International Research Journal of Finance and Economics

ISSN 1450-2887 Issue 45 (2010)

© EuroJournals Publishing, Inc. 2010
http://www.eurojournals.com/finance.htm

Impact of Recession on the Indian Tyre Industry

Jasmine Kaur
Assistant Professor in Guru Arjan Dev Institute of Management & Technology, New Delhi
jasmine.rus@gmail.com
Tel: (91) 9811160007, (91)9811669777; (91) (011) 25133012

Abstract

Recession is the much talked about topic now-a-days in every sphere of work-field
across the globe. It refers to the state of an economy when it is having a negative growth
rate. It is the result of reduction in the demand of products in the global market over a
sustained period of time. Recession has had a negative effect on India – Share market, Real
estate IT and Industrial sector leading to increased lay-offs, unemployment etc. This article
analyses the impact of recession on the Indian tyre industry w.r.t its effect on production,
exports, sales and profits of the industry and the measures undertaken to stimulate growth
and competitiveness of the tyre industry. This industry has been worst-hit by recession. The
bus and truck tyre production has declined from 6.2% to (-7.5%) in 2008-09. The sales
have also declined leading to a loss of 2.17% in the third quarter of the year 2008-09.

Keywords: Recession, Indian Tyre Industry, Economy

Introduction
Global economic meltdown has affected almost all the countries. Strongest of American, European and
Japanese companies are facing severe crisis of liquidity and credit. India is not isolated either.
Although, India’s cautious approach towards reforms has saved it from possibly disastrous
implications, Indian economy is also facing a slowdown. The prime reason being, world trade does not
function in isolation. All the economies are interlinked to each other and any major fluctuation in trade
balance and economic conditions causes numerous problems for all other economies.
According to official data, industrial growth has plummeted to 1.3% which definitely is a cause
of concern for policy makers and industries. 1.3% industrial growth is the lowest IIP(index of industrial
production) data ever registered since last ten years. It is also not possible to achieve a yarget of 7.5%
GDP growth rate this fiscal. As the global financial and economic crisis deepen, the growth in India
would continue to be affected. The external economic environment of India is likely to worsen as the
major developed countries contract further and international trade growth slows down sharply. Today
the Indian business is facing the following broad risks:
 A deeper and prolonged recession in the world economy.
 Future lightening of external funding conditions.
 Financial stress due to volatile capital flows.
 Weak domestic demand.
108 International Research Journal of Finance and Economics - Issue 45 (2010)

Recession: Conceptual Understanding

A Recession is a contraction phase of business cycle. National Bureau of Economic Research(NBER)
which is the official agency incharge of declaring that the economy is in a state of recession, defines it
as,significant decline in economic activity lasting more than a few months, which is normally visible in
real GDP, real income, employment, industrial production and wholesale-retail sales.”
An economy typically expands for 6-10 years and tends to go into a recession for about six
months to two years. A recession normally takes place when consumers loose confidence in the growth
of the economy and spend less. This leads to a decreased demand for goods and services which in-turn
leads to a decrease in production, lay-offs and a sharp rise in unemployment.
U.S faced major crisis because of:
 Subprime mortgage crisis(home loan defaults)
 Rising oil pricesat $100 a barrel.
 Global inflation.
 High unemployment rates.
 A declining dollar value.
All this slowed down the growth of the U.S economy as the GDP rate fell to 2%leading to
recession of the economy.

Impact of Recession on India

A slowdown in the U.S economy has also affected India because:
 Indian companies have major outsourcing deals from the U.S.
 India’s exports to the U.S have grown substantially over the years.
 Indian companies with big ticket deals in U.S are having their profit margins shrinking.
This has impacted India in the following ways:
 The Industrial growth has declined drastically. Government and private companies are reluctant
in starting new ventures and projects. Projects that are halfway to completion or companies that
are stuck with cash flow issues on businesses that are yet to reach break-even, have run out of
cash.
 Foreign investors have pulled out of stock market leading to heavy losses in stock and mutual
funds. People have started saving in banks rather than investing in shares or real-estate.
 Due to liquidity crisis, companies have laid-off many employees. There is cut in salaries, perks
and other benefits. They have put their expansion plans on hold, stopped hiring employees and
projected lower manpower needs.
 Exports have also declined.

The Indian Tyre Industry

The Indian tyre industry is in troubled waters. The impact of global credit crunch is re-sounding in
India as well. The Indian economy has perceptibly slowed down and the automobile companies are
struggling to push sales. A fall -out of this has been a distinct slow down the Indian tyre industry as
well. Tyre industry has always been working with low margins but managing with high volume of
sales. Reduction in domestic demand has affected the operating margins of these companies drastically.
Automobile industry world wide including India has been adversely affected due to the present
crisis (Exhibit-1) Due to this, the requirement of tyres with the original equipment manufactures have
come down because of the reduction in production level of vehicles to match the demand. (Exhibit-2)
Exhibit-1: Heavy Commercial Vehicle Production

