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Performance of Indian tyre Industry post liberalisation

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Structure and growth performance of Indian tyre industry post liberalisation

MA Applied Economics Course AE208 Project Report

Submitted by

Emil Mathew Binny

April 2018

Centre for Development Studies

Thiruvananthapuram
I hereby affirm that the work for this project, “Structure and growth performance of
Indian tyre industry post liberalisation” being submitted as a part of the requirement
of the MA Programme in Applied Economics of Jawaharlal Nehru University, New
Delhi, was carried out entirely by myself. I also affirm that it was not part of any
other programme of study and has not been submitted to any other University
for the award of any degree.

Emil Mathew Binny

Date: 26/04/2018

Certified that this project is the bona fide work of Emil Mathew Binny, carried
out under my supervision at Centre for Development Studies.

Dr K J Joseph
Professor
 Abstract
The much lauded liberalisation of the Indian economy did not have equal effects or was not as
effective in improving the manufacturing sector of the country as it was expected to be. Many of
the industries which were oligopolistic or monopolistic in nature continued to remain so even after
liberalisation. So here in this study we are trying to show that tyre industry is one such industry
which was not prone to much change even after liberalization. The incumbent players remained to
be the main players even after liberalization cornering a major portion of the market sales. This
study is based on empirical approach of structure conduct performance paradigm which studies an
industry performance on the basis of the two former variables. The Indian tyre industry which
shows participation from around thirty-four players is an oligopolistic market. The study is
analyzing the post reform period from [Link] finds that Indian companies have become
competitive and are world market players now. India is on the way to become the world’s third
largest automobile market just being China and USA and auto tyre industry which is an ancillary
of automobile will also show a similar growth

JEL Classification: L69, L1, C33, C87

[Link]
The growth of Indian tyre industry is synonymous with the growth of the Indian automobile
industry. The Indian roads which had only ambassadors, fiats and padminis now have hundreds of
different automobiles from tens of brands. This growth in automobiles happened post liberalization
in India. India produced around 2.3 vehicles in 2017 out of which eighty percent were two
wheelers. Indian tyre industry is estimated to grow at a pace of 8% year on year which is faster
than the growth of the automobile industry (ATMA 2011). From being a net importer of tyres in
the 50s and 60s we have become a net exporter which has the ability to produce even specialized
tyres for the world market. It is estimated that the tyre industry across the world employees around
600,000 people directly and has sales of 130 billion dollars annually (ICRA 2017). The story of
pneumatic tyres (air filled) begin with their invention by Robin William Thomson in [Link]
there were a lot of inventions and innovations in the industry including the finding of pneumatic
or air filled tyres, adding carbon black to the tyre to increase their durability and the invention of
radial tyres which are the most popular ones now. Indian tyre industry had its origin with the
establishment of a factory by Dunlop UK in 1926 for local manufacturing, in West Bengal. The
other foreign players present in the market were using the facilities of Dunlop to produce and were
technology providers. Indian tyre industry can be broadly divided into four main time periods
based on the market structure and the competition type (Mani 1993). The main players in the first
period were Firestone, Dunlop, Goodyear and Indian tyre and rubber. In the early phase (1947-
1953) these companies cornered the whole market four firm concentration ratio was as high as
hundred percent. Firestone was the major player and Dunlop was right behind. In the second phase
(1960-1974) the Indian firms started showing signs of growth and these firms came up with foreign
technological collaborations. The new Indian players which came up were MRF, Premier and
Inchek. The top players were still the foreign firms who had better access to capital and technology.
The main feature of this period was that the industry which had an informal collusion in the earlier
phase formalized it through agreement and they started engaging in entry deterring activities to
prevent entry of new firms. The third period or the period of structural change in the industry was
from 1975-1988. Huge Indian business houses started showing interest in the industry and there
was an unprecedented level of vertical and horizontal integration in the industry. Seven new
players including Modi, Apollo and JK tyres entered the industry. The four firm concentration
ratios fell from a hundred percent in 1947 to an average of 66% in this period. In the beginning of
this period Dunlop was the market leader and by 1982 Modi group and 1988 MRF tyres became
the market leader. The next phase in Indian tyre industry is the post liberalization period, which is
the focus are of our study. The tyre Industry in India grew manifold during this period and is one
of the top industries in India. The tyre industry derives its importance not only due to the size of
its contribution to the economy, but also due to the number of people who directly and indirectly
depend on the industry for their livelihood. According to CMIE database there are around 44
companies working in the tyre sector in India. The major players include MRF, JK, Apollo, CEAT,
Birla, Good Year etc. In India tyre imports are freely allowed except for the radial tyres in
commercial vehicles. Indian tyre industry produces and caters to almost all the needs of the Indian
automobile markets except in certain specific cases like aero tyres and specialized tyres.
[Link] of Indian Tyre Industry
Indian tyre industry is the world’s third largest tyre industry behind US and China if we go with
the automobile sales data. (CARE Industry research 2017). In the top thirty tyre companies of the
world there are four Indian firms. They include MRF, Apollo, JK and ceat. India has the second
highest number of companies in the list after China which has nine. Indian tyre industry has the
presence of a number of Indian and global companies which makes it very competitive. The tyre
industry which is an ancillary of the automobile industry swings according to the latter’s market.
The tyre production in India had been growing consistently over the years but showed a sluggish
growth in the financial year 2017 following demonetization by the government which affected the
replacement market for tyres which mostly came from the unorganised sector. The following table
shows the size of Indian tyre industry across years.

