

mp

anie

s

Company vs No of Countries

Preferred Countries for investments

There are many LCC’s and the companies have ample choices for sourcing. The

following chart gives the number of companies invested in those countries.

From the above chart it is evident that China is the most attractive destination

for sourcing of Tyres due to its abundant raw materials, cheap labour and less

product cycle.

China has attracted (23-25) % of total LCC investments during 199-2011.

Trend in selecting the destinations

During the years 1999-2001 companies like Continental and Bridgestone

invested in their host continents.

From 2004-07 the companies expanded vigorously in Eastern Europe, Asia and

Latin America.

After 2008 all the companies invested only in Asian Countries.


63

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Trend of Manufacturing Costs as % of Sales

Bridgestone

Goodyear

Yokohama

Continental

Michilin

Conclusion

The companies are able to cut the manufacturing costs over the period of time.

The following chart represents the percentage of manufacturing costs to the

sales turnover.

It can be observed that from the year 2009 most the companies have reduced

their manufacturing costs. This was possible by Low Cost Country sourcing

during the past years.

Except Bridgestone all the companies registered had shown significant

reduction in manufacturing costs. This is because Brigestone had invested more

in High cost countries where as the remaining companies have invested in

LCC’s.


64

Observations:

1. Michelin and Bridgestone are the companies with highest Capital

Expenditures but Michelin is investing more in LCC’s whereas Bridgestone

is investing more in non LCC’s.

2. Capital Investments of all the companies have been increasing sharply

from 2009.

3. China has emerged as the preferred destination for Tyre Sourcing

followed by other countries like Mexico, Brazil, Russia, Thailand, India,

Indonesia etc.

4. Commercial Tyre segment has attracted majority of investments in LCC’s.

5. Most of the production in LCC’s is used for the respective LCC.

6. The capacity at LCC’s is gradually increasing year by year.

7. The companies started sourcing from East European, Latin American and

Asian countries during 2004-2007 but from 2009 all the companies began

to source from Asian LCC’s.

8. The companies who have invested in LCC’s showed reduction in their

manufacturing costs over the period of time.


65

Suggestions to India and JK Tyre

1. As all the companies are looking for Asian countries it is the best

opportunity for India to attract more companies if manufacturing

costs are maintained low compared to other LCC’s.

2. JK tyre which is located in an LCC and being the largest exporter of

tyres in India can avail this opportunity to outsource tyres to more

foreign tyre companies.

3. There are overseas opportunities for JK Tyres to increase their global

footprint in much lower LCC’s than India.


66

Source of Information Secondary data is used mostly for the project.

Most of the resources are obtained from internet. The following are the sources

for the data collection.

1. Company Annual Reports

2. Company websites

3. http://www.atmaindia.org

4. http://www.ranker.com

Date post:	18-Apr-2015
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Low Cost Country Sourcing by International Tyre Industry

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