Period Production % Changes

(due average monthly 2007-08)
2007-08 (Apr-Mar)-Aug-monthly 24260
2008
July-Sep (avg monthly) 19425 -19.9%
October (Actual) 16072 -33.8%
November (Actual) 7701 -68.3%
December (Actual) 4986 -79.4%
2009
January (Actual) 5800 -76.1%
Feb-March (Actual) 5000 -79.4%

Exhibit-2: Light Commercial Vehicle Production

Period Production % Changes

(due average monthly 2007-08)
2007-08 (April-march)-Aug/ Monthly 21172
2008
July –Sep (Aug/Monthly) 23008 8.6%
October (Actual) 20368 -3.8%
November (Actual) 12605 -40.5%
December (Actual) 9897 -53.3%
2009
Jan (Actual) 12767 -39.7%
Feb-March (Actual) 11000 -48.1%

The production in the category of truck & bus, jeep and light trucks segment has declined in the
year 2008-09 except only in the case of passenger’s cars where the production numbers have increased
(graph1)

GRAPH 1: Auto production

Auto production (000' nos.)

1600

1400

1200

1000

800

600

400

200

Truck & Bus Light Trucks Cars Jeeps

2006-07 2007-08 2008-2009

110 International Research Journal of Finance and Economics - Issue 45 (2010)

In this period of global slowdown, even exports have been adversely affected due to increase in
subsidies by countries like China and sharp devaluation of currency in South Korea. (exhibit-3)

Exhibit-3: Tyre Export Statistics

Truck and bus tyres

Period Lakh Average Monthly % Change

2007-08 (apr-Dec) 18.65 207256
2008-09 ( Apr-Dec) 15.63 173667 -16%
2008 Total (nos)
September 215654
October 190823 -12%
November 163982 -14%
December 146359 -11%

Passenger Car Tyre

Period Lakh Average Monthly % Change

2007-08 (Apr-Dec) 8.03 89259
2008-09 (apr-Dec) 7.83 87053 -2%
2008 Total
September 118186
October 76812 -35%
November 97421 27%
December 81237 -17%

Due to recession, the freight and cargo movement has also slowed down. As a result the
replacement market which accounts for 66% of the market has taken a hammering. The major players
MRF, CEAT, APOLLP and J.K. who account for a 68% market share either had to cut down
production or pile up inventories During April 2008-February 2009, tyre production in volume terms
has witnessed a decline of around 0.4 per cent year-on-year (y-o-y) across main categories (truck and
bus, light commercial vehicles, cars and jeep). While, production in tonnage terms declined by around
1.7 per cent y-o-y, the dominant truck and bus (T&B) tyre segments registered a de-growth of around
2.8 per cent y-o-y during the same period. Growth slowed down due to the deceleration in medium and
heavy commercial vehicles (MHCV) production coupled with slowing replacement demand with
increasing idle capacities. The light commercial vehicle (LCV) tyre segment grew by a mere 1.6 per
cent y-o-y, while the passenger car tyre segment remained almost at the same level (0.1 per cent
growth y-o-y). CRISIL Research estimates tyre demand to decline by around 1.0 per cent in 2008-09
mainly due to slowdown in off-take of commercial vehicles The industry has registered a de-growth in
the trucks and bus tyre production category. It is declined from 6.2% to (-7.5%) in 2008-09 (graph 2)
 Graph 2: Tyre Production

8.5%

6.5%
4.5%

2.5%

0.5%
Q1 Q2 Q3 Q4
-1.5%

-3.5%

-5.5%
-7.5%

2006-07 2007-08 2008-09

Also the annual results of all major tyre manufactures corroborate a fall in demand. These
players have seen their bottom line squeezing or have reported a lar. The competition remains severe
with pursuer on price margins. The net sales of the companies have declined from Rs.4283 Cr. in
quarter 1 to Rs. 3738 cr. in quarter III for the year 2008-09 (graphic3)

Graph 3: Net Sales of Tyre Industry

NET SALES

4282
4283
4109
3725
3728

3738
3570
3591
4500
3419
3346
3233
2967
2745
2693
2694
2713

2681
2639
2555

2569
2431
2443
2291
2244

2238
2184

2212
2081

3000
1955
1819
1804

1500

0
QI QII QIII QIV QI QII QIII QIV QI QII QIII QIV QI QII QIII QIV QI QII QIII QIV QI QII QIII QIV QI QII QIII QIV QI QII QIII
2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
02 03 04 05 06 07 08 09

Similarly the companies have reported net loss of Rs.51.56 Cr. and Rs. 81.21 Cr. in quarter II
and quarter III of the year 2008-09 (graphic4)
112 International Research Journal of Finance and Economics - Issue 45 (2010)
Graph 4: Net Profit Of The Tyre Industry