Figure 1 (Source: Rubber Board Bulletin)

Indian tyre industry can be subdivided into different sections based on different types of
classification.
2.1; Markets
Based on the markets to which it caters the tyre industry is categorized into three different
subdivisions, namely
a; OEM market- The OEM market or Original Equipment Manufacturers is the market where the
producers sell tyres to newly produced automobiles. This market is smaller compared to the
replacement market.
b; Replacement Market-Replacement market is the market where the manufacturers cater to the
already produced and in use vehicles. This is done through retail shops and showrooms of the
manufacturers. In India this forms the largest chunk of production of tyres in India.
c; Exports-The export market in India is smaller compared to other two segments. The Indian
companies export tyre and have factories in other companies too.
2.2; Vehicle categories
The automobile industry can be categorized into commercial and personal.
In commercial we have off the road vehicles, animal Driven vehicles, tractors, LCVs and Trucks
and buses. Commercial vehicles account for only 16 percent of Indian tyre manufacturing. But
trucks and buses are the biggest revenue earners in the tyre industry. They occupied prime spot in
terms of production also earlier but now in quantity terms they have lost their position to
motorcycles.
In personal we have the motorcycles passenger cars and scooters. Motorcycles are the biggest
automobile segment in India and in tyre industry also they are the largest in number with a market
share of 53 percent of total production Passenger car market in India has grown up manifold after
the liberalization but it still accounts for only 28 percent of the total tyre industry.
If we take the world market scenario personal car tyres are the largest quantity produced and they
earn the highest revenue for the manufactures.
2.3; Design-In terms of design the tyre industry can be classified into two.
a; Radial Tyres
These are tyres in which the cord ply is arranged at 90 degrees to the direction of travel. They offer
much more number of miles compared to ordinary cross-ply tyres but are costlier. In India
passenger car market has fully adopted radial tyres due to their higher efficiency and better cost
effectiveness.
b; Cross-ply Tyres
Cross ply tyres are ordinary tyres which were used in automobiles earlier. In India cross-ply tyres
are still used by trucks and buses and other commercial vehicles due to their better suitedness to
Indian roads which are of poorer quality compared to their western counterparts. India motorcycles
also use these up to a certain extent.
Indian Tyre Companies
[Link] Company Name Inc yr Ownership group Age group

1 Modistone Ltd. 1939 Modi Vinay Kumar Before 1950

2 J K Tyre & Inds. Ltd. 1951 Hari Shankar Between 1951 and 1971
Singhania Group
3 Ceat Ltd. 1958 RPG Enterprises Between 1951 and 1971
Group
4 M R F Ltd. 1960 MRF Group Between 1951 and 1971
5 Balkrishna Industries Ltd. 1961 Siyaram Poddar Group Between 1951 and 1971
6 Goodyear India Ltd. 1961 Private (Foreign) Between 1951 and 1971
7 Apollo Tyres Ltd. 1972 Raunaq Singh Group Between 1972 and 1985
8 Falcon Tyres Ltd. 1973 P K Ruia Group Between 1972 and 1985
9 Vikrant Tyres Ltd. 1973 Hari Shankar Singhania Between 1972 and 1985
[Merged] Group
10 Malhotra Rubbers Ltd. 1978 Private (Indian) Between 1972 and 1985
11 Avadh Rail Infra Ltd. 1980 Private (Indian) Between 1972 and 1985
12 T V S Srichakra Ltd. 1982 T.V.S. Iyengar Group Between 1972 and 1985
13 Agarwal Rubber Pvt. Ltd. 1983 Private (Indian) Between 1972 and 1985
14 Tyre Corpn. Of India Ltd. 1984 Central Government Between 1972 and 1985
TakenoverEnterprises
15 Rado Tyres Ltd. 1986 RPG Enterprises Group Between 1986 and 1990
16 S Kumars Tyre Mfg. Co. 1986 S. Kumars Group Between 1986 and 1990
Ltd.
17 Fidelity Industries Ltd. 1987 T.V.S. Iyengar Group Between 1986 and 1990
18 Michigan Rubber (India) 1987 Private (Indian) Between 1986 and 1990
Ltd.
19 Raam Tyres Ltd. 1988 Private (Indian) Between 1986 and 1990
20 Goodyear South Asia 1993 Private (Foreign) After 1991
Tyres Pvt. Ltd.
21 Dolfin Rubbers Ltd. 1995 Private (Indian) After 1991
22 Innovative Tyres & Tubes 1995 Private (Indian) After 1991
Ltd.
23 Shri Sapthagiri Rubbers 1995 Private (Indian) After 1991
Ltd.
24 T M Tyres Ltd. 1995 Private (Indian) After 1991
25 Bridgestone India Pvt. 1996 Private (Indian) After 1991
Ltd.
26 Noslar International Ltd. 1997 Private (Indian) After 1991
27 Ace Tyres Ltd. 2001 Private (Indian) After 1991
28 Classic Auto Tubes Ltd. 2005 Private (Indian) After 1991
29 Continental India Pvt. 2006 Private (Foreign) After 1991
Ltd.
30 Michelin India Pvt. Ltd. 2009 Private (Indian) After 1991
31 Dunlop Auto Tyres Pvt. 2010 P K Ruia Group After 1991
Ltd.
32 Vee Rubber India Pvt. Ltd. 2014 Private (Indian) After 1991
33 Cavendish Industries Ltd. 2015 Hari Shankar Singhania After 1991
Group
Table 1 (Source -CMIE Prowess)
3; Review of Literature
Mani (1993) ‘Industrial Concentration and Economic Behaviour-case of Indian Tyre industry’. In
this book he has done an extensive study of the Indian tyre industry and has brought out the trends
in the tyre industry during pre-reform period. He has divided the entire period from 1936 to 1988
into three periods and has analysed the structure of the industry for all these three periods. The
first period he argues is that of heavy market concentration with just two firms in the market. Then
from the 1960s new firms including Indian owned business houses with foreign collaboration came
to the manufacture of tyres and the market concentration declined and it led to the formation of an
oligopolistic kind of market with the firms colluding ad fixing the output and prices. This was
when the government was trying to deconcentrate the industry by licensing more units. The final
phase is from the mid 1970s when Indian business houses like MRF and Apollo started becoming
major players in the industry which was notorious for its foreign monopolies.
Mani (1984) in his article ‘taking the buyer for a ride’ tells us that the central government had a
five-member expert committee to study the different aspects of tyre industry, like production
pattern, raw material consumption and technological status.
Mani (1984) in another article ‘concentration and market power in Indian automotive tyre industry’
shows us the presence of an agreement namely, International Rubber regulation agreement(IRAA)
which existed between 193 and 1942 which facilitated the availability of raw materials at
extremely low prices.

