Speed bumps for tyre MNCs in India

Michelin, a French multinational tyre manufacturing company, has had to curtail the import of passenger car radial tyres (PCR) to India.

In a statement to Fortune India, Michelin India said that the government has recently issued it a limited import licence. Tyre importers require a licence or permission for imports following the government’s move in June 2020 to restrict import of tyres used for cars, buses, trucks, and motorcycles, including radials and tubeless ones.

Michelin India said it plans to utilise the licence to import passenger car tyres, for which there is high demand, in a “restricted manner”. “Consequently, to streamline our supply chain in the current situation, Michelin India has decided to prioritise selling of these limited stocks only through select partners such as TYREPLUS, Michelin Tyre & Services, Michelin Tyre & Car Services, and Michelin Priority Partners,” it said in the statement.

To set the context, on January 19, Manish Pandey, commercial director (passenger car & 2-wheeler) at Michelin, wrote a letter to his channel partners, which read: “The recent import restriction on tyres in India has impacted our passenger car business by constraining supplies and restricting our sales. Due to this uncontrollable situation of licence-limiting our supplies, we regret to inform you that we will not be able to supply passenger car tyres to you until further update from the government,” he wrote. The company used to import tyres from its plants in Asia.

Michelin will, however, continue with the sale of two-wheeler and truck/bus tyres. It produces truck/bus radial tyres (TBR) in its Chennai plant and two-wheeler tyres at a TVS plant in Madurai under an agreement.

The company has continued to expand its production capacity at the Chennai truck/bus radial tyre plant, its largest and most advanced globally, to 30,000 tonnes per annum at a capex of ₹3,500 crore. It has also strengthened its presence in India with a research and development (R&D) centre in Gurugram and a material testing laboratory in Manesar in the last few years.

A few other tyre MNCs depending solely on imports such as Hankook of Korea and Pirelli of Italy have also found it difficult to continue in the Indian market. Last week, Hankook also announced that it was stopping its warehouse business for the time being. A note to its channel partners said that it has decided to refund all outstanding related to deposit, credit note for volume bonus and claim tyres, etc.

The decision to curtail Indian operations by the global tyre giants stems from the uncertainty created by the government’s sudden move to restrict tyre imports. The import curb was aimed at boosting domestic companies hit by a severe demand recession during the Covid-19 pandemic.

The rules were notified by an amendment in the import policy of pneumatic tyres by the Directorate General of Foreign Trade (DGFT). The new rule meant that tyre importers required a licence or permission for imports just like in the case of any other goods in the restricted category. Industry officials said the government has been adamant on the import restrictions and has not relaxed them so far.

Before Michelin India was issued the limited import licence, DGFT was issuing licences only to Indian car manufacturers such as Maruti and Hyundai with a caveat that the imported tyres would be used only for the cars that are being exported. A special nod had also been given to luxury car manufacturers such as Mercedes-Benz, BMW, and Audi, who use speciality tyres for their various brands.

“Prior to the import ban, a parallel tyre market was thriving as there weren’t any restrictions on imports. Anyone who paid the prescribed customs duty could import tyres freely,” says Rebin Sunny of Omega Trading, who used to import foreign tyres from Maxxis (Taiwan) and Linglong (China) to supply to the aftermarket. He said the imports have come to a complete standstill.

The government move has had a quick impact on Indian tyre manufacturing. Most of the domestic tyre makers have reported 100% capacity utilisation during the last few months as demand surged.

While many other MNCs pulled out of India’s PCR market, Japanese tyre giant Yokohama is strengthening its presence in India. The company, which forayed into the Indian market in 2007, had set up a PCR plant at Bahadurgarh in Haryana, in 2014.

“The second phase of the Yokohama plant came on stream by mid-2020, and its capacity has doubled to 4,000 tyres a day. We have plans for another two more phases. We can go to 8,000-10,000 tyres a day capacity,” a senior Yokohama official told Fortune India.

Production from this facility is entirely for the domestic market. “We are not exporting any.” The plant started with the manufacture of Yokohama Earth-1 tyres, especially designed for India keeping the diverse road conditions in mind. In 2020, it introduced BluEarth tyres in India as part of its global launch.

Yokohama is now expanding its presence beyond the big cities to tier 2 and tier 3 towns by expanding the channel partner network from the current count of 15,000. “The projection is to reach 6% market share by 2025, nearly 50% more than the current share,” said the official, who didn’t want to be named.

Yokohama India is a wholly-owned subsidiary of Yokohama Rubber Company.

Yokohama’s expansion in India is not restricted to the PCR market. On September 11, 2020, it unveiled another plan to build a new plant at Visakhapatnam with a projected capital investment of $165 million. The plant will expand the production capacity of Alliance Tire Group (ATG), which Yokohama Rubber Company took over in 2016 from the private equity giant KKR and the Indian promoters, the Mahansaria family, in a $1.2-billion deal. The company is engaged in the manufacture and sale of off-highway tyres, such as those used on agricultural and construction equipment. The new plant will have a daily production capacity of 55 tonnes of rubber. Yokohama said the plant is scheduled to come on stream in the first quarter of 2023.

ATG currently has two tyre plants in India—at Dahej in Gujarat and Tirunelveli in Tamil Nadu—both catering to foreign markets. The plants produce all three of ATG’s core off-highway tyre brands—the Alliance, Galaxy, and Primex—which are used on agricultural, construction, industrial, and forestry machinery. After the takeover, Yokohama also invested heavily into the Dahej plant and expanded its capacity by 1.6x. Subsequently, the outlook for an increased demand for ATG’s off-highway tyres from foreign markets has forced the company to build an entirely new plant.

On January 1, 2021, The Yokohama Rubber Company consolidated its various off-highway businesses into one single entity, bringing huge changes in the Indian subsidiary, ATG. This saw the merger of ATG with Yokohama’s off-the-road (OTR) tyre businesses across the globe. The new entity, named Yokohama Off-Highway Tires, is headquartered at Wakefield, Massachusetts. It will have a global footprint with the leadership team spread over Tokyo, Boston, Amsterdam, and Mumbai. The proposed integration plans for the rest of the world are yet to be concluded.

For Yokohama, India is a significant market, after its home market of Japan, and the two big markets of the U.S. and China. Its first manufacturing unit in Haryana was initially built with an investment of around ₹300 crore, for an installed capacity of 2,000 tyres per day, as per a statement issued by the Indian subsidiary, Yokohama India Pvt. Ltd.

For the parent Yokohama, India’s import ban has brought in mixed feelings. In the PCR market, the ban is indeed a positive development. But for ATG, which is now part of Yokohama Off-Highway Tires, nearly 90% of its production goes for exports. Yokohama is worried that if India’s ban prompts other countries to introduce a ban on Indian exports, it will lead to a big loss for them.

As a multinational giant with production facilities spread over several countries like Thailand, Vietnam, India, the U.S., China, the Philippines and Israel, Yokohama can’t afford to support any trade restrictions like the one imposed by the Indian government.

“The move to shut down imports cannot be a long-term policy. Indian companies export nearly 20% of their production, worth over ₹12,000 crore, every year. If every market decides to ban Indian tyres in a retaliatory move, it will create a mess,” said a Mumbai-based tyre industry official.

Is the import ban sustainable? “No. Hopefully, the government will revoke it soon as the markets stabilise post the vaccine rollout,” he said.

While a few MNCs are investing heavily into India, some others, operating through imports, are taking a pause and evaluating if it makes economic sense to invest in the country.