NET PROFIT
350

236.13
177.52

163.59
153.28
250

126.38

103.76
98.52

94.91
93.59
150

64.56
63.54

57.03
47.27
43.66

45.63
42.46

41.79
39.79

37.47

38.18

36.84
33.57
31.59

33.04

25.25

21.08
8.52
2.98

50

-50 -13.29
-51.56
-81.21
-150
QI QI QI QI QI QI QI QI
QII QIII QIV QII QIII QIV QII QIII QIV QII QIII QIV QII QIII QIV QII QIII QIV QII QIII QIV QII QIII
2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-

Series1 2.98 -13.3 8.52 42.46 63.54 64.56 43.66 93.59 31.59 33.57 39.79 41.79 33.04 37.47 25.25 21.08 45.63 47.27 38.18 57.03 36.84 98.52 94.91 126.4 153.3 177.5 163.6 236.1 103.8 -51.6 -81.2

The net profit ratio has declined from 2.42% in quarter I to a loss of (2.17%) in quarter III of
the year 2008-09 (graph 5 )

Graph 5: Net Profit Ratio Of The Tyre Industry

6 .1 9
NET PROFIT AS A % OF SALES

4 .7 7
6
4 .2 3

4 .1 2

4 .5
3 .5 4
2 .9 6

2 .9 4
2 .9 1

2 .7 8

2 .4 2
4
2 .0 4

1 .9 5

1 .9 2
1 .7 8
1 .7 6
1 .6 3
1 .6 4
1 .4 1
1 .3 8

1 .3 9

1 .3 9
1 .2 5

1 .1 4
0 .9 4
0 .7 8
0 .4 7

2
0 .1 5

0
-0.73
-2 -1.2
-2.17
-4
QI QI QI QI QI QI QI QI
QII QIII QIV QII QIII QIV QII QIII QIV QII QIII QIV QII QIII QIV QII QIII QIV QII QIII QIV QII QIII
2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-

Series1 0.15 -0.73 0.47 2.04 2.91 2.96 1.95 4.23 1.41 1.38 1.63 1.64 1.25 1.39 0.94 0.78 1.78 1.76 1.39 1.92 1.14 2.94 2.78 3.54 4.12 4.77 4.5 6.19 2.42 -1.2 -2.17

In all this gloom, one silver lining for the industry has been easing of raw material prices from
September 2008 onwards. However, the impact of this was not visible in the result as the companies
were laden with high price inventories. The reduction in raw martial price is of little cheer to
manufactures as they are up against a huge drop in demand rupee depreciation and import of Chinese
tyres. ‘The benefit due to the reduction in raw material price has been to a great extent, offset by the
30% slump in demand. The cost of production has therefore, not changed much.” Paras k. Choudhary,
MD, CEAT ltd.

Measures to Stimulate growth in Tyre industry

To increase the competitiveness of the tyre industry, it is important to take some aggressive measures
like giving export benefit and reducing the input costs. Some of the other steps taken are:
 The import of radial truck bus tyres has been placed in the restricted list, fearing large scale
import of radial tyre classified as bias tyre especially from Chinese tyre manufactures. This is
because Chinese tyre manufactures, who are also facing a recession, expect Indian economy to
have a moderate growth.
 Government is ensuring that important infrastructure project like North-South and East-West
corridor projects for development of roads move at a faster pace.
 The Government. has also tried to provide external stimulus by effecting 6% excise duty cut
accror industries (excise duty brought down from 14% to 10% w.e.f. Dec. -7 2008 and then
 further reduced 85 w.e.f. Feb 25,2009) It is also required of government to waive off custom duty
to nil on raw-materials not manufactured domestically like Butyl Rubber, SBR, Polyester Tyre
Cord etc.
 Due to recession, the exports of tyre industry have been severely impacted. China as a major
competitor, has announced revised export tariff rebate rate on Rubber products (including tyres )
exports from 5% to 9% effective 1/12/2008. The Indian Government. should also support the tyre
industry and provide special duty free credit equal to 5% of value of exports till the economic
situation improves.
 Interest rates applicable on export credit are high at 10% -11% in the case of tyre industry. The
interest rates should be made comparable with china where export credit is available at around
6% rate.
 Apart from the Government measure, the onus lies on the tyre companies also to focus on full
capacity utilization which at present is 82% to reap the benefits of economies of production.

Conclusion
The last two years have been the toughest for the indian tyre indusry with the continuing slump in the
market of commercial vehicles which sustains the domestic tyre industry and the spurt in the prices of
raw-materials. As a result, India’s tyre industry is not likely to lift itself out of its recession for some
more time as the market shows no signs of any dramatic recovery. The recession seems there to stay
for a period of time and to ensure that the domestic tyre industry does not succumb under the pressure
it is important for the government to take immediate effective steps till the time the economy is back
on the road of recovery.

Reference
[1] Indian Tyre Industry Report 2008; The Indian Automotive Tyre Manufactures Association
(ATMA).
[2] FICCI meeting with cabinet secretary on impact of economy & financial crisis & how to
stimulate the growth of Indian economy on 17th Dec2008.
[3] Tyre makers on rough Terain (Manu p. Toms) on 15th Dec2008 to The Hindustan Business line.
[4] The outlook on Indian tyre industry: CRISIL Report 2008.