Dasgupta (1986) – ‘Liberalisation of automobile industry policy and demand for commercial
vehicles’ tried to estimate the demand for different kinds of vehicles till the end of this decade. He
argued against the establishment of new firms in automobile industry as the official projections
are unrealistic and he suggested the enhancing of production at the existing firms.
Pola (1991) – ‘World class in tyre technology’. In this article talks about MRF Ltd and their foreign
collaborations for R&D needs. This paper looks at the growth and development of Indian firms
amidst stiff competition from foreign MNCs.
Singh and Khan (1991) – ‘automobile industry in India: growth performance and productive
efficiency ‘. This article looks at the slow and uneventful growth of Indian automobile sector till
Chugan (1995) –‘Foreign collaborations and industrial R and D in developing countries – Case
of Indian Automobile Ancillary industry ‘.This article is a study on the firms which have foreign
collaborative agreements and those which don’t. So, he argues that foreign collaboration restricts
the autonomy of the firms to perform and they might be performing worse than those which do not
have FCA.
Mukherjee, [Link], (1996) - ‘Automotive industry in emerging economies: China, India, South Korea
and Brazil ‘.In this article he points out that India which has received a large number of MNCs is
going on through a revolutionary phase of automotive industries along with countries like China,
South Korea and Brazil.
Joseph and Harilal (1998) – ‘Natural rubber: Perils of policy’. In this article the authors argue that
the crisis in rubber industry is not only due to the demand supply mismatch but also due to dullness
in domestic economy and the recession and innovative policies are required to tide over such
difficult situations.
George and Mohanakumar (2001)-Impact of economic reforms on the industry’. This paper
analyses the impact of liberalization of the tyre industry. Their study is mainly focused on the
truck and bus. They are apprehensive of the large-scale entry of foreign MNCs into the Indian tyre
manufacturing scenario and are sceptic of the Indian firms’ ability to withstand the pressure. The
critical factors determining the survival of Indian tyre companies are competitiveness in price and
quality, technological compatibility to the developments in vehicle geometry and the capacity to
over-come the limitations imposed by the growing importance of regional economic groupings.

Chaudhari (2002) – ‘Economic reforms and industrial structure in India’.

This is a critique of the reforms undertaken in [Link] believes that the disappointing performance
in output growth and employment is due to policies followed and he recommends the change of
those policies to increase the demand in the market for more output to be produced, more people
to be employed and for poverty to be reduced.
Sharma and Bhatnagar (2006)– ‘Automobile industry and productivity’
They state that the automobile industry in India is booming, especially after the lifting of
restrictions on foreign collaborations. The 120 billion auto component industry is a key sector of
the economy and the automobile industry has many linkages which helps in the growth of many
other industries like steel, aluminum, zinc, rubber etc.
Mitra (2009) – ‘The current automobile landscape in India’. He talks of the phenomenal growth
of Indian automotive industry post delicensing and opening up for FDI, which has enabled us to
become the largest tractor manufacturer, second largest two-wheeler maker and fifth largest
commercial vehicles producer.
Jasmine Kaur (2010)– ‘Working capital management in tyre industry ‘. In this article she has
focused on the management of working capital in tyre industry. She claims that working capital
management is one of the most important and challenging aspect of overall financial management.

