Financial Daily from THE HINDU group of publications
Wednesday, Dec 25, 2002
`No tyre company here is big enough not to be gobbled up' - Mr Paras K. Chowdhary, MD, Ceat
Shyam G. Menon
MUMBAI, Dec. 24
TYRE manufacturer Ceat Ltd is on the road to recovery. Yet even as it leaves its losses behind, refuses to borrow and enhances sales, there are sectoral issues it must confront. Mr Paras K. Chowdhary, Managing Director, Ceat, spoke recently to Business Line on the domestic tyre industry and challenges before it.
Excerpts from the interview:
How do you see 2002-03 shaping up?
The year so far has been good for the industry. All the tyre companies had good results in Q1, we too. In Q2 also, that trend continued - Apollo was the most impressive and compared to the previous similar period Ceat was also impressive. Now at end-Q3, I am noticing a mild depression in demand. I don't know the reason - December demand is always a little low, but then this year even October-November demand saw a mild fall.
It could be due to some after-effect of poor rains. But Q3 is a period of high tyre production. Therefore, there is a little extra-supply in the market at present. Companies are now trying to export more to take care of this problem.
But is not the global automobile market sluggish?
I am talking of trucks and LCVs. I won't say the market worldwide is down. In fact, January-December last year most tyre companies posted good results. But yes, the kind of growth that was expected did not happen. However due to the 9/11 attack in the US, crude oil prices fell and when that happens everything else falls - synthetic rubbers, caprolactum - all went down by 20, 30 or 40 per cent.
The result was that even if the demand was low, it did not matter due to bigger gains on raw material costs. If good things happen for bad reasons, nobody talks of it! Until June this year, the situation was good because crude recovered but did not go above $23-24. Later, owing to issues like tension in the Middle East, crude flared up, touching $30-31. I have not seen a scenario, where within nine months you see crude at $17 and $31. Almost 80 per cent up! If your main raw material swings by 80 per cent, its derivatives also swing. At this point in time, raw material cost is another issue facing the industry. It is a substantial increase.
So, Q4 and into next year, it is a dicey market one is looking at...
Q3 demand is more or less the same as Q2. It is seasonally a little weaker than Q2. But in this particular quarter, I think there will be some pressure on margins. In Q4, at least for the first two months, the pressure will be even more due to all the increases that started coming in from July/September - their real effect comes a few months later.
Two or three situations are likely. The tyre industry may be able to pass on the price increase. Can't say whether it will happen or not because there are now four major players and there is quite a fight going on in the market place. There is the possibility that in the Budget, the import duty on raw materials will come down again - could be a five per cent decline.
There is also a feeling that by February/March the tension in the Middle East may settle down a bit, so you could see crude prices stabilising at $22-24. If so, raw material prices will fall. Besides, the rupee has not depreciated against the dollar; it has somewhat appreciated. Thereafter the industry may be on a stronger footing.
What could be the impact on the domestic tyre industry, of the rounds of consolidation beginning to happen?
The market in India is worth about Rs 10,000 crore. It is in the hands of four big players, two medium players and few small players. The big four - and here I am assuming Vikrant and JK are merged - are likely to have a 2002-03 turnover of Rs 8,000 crore. The two medium players - Goodyear and Birla - should account for Rs 1,000-1,200 crore. The rest should notch up another Rs 1,000 crore. About 15 years ago, we were 12 big players. But in my opinion, we will see further consolidation and nobody should be under the illusion that he is big enough to be not gobbled up. I would expect in the next two years, the number of players from four plus two, to be reduced by at least one. One more player should get out of business in the next two years and every two years you should see a player getting out. Ultimately, it will be a business of just four players.
I am not necessarily saying that the medium ones will go, because Goodyear will not - they have taken a decision to remain in the business. They may lose money, but they will stick around, they have deep pockets. Out of the other five, one or two will be gobbled up over the next five years. The strategy has to be - first you take adequate steps to ensure you are not gobbled up. Second, you must have a topline whereby you get 20 per cent of the business. So, if you have a market size of Rs 10,000 crore, the minimum critical mass is Rs 2,000 crore. If you don't reach that, the chances of your going out of business are high.
Worldwide the industry is highly consolidated. It is a $70-billion market and ours is $2 billion. All Indian players rank between 10 and 20 globally. The top three worldwide are in the range of $12-13 billion, the biggest among us is MRF, about half a billion dollars. If you go to the middle level - like Continental, Pirelli or Yokohama - they are about $2-2.5 billion. So, we are still one-fifth the size of medium players globally. But on the other hand, if you reach $1 billion, you will be in the top 10.
So what is Ceat's strategy here?
Strategy won't be any different for Ceat. For all, it hinges on three factors - topline, then technology - it changes every 4-5 years and most Indian players are not prepared for technology changes. They will have to look for outside help in the form of collaboration or partnership.
Modernisation and minimum critical mass is the other factor. If you try to do some of these things early - like we tried to set up a radial plant in league with Goodyear long time back but were doing it ahead of time - we lost heavily as a result and had to pull out of the joint venture.
Likewise, everyone is thinking when to get into radials; but when India will radialise is a million dollar question.
JK is attempting it, they have a radial facility in Vikrant; but they are unable to utilise that capacity. They have I think 20,000 plus capacity, but are able to sell around 3,000 in India. Apollo has announced they will put up a pilot radial facility in Vadodara and they will come up with production early next year.
All this is very nice to hear. If you go deep, you won't find clear answers from any company because it depends a lot on Government policy, how infrastructure comes up. If roads are not good, radials won't come.
Are you looking for a technology partner?
I think everybody is! I won't say we are looking for a partner; we are looking for an association. It is clear for JK, Modi and Apollo because they have a collaborator.
But in the case of MRF and Ceat, there is no clear signal because we don't have a technology partner today. I am sure over time both of us will figure out who can be our technology partner.
Does a technology partner imply an equity partnership?
Most of the tyre companies abroad are not well placed for equity participation. Bridgestone lost a lot of money in the US after which they are not keen to set up plants.
Michelin does not operate in partnerships, they like 100 per cent ownership or majority ownership with the rest held by the public. They don't like to have a big local partner anywhere. The European economy has not done well, so the earnings of European tyre companies are down and they are not keen to invest.
The weakness with Indian companies is technology. But they are wary of joint ventures or partnerships.
On the other hand, retained earnings at our tyre companies is poor, Rs 10-20 crore a year. You can't get technology for that price! So, it is not a simple jigsaw puzzle to be fixed.
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