OEM demand turns a strong driver for tyre makers

Increase in automobile sales is boosting the growth of the tyre industry. In the past, progress used to be mostly driven by the replacement market demand, which still accounts for a lion’s share of total tyre sales. However, share of sales to automobile makers, also called Original Equipment Manufacturer (OEM) sales, is moving up for tyre makers.

“With the bullishness in the economy and the auto industry, the tyre industry was also on an upward march (in FY18). Our own estimates indicate that the growth has been led by the Original Equipment (OE) sales more than by the sales in the replacement market,” leading tyre maker Apollo noted in its FY18 annual report. The contribution of OEM in growth is estimated to be strengthening further in the current financial year.

In the first quarter of FY19, production of all automobiles-passenger and commercial vehicles, two and three wheelers-has increased by over 16 per cent. The production volume of automobiles (excluding tractors) had grown by almost 15 per cent in the last financial year to 29.07 million units. The trend so far in the current year indicates that it could be another record year of production.

MRF has pegged the tyre volume growth at 8-10 per cent. However, it expects replacement demand to grow at 6-8 per cent against 8-10 per cent growth in OEM consumption. While overall volume growth is a welcome sign for tyre makers, the production volume commercial vehicles (CVs), which brings maximum revenue to the tyre industry, is also growing at a double digit. After a 10 per cent production growth last year, the first quarter production of CVs has jumped 68 per cent though on a low base of the previous year when the transition to GST and BS-IV emission norms had impacted sales.

The share of OEM business in overall revenue of tyre makers has been inching up. Apollo Tyres saw the share of OEM contribution move up to 25.50 per cent in FY18 from less than 22 per cent four years ago.

Ceat witnessed the OEM share increasing to 24 per cent last year from 22 per cent in FY14. The industry’s share of OEM business will further pick up as new entrants in the domestic car market - Kia, MG Motor and Peugeot are scheduled to begin production next year.

The expanding OEM business and a healthy growth in replacement demand in the last couple of years have led to a better capacity utilisation in the tyre industry. Factors like the imposition of anti-dumping duty on truck and bus radial (TBR) tyres from China last year also supported growth. “The Chinese tyre imports dropped by almost half after the government imposed an anti-dumping duty in 2017. Since then, domestic tyre companies have been witnessing an increased demand and their capacity utilisation has also gone up. The demand got another boost with the implementation of the GST,” tyre maker Ceat notes in its FY18 annual report.

No wonder that players have announced huge investments to add capacity across segments in recent quarters. According to Automotive Tyre Manufacturers Association (ATMA), the industry is investing Rs 206 billion in the ongoing greenfield projects and another Rs 157 billion in brownfield expansion.

Satish Sharma, president, Asia Pacific, Middle East & Africa (APMEA) at Apollo Tyres said the company will increase TBR capacity in Chennai to 12,000 tyres a day from the current 9,000-9,500. Rajiv Prasad, President (India Operations) at JK Tyre said it is observing an increasing demand from OEMs as well as replacement markets as better road infrastructure, stable interest rates and good monsoon has supported demand for all automobile segments.