Review of empirical literature

The beginning of Structure Conduct Performance model was with Mason of Harvard in 1939.
Though he began his study with focus on firm behaviour, it was later shifted to industrial
behaviour. Bain(1951) has studied the relation of profit rate to industry concentration in American
manufacturing sector using SCP paradigm. He showed how monopolistic or oligopolistic forms of
markets lead to welfare loss. Bain has his own hypothesis which argues that price cost margin has
a positive correlation with concentration ratio. His study was based on forty-two US industries and
was a firm level study for the latter part of 1930. Bain (1956) and Bain (1959) further strengthened
the Structure Conduct performance paradigm. Mann (1966) and Wilson and Commonor (1967)
took forward the work of Bain. They also found similar trends as Bain had found. Demsetx (1973
and 1974) provided alternative explanations to Bain’s hypothesis. Esposito and Esposito (1971)
had studied the relation between foreign competition and domestic industry profitability. Martin
(1979) has studied the relation between advertising, concentration and profitability. Yamawaki
(1986) has studied the exports, foreign market and profitability in Japanese and US manufacturing.
Yoon Seok (2004)-’A note on the market structure and performance in Korean manufacturing
Industries’. Here the author has used SCP paradigm to conduct a study on the manufacturing
structure of industries in Korea which includes automobile and ancillaries. In India SCP paradigm
was used in different studies. Some of them include Gupta (1968) where one year’s profit rate was
taken as a dependent variable and the independent variables were four firm concentration ratios
along with measures to barriers to entry. Then Apte and Vaidyanathan (1983) undertook a study
of twenty-nine Indian industries based on three-digit classification. As a measure of performance,
he took the average of profitability ratio and ratio of profits before interest and taxes but net of
depreciation to total net assets. They found that concentration has significant positive impact on
profitability.
4;Research problem and objective of the study
The objective of the study is to analyse the performance of Indian tyre industry under
liberalisation. The study aims at looking at the trends and patterns of the Indian tyre
industry using empirical evidence. It is hoped that the project will help in better policy
formulation for the tyre industry. There is a serious dearth of research on Indian tyre
industry post liberalization and we intend that this work helps in filling that gap up-to a
certain extent.
4.1 Relevance of the study
India is one of the fastest growing economies of the world and the per capita income of the citizens
are also rising which creates the demand for quick and cheap mode of personal transport. The
automotive industry is one of the best performing industries in India and the tyre being an
important component grows along with it. But this fact is quite neglected and there is a dearth of
literature and studies in this field except for some quality works which were done during times of
liberalization. There has not been a serious attempt to study the structure and concentration of the
industry post liberalization which brings this present study to relevance.
5; Methodology, Data and Variables
5.1The Approach
There are three broad approaches to the study of industrial organisation and they are analytically
divided into three groups which are namely Rival approach, the dominant approach, and the new
departures. The rival approach includes-The Marshallian approach, The Austrian revival and the
theory of workable competition. The new departures consist of the Theory of contestable markets,
the natural monopoly analysis and the organisational view of the firm. The Structure-Conduct-
Performance paradigm which we use for this study is contained in the dominant school. In this
approach the structure of the industry in which the firm works is usually analysed by looking at
the market concentration of the industry or the type of market, namely oligopolistic, monopolistic
or perfectly competitive in which the firm works. The conduct of the firms is analysed using
different variables like advertisement and export intensity age of the firm etc. and the performance
of the firm is determined by the price cost margin or social welfare. The structure of the firm
should include number and size of firms in an industry or in other words the degree of
concentration, the entry condition, features of a product, the international competitiveness etc.
Since many of these features are interdependent the structuralist hypothesis is a joint hypothesis
about the combined effects of a number of facets of industry performance. The structuralist
paradigm has undergone three distinct phases of development. In the 1930s under ES Mason of
Harvard, the subject grew out of a concern for generating optimal input through an empirical
analysis of the organization of industrial markets. This was the beginning of S-C-P paradigm. In
this approach the study was on the behaviour of firms in an imperfect industry rather than to study
the industry itself. Later as the study of IO developed the study meant studying the industry itself
and not the firm. Then came the second stage of the structuralist approach. This phase was opened
up mainly by Joe S Bain. In this phase a large number of industry studies were conducted and they
were aimed at generalizing the relationship between industry characteristics and performance.
After Bain a similar exercise was conducted by Mann(1966), for thirty industries in US
manufacturing sector for a ten year period 1950-1960, they both pointed to entry barriers and
concentration as two main determinants of profitability in US manufacturing. In the case of using
S-C-P paradigm for developing countries we should be particularly careful, as the case of
developing countries is different from that of the developed. Developing countries have a tendency
to intentionally promote monopolies to overcome the stat’s lack of capital for investment. The
local governments might be encouraging domestic industries by giving them subsidies, tax
incentives to promote exports, controlling imports for boosting local manufacturing. So developing
country monopolies have ample avenues to boost their monopoly power. Another issue is the small
market size in developing countries which forces them to prevent the entry of other firms while
trying hard to retain their monopoly power. Both these together lead to an increase in social costs.
After considering all these factors we can come to the conclusion on the basis of empirical studies
that there is a strong correlation between market structure and performance in developing
countries.
5.2;Methodology
This study is based on an empirical analysis on the correlation between concentration ratio and
price cost margin of tyre industry in India. The study takes thirty-four firms from the Indian market
which are reporting their data to the Centre for Monitoring Indian economy. The data for these
firms is taken and then a primary analysis based on descriptive statistics is conducted. After which
some of the variables are used for conducting an empirical study. The procured data was used to
calculate the concentration ratios and price cost margins of the firms. It is necessary that we get a
BLUE or good estimation. For that we need to review the metric model for its assumptions. There
are chances for multicollinearity since we are using a panel data and homoscedasticity problems
can occur if error term is homoscedastic. The results don’t show any serious multicollinearity or
heteroscedasticity problems, so they are ignored in this study.
5.3;The Model
In the model which we are using in this paper to analyse the market structure and performance we
use import and export factors as independent variables for analyzing the market structure and
performance of developing countries. The following assumptions are used across this model. We
hypothesize that price cost margin is influenced by market factors and it is influenced by
concentration ratio and barriers to entry. We have used advertisement intensity and R&D as
independent variables which reflect barriers to entry. Both these variables reflect the amount of
product differentiation in the industry. We have taken advertisement as advertisement intensity
which is the ratio of advertisement to sales and R&D is taken as a dummy variable. It shows
whether the firm is doing research or not. The barriers to entry variables are hypothesized to have
a positive effect on price cost margin. We have considered the market demand as an independent
variable which can change over time and can affect the balance of price cost margin (Cowling and
Waterson 1976). Export intensity is used as an independent variable to know the international
competitiveness of the Indian industry. In the international market the firms have to compete with
the rest of the world and any kind of protection or monopoly power which they had in their
domestic countries won’t help them there. So, it is hypothesized that exports have a positive
correlation with price cost margin. We have taken the import of raw materials and calculated its
intensity by dividing it with sales. Import intensity is calculated and used as a variable since tyre
being a highly raw material intensive product should be showing a higher positive correlation with
its imports because the world market price of rubber is cheaper than the domestic market.
Herfindahl index which is another measure for market concentration should show a positive
correlation with price cost margin and negative relation with market demand (domestic). Age of
the firms should have a positive correlation with the profitability of the firms since an old firm will
try to diversify their product basket to compete with competing new firms or new entrants who
enter market with new technology. Sales of the firm is a firm specific character and it is
hypothesized that a firm with higher sales should have higher profits too.
5.4;Data
The data for this study is taken from Prowess software provided by Centre for Monitoring Indian
Economy. Prowess is a very handy and useful database which comprises of firm level data of
around forty-eight thousand firms in India. The data is taken from the annual reports of companies.
The data in prowess is available from the year 1987 to [Link] are forty-four companies in the
sub category of tyres and tubes. Among these only thirty-four companies are indulged in the
production of tyres. The tariff data and imports-both in terms of quantity and value has been taken
from WITS (World Integrated Trade Solution) platform developed by World Bank which provides
data from different platforms like UN Comtrade, UNCTAD, TRAINS etc. The data from WITS
was in dollar terms and I had used average rupee-dollar exchange rates for different years provided
by Reserve Bank of India. Then we have depended on the rubber board of India website for data
on the number of tyres manufactured in India, the product wise breakup of tyres in India, the
production and consumption of natural rubber in India. Also, we have taken the values of the
imports of natural rubber and synthetic rubber and consumption of natural and synthetic rubber by
tyre manufacturers.
6; Descriptive Analysis
Before getting into the empirical analysis we are looking at the industry using a few variables
which are available from CMIE. This is to get a basic idea of the structure and other basic features
of the industry.

Size of Indian Firms(2017)

138076.9
96057.8
4678714721.6
51825.6 65772.9
14582.31229.7 94.8 15864.3
Innovative…
Agarwal…

Balkrishna…

Classic Auto…
Continental…

Dunlop Auto…
Dolfin…

Falcon Tyres…
Farseen…

J K Tyre &…

Malhotra…

Noslar…
Apollo Tyres…
Avadh Rail…

Bridgestone…
Cavendish…

Fidelity…
Goodyear…
Goodyear…

Michelin India…
Michigan…

S Kumars Tyre…
Shri…

T V S…
Tyre Corpn.…
Vee Rubber…
Vikrant Tyres…
Ace Tyres Ltd.

Ceat Ltd.

Raam Tyres Ltd.

M R F Ltd.

Modistone Ltd.

Rado Tyres Ltd.

T M Tyres Ltd.

Figure 2 (Source: CMIE Prowess)

From the above chart we can see that the four biggest firms in Indian tyre manufacturing are MRF,
Apollo, JK tyres and CEAT. These companies have been on the top for the last many years and all
are Indian firms
 Size-Top 4 vs Total
600000
400000
200000
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total Size of top 10

Figure 3 (Source: CMIE Prowess)

The graph in which we have plotted the sales of the top four firms and the total industry sales show
us that the top four firms corner most of the market leaving a very small amount of market for the
rest of thirty companies.

Duty Structure on tyres (2016 in %) (Source: Own Calculations)

Figure 4 (Source: WITS)

The tariff rates on different types of tyres are calculated to show how they have progressively
declined over the years making the market more open for trade and external competition. The final
opening up happened after 2005 and the tariff rates have been set constant at ten percent for all
types of tyres. But the effective tariff rates are still lower due to various kinds of trade agreements
we have with different countries as is shown in the table below.
Basic Customs Asia Pacific Trade Ind-Sng Ind-SK Ind- Ind-
Catogory Duty Agreement ECA CEPA ASEAN Malaysia
Truck & Bus-radial 10 8.6 10 10 5 5
Cars-radial 10 8.5 10 10 5 5
Motorcycle/scooter 10 8.6 0 10 5 5
Off Road Vehicles 10 8.6 0 1.56 0 0
Agriculture/Tractor 10 8.6 0 1.56 0 0
Table 2 (Source: CARE Report)
 Figure 5 (Source: CMIE Prowess)
The tyre import intensity has been calculated by taking the value of tyre imports from WITS and
then converting it into rupees and dividing by total sales of industry. The tyre import intensity
shows an increasing trend over the years especially from 2004-05 when the tariff rates were
reduced. Now imports are not a huge component in Indian tyre industry as most of the firms have
plants here and only specialized tyres are imported.

Orange-Cars, Yellow-Trucks, Blue-Two wheelers Figure 6 (Source: Rubber Board Bulletin)

Breaking down imports into different categories we find that passenger car tyres are the most
important imports followed by trucks and two wheelers which are almost the same. The imported
tyres ae mainly by companies like Yokohoma, Pirelli etc. which are yet to establish plants here
and who cater to the luxury products in automobile industry.
Raw Materials in Tyre Industry
Tyre industry is a highly raw material intensive industry as is evident from the graph below. The
most important raw material is natural rubber which is followed by synthetic rubber, carbon black
etc. The pie chart below shows the amount of raw materials required for the production of a tyre.

Raw Material Consumption in tyre

Industry NR: Natural Rubber
BW Others NTCF: Nylon Tyre Cord Fabric
3% 6% PBR BR CB; Carbon Black
4% 2% RC: Rubber Chemicals
RC BR: Butyl Rubber
3% PBR: Polybutadiene Rubber
NR SBR: Styrene Butadiene Rubber
47%
BW: Bead Wire
CB
24%

NTCF
11%

Figure 7 (Source: CARE Report)

Figure 8 (Source: CMIE Prowess)

The graph above shows the raw material intensity of the industry and the top four firms in the
industry in terms of sales. It is evident from the graph that the whole industry is raw material
intensive and it is not a firm specific character as can be the case of many other inputs.
 Tyre Manufacturing
35
30
25
20
15
10
5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-5

Change in consm NR by tyre mfg Change in consm SR by tyre mfg

Figure 9 (Source: Rubber Board Bulletin)

We can see from figure 9 that the tyre manufacturers have started using more of synthetic rubber
compared to natural rubber and this use increases when the price of natural rubber goes up.

Natural Rubber Trends

140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
-20.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-40.00
-60.00

RSS-4 price change Change Pdn NR Change in consm NR by tyre mfg Change in Import NR

Figure 10 (Source: Rubber Board Bulletin)

Figure 10 shows the trends in production and consumption of natural rubber and its imports. The
imports of natural rubber goes up when the price goes up which leads us to the conclusion that the
manufacturers are finding it more profitable to import natural rubber than depending on local
production. The production in India is almost constant without much change except for all recent
fall.
 Synthetic Rubber Trends
80.00

60.00

40.00

20.00

0.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-20.00

-40.00

-60.00

RSS-4 price change Change Pdn SR Change in consm SR by tyre mfg Change in Import SR

Figure 11 (Source: Rubber Board Bulletin)

The imports of synthetic rubber goes up when there is an increase in the price of natural [Link]
production of synthetic rubber increases when there is a fall in crude oil price which is its main
raw material.

RSS-4 price change

80.00

60.00

40.00

20.00

0.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-20.00

-40.00

-60.00

Figure 12 (Source: Rubber Board Bulletin)

The price of natural rubber had been climbing from 2001 but there was a huge fall in prices
beginning from 2014 due to the fall in oil prices which has pushed up the production of synthetic
rubber and also due to imports from other producing countries.
6.1;SCP Paradigm Variables
In this paper we are using the dominant approach to study about our industry. The structure of the
industry in which the firm is located is looked at through variables like four firm concentration
ratio and Herfindahl index. The conduct of the firms are looked at through variables like export,
intensity, import intensity, advertisement intensity, R&D intensity etc.

Structure Variables In this section we are trying to show trends and patterns of certain key variables
associated with the tyre industry. Some of these variables are further used for the econometric
analysis which we have done. The variables are described according to the structure conduct
performance paradigm.
Structural variables are first described then the conduct variable sand finally the performance
variables.
6.1.1; Market Structure Variables

Figure 13 (Source: CMIE Prowess)

Four firm concentration ratios is the top four firms’ concentration ratio based on sales. The four
firm concentration ratios in Indian tyre industry points to a concentrated market where top players
corner most of the market share.
 Figure 14 (Source: CMIE Prowess)
Hirschman-Herfindahl index is another measure of market concentration. It can vary from 0(0) to
10000(1).A Herfindahl index of 10000 points to a highly concentrated monopolistic market. In
another case a Herfindahl index of 0 points to a completely competitive market. Indian tyre
industry is showing that it is concentrated moderately according to HHI.
6.1.2; Firm Conduct Variables

Figure 15 (Source: CMIE Prowess)

Export intensity of the industry is calculated by summing up total exports and dividing by sales.
The export intensity of Indian firms had been showing an increasing trend. A firm exporting more
means it is competitive enough to play in world market and so its profits should be higher.
 Figure 16 (Source: CMIE Prowess)
As we had seen earlier tyre is a raw material intensive good and the import of raw materials should
have a positive correlation with the profitability of the firm. The raw material imports of Indian
firms have been going up and the recent fall might be due to the decrease in rubber prices.

Figure 17 (Source: CMIE Prowess)

Advertisement intensity is expected to show a positive correlation to profitability of the firm as
advertisement helps in product differentiation and this would help the firms to earn better profits.
Tyres are homogeneous goods and for the firms to establish themselves need to spend money on
advertisement.
 Figure 18 (Source: CMIE Prowess)
Research and Development expenditure is also hypothesized to have a positive correlation with
the profitability of the firm. R&D expenditure helps in product differentiation. New firms will
come with newer products and so old firms have to innovate to stay competitive in the market.
Indian firms have been innovating more as is seen on the graph.

Figure 19 (Source: CMIE Prowess)

Capital goods imports intensity measures the amount of capital goods that are being imported by
the Indian firms from abroad. The variations in trends are when the firms are setting up new plants
in India or abroad.
6.1.3; Performance of the Industry

Figure 20 (Source: CMIE Prowess)

Price cost margin is a measure of the performance of the industry. It is calculated by subtracting
ratio of total cost and sales from sales. (sales – (material cost + labor cost + overhead cost + other
costs)/sales). this will be our dependent variable. We will be checking the influence of all the other
variables on this.
7; Empirical Analysis
We have used static panel data regression for finding time specific individual invariant effect (𝜌" )
and individual specific time invariant effect.

Based on the nature of individual specific effect (𝛿" ) two types of models are used in static panel
regression. Random effect model and fixed effect model. Ordinary least Square (OLS), generalized
Least Square (GLS) and within group estimators are used under various assumptions. Here we
have used GLS estimator. GLS estimator is used to address the issue of heteroscedasticity. The
variables used in the regression analysis are given below in table 3.
Variable code Variable Name Variable defined Expected effect on
dependent variable

lpcm Logarithmic price cost • PCM=(output- • Dependent variable

margin variable
cost)/output

expint Export intensity export earnings/sale +

rawmint raw material intensity Raw material cost/sales -

adint Advertisement advertisement cost/sales +

intensity

rddummy Research and rddummy=1 (if R&D +

development dummy exp>0) or 0

cr 4-firm concentration CR=Largest four firms +

ratio sales/total sales

Hhi Herfindahl Index Herfindahl +

Index=H=∑( '
&)* 𝑠& ;
si is the market share of
firm i in the market,
and N is the number
Of firms
lninddemand Industry’s demand output-exports+imports +
logarithmically

age Age of firm 2017-year of +

incorporation

lnsales Sales of firm Sales data

Table 3
7.1; Descriptive Statistics
Variable Obs Mean Std. Dev. Min Max
lpcm 162 -1.7 1.5 -7.14 5.89
expint 148 0.2 0.2 0 0.88
rawmint 225 15.9 225.9 0 3384.6
adint 163 0.1 1.3 0 16
rddummy 408 0.2 0.4 0 1
cr 408 0.8 0.0 0.71 0.82
hhi 408 0.2 0.1 0 0.20
lninddemand 408 12.6 0.4 11.9 13.17
age 408 30.7 16.3 2 66
lnsales 225 7.9 2.6 -1.2 12.3
Table 4
The summary statistics of the key variables used in the analysis are given in table 4. The mean of
logarithmic price-cost margin is -1.7 with a standard deviation of 1.5. Raw material intensity is
showing wide variation. Average age of firms is 30 years with a standard deviation of 16.3.
7.2; Correlation Matrix

lpcm expint rawmint adint cr hhi lninddemand age lnsales

lpcm 1
expint 0.1028 1
rawmint -0.1929 0.3292 1
adint -0.0161 0.0833 0.2548 1
cr 0.1501 0.2049 -0.271 -0.2668 1
hhi -0.0768 0.0748 0.0521 -0.1557 -0.1542 1
lninddemand -0.1221 -0.2486 0.2811 0.3868 -0.885 -0.2117 1
age 0.6027 0.0742 0.021 0.3454 0.1598 -0.1049 -0.1123 1
lnsales 0.2742 -0.3571 0.2992 0.539 -0.2847 -0.1613 0.3889 0.584 1
Table 5
The correlation matrix doesn’t show any serious correlation problems. Correlation can range from
-1 to 1. It shows the direction and strength of linear relations between variables. If correlation is
negative it means as one variable increases the other decreases.
7.3; Results
Only Conduct Structure variables All variables
included
VARIABLES Model 1 Model 2 Model 3
expint 0.700*** 0.642*** 0.714**
(0.266) (0.195) (0.327)
rawmint -0.596 -0.569 -0.758
(0.438) (0.416) (0.522)
adint 24.69*** 24.34*** 18.37**
(5.434) (8.187) (9.344)
rddummy 0.0807* 0.112* 0.105*
(0.0488) (0.0628) (0.0606)
cr 5.261*** 5.158**
(1.993) (2.205)
hhi 2.881** 2.789**
(1.339) (1.420)
lninddemand 0.406** 0.420**
(0.162) (0.171)
age 0.0476
(0.0326)
lnsales 0.0240
(0.189)
Constant -2.427*** -12.10*** -14.12***
(0.431) (3.502) (3.495)
Hausman 5.33(0.7221)
Observations 106 106 106
Number of serial no 15 15 15
Firm FE Yes Yes Yes
Table 6
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
We have used a pooled random effects model for the regression analysis. The random effects
model was selected after doing the Hausman test which gave us a probability value of 0.7221
which is not significant at 5% level of significance. So we have to do random effects model. We
use random effects model since we assume that the variation across entities is assumed to be
random and uncorrelated with independent variables in the model. If we use random effects model
we can include time invariant variables. The model assumes that the entity’s error term is not
correlated independent variables which allows for time invariant variables to play a role as
explanatory variables. The data has been pooled because some data values for some years of certain
variables were missing. Stata software was used for doing the regression analysis. The main result
of the regression analysis could be found in table 6. Column 1 shows the regression of only conduct
variables. Column 2 shoes the structure variables along with the conduct variables and column 3
shows the regression results after including firm specific characteristics like sales and age of the
firm also. The results are robust because the variables are not showing any difference in sign or
significance in different models. Export intensity is positively correlated to price cost margin as
the firms are becoming more competitive when they are exporting more. To be a player in the
world market you have to be internationally competent and should be cost effective which could
lead to higher profits. Raw material intensity is showing a negative correlation but is not significant
at any level. This could be because of the price of raw materials affecting the profits of the firms.
Raw material prices can vary quickly but prices can’t adjust that fast due to the inventory
constraints faced by firms. Advertisement intensity is showing a positive correlation with price-
cost margin at 1% level of significance. This might be because tyres being a homogenous product
forces the company to do product differentiation and to create market barriers which will help
them in maintaining their monopoly power. As advertisement expenditure goes up the profits of
the firm will also go up. R&D dummy which shows whether the firms’ decision to do R&D or not
will have any effect on their price-cost margin shows a positive correlation at 10% significance
level. Firms decision to do R&D is to differentiate their product from that of their competitor’s
which helps them earn better profits. The market concentration ratio which shows the type of
market in which the firms are functioning has a positive correlation with the profits earned by the
firm. A highly oligopolistic market like the tyre industry has helped the firms earn higher profits.
The variable is significant at 1% level across models. Herfindahl index which is another measure
of market concentration also shows the same results as market concentration variable which
validates our previous variable’s result. Market demand variable which is common for all the firms
operating is positively correlated to price-cost margin and is significant at 5% level across models.
Age of the firm is not significant for the firm’s profits as is seen from the results, but it is seen to
have a positive relation.
8; Conclusion
The tyre industry in India has not undergone any drastic changes after the liberalization. Indian
companies which were on top have not been displaced. Foreign players are not to be seen anywhere
near the top. Four firm concentration ratios is high in Indian tyre industries which points to a highly
concentrated market. Indian companies have become highly competitive and a few of them are
now world players. India which used to import specialized tyres earlier now manufactures almost
all types of tyres needed in the country. Coming to the technological progress we have made in the
tyre industry, after the invention of radial tyres nothing much has improved. Indian consumers
have not yet fully adopted the radial tyres. Trucks and bus tyres are still the highest revenue
generator for the tyre companies but in terms of numbers they have fallen behind two-wheeler
tyres and passenger car tyres. The share of imported raw materials is rising in the tyre
manufacturing and the companies are trying to push down the prices acting as a cartel by
purchasing from abroad pushing the local raw material producers into distress.
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