KEY ISSUES CONCERNS OF INDIAN TYRE INDUSTRY

Pre Budget Meeting with Finance Ministry / CBEC on Tues. 11th Dec. 2012, at 3:30pm, New Delhi

Submission by :

Automotive Tyre Manufacturers Association (ATMA)

Phone : 91-11-26851187, 26564291, 91-11-2686 4799 rajiv@atmaindia.org; atma@atmaindia.org; www.atmaindia.org
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Agenda Points
(Explained in following section)

Indian Tyre Industry - A Profile Industry Environment & Outlook

Economy Auto Sector Tyre Industry (Including Capacity & Investment by Tyre Industry)

Natural Rubber : Inverted Duty Structure / ATMA Submission Major Raw Materials of Tyre Industry, Demand Supply Gap ATMA Submission on Proposed Duty Customs Duty on Tyres
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Indian Tyre Industry A Profile

NO. OF TYRE COMPANIES - 39 NO. OF TYRE PLANTS TURNOVER (Est.) EXPORTS - 60 - Rs. 43,000 Crores /US$ 7.7 billion - Rs. 4800 Crores / US$ 770 million

INDUSTRY CONCENTRATION - 10 Large tyre companies account for 95% of Industry Turnover
(in Tonnage / Value terms)

Industry, Environment & Outlook

Current Economic & Sectoral Environment
Economy The Reserve Bank of India (RBI) has sharply lowered this fiscal's Indias economic growth projection to 5.8 per cent, from 6.5 per cent earlier, in view of global and domestic factors like poor investments and subdued demand. The growth rate in the first quarter (Apr.-Jun. 2012), has slipped to 5.5 percent from 6.9 percent in the same period last fiscal. Likewise GDP growth projection for Q II (current fiscal) has been pegged at 5.5%. Auto Sector The ongoing economic downturn has adversely affected Indias Automotive industry. As per the Society of Indian Automobile Manufacturers (SIAM), Medium & Heavy Commercial vehicles witnessed a (-)16% YoY drop in production for the period AprOct.12 as against same period last fiscal. Tractor Production witnessed a (-)8% YoY drop for the period Apr-Oct.12 vs. the same period last fiscal. Tyre Sector Indian Tyre industrys performance is directly linked to that of the Automotive Sector. The % share of tyre supplies to OEMs (Original Equipment Manufacturers), has been increasing consistently for all major tyre categories i.e. CV, Passenger Car, 2/3 Wheeler, Tractor etc. With the ongoing slowdown of the Automotive sector, the Tyre Industry too faces a slow growth in the current fiscal and uncertanity prevails for the future.

Auto &Tyre Industry Performance of Key Categories

Continuing economic uncertainty and lower growth impacts domestic OEM demand, replacement sales global slowdown affects Tyre Exports from India the current fiscal so far has been slow.
Vehicles Medium / Heavy CV Production Car Production Tractor Production Tyres
Truck/Bus Tyre Production
Car Tyre Production 2/3 W Tyre Production

(% Growth YoY)

2010-11 38% 27% 26%

2011-12 11% 2% 27%

Apr-Oct : 2012-13 /2011-12

(-)16% 10% (-)8%

Apr: 2012-13 / 2011-12
(latest available)

3%
29% 29%

3%
4% 6%

0.4%
4% (-)11%

Truck/Bus Tyre Export

(-)2%

12%

(-) 8%

Outlook for rest of the year appears weak and dismal for Auto Sector especially the Medium and Heavy Commercial Vehicle Segment & Tyre Industry unless major steps/initiatives are announced by the Government to 5 revive demand & spur growth.

Summary Statement of Capacity Creation & Investments in Tyre Industry in India

(per month figures) Project(s) Recently completed Greenfield Brownfield Total TBR (in units) 26,200 4,73,000 1,25,000 6,24,200 PCR+LT (in units) OTR (in MT) 2W (in units) Others (in units) 1,28,000 7,00,000 4,167 20,14,500 17,700 25,000 7,30,000 6,448 2,50,000 28,72,500 24,148 9,75,000 4,167

Project(s) Total Investment (Rs crore) Recently completed 1,064 Greenfield 13,845 Brownfield 4,593 Total 19,502
As of Sep12

Cumulative Investment
(approx.)

Rs. 20, 000 Crore

Inline with the capacity creation in the auto sector, the tyre sector has also added/expanded capacity pan India. This kind of investment by the tyre industry in India is unprecedented in history. Source: Smithers / ERJ

Natural Rubber : Inverted Duty Structure

Customs Duty on Tyres vis-a-vis its Principal Raw Material (i.e. Natural Rubber)
Tyre Industry is Raw Material (RM) intensive. RMs account for 72% of Industry Turnover.

Natural Rubber is the key raw material of the tyre industry with a cost of 45% of all raw materials.
Customs duty on tyres has been reduced over the last few years with no corresponding reduction in basic rate of customs duty on Natural Rubber (as
shown in Table - 1 below) :

Tyre Natural Rubber (NR)

Table - 1 1996-97 50% 20%

2012-13 10% 20%*

(*) In Apr11, following a decision by the Hon'ble Delhi High Court in a Petition filed by NR consuming interests, the Government had restructured the NR customs duty from 20% (Basic Rate) to 20% or Rs. 20 per kg. whichever is lower.

It is worthwhile mentioning that NR is a non agricultural product (RM for industrial application) whereas the duty on the same is not in line with industrial raw-materials like cotton, etc. 8

Incidence of Duty on NR (after restructuring)

As stated above, in Apr11,NR duty was restructured from 20%, to 20% or Rs. 20 per kg, whichever is lower.

However, the actual incidence of 'restructured' duty has, in fact, increased after the restructuring was done, as is evident from Table - II below:
Table-II
Intl NR Price (RSS-3) / (Rs. per Kg) Customs Duty @ Customs Duty on (%) basis @ Rs. 20/Kg Rs. 20 per kg / applied on prevailing NR Price

Month / Year

Apr11

260

20

7.7 %
(Lower than tyres i.e. 10%)

Nov.12

165

20

12.1%
(Higher than tyres i.e. 10%)

It would be seen that with the drop in price of NR (and keeping the duty level the same @ Rs. 20/kg) the incidence of duty increases from 7.7% to 12.1%.
In view of the above, there is a need to re-examine the customs duty on NR or increase the existing customs duty on Tyres to correct duty inversion.
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Basic & Preferential / Concessional Customs Duty on Natural Rubber in India

Although tyres (finished product) can be imported into India at preferential / concessional duties under various RTAs, the corresponding concessional duties for NR is not beneficial. NR falls in the negative list across most FTA except for Asia Pacific and SAFTA. However, in both Asia Pacific and SAFTA, the concessional duties apply mainly for NR imports from Sri Lanka (which are insignificant and hence of no practical significance).
20% or Rs. 20/kg, whichever is lower 16%
20% 16% 12% 8% 4% 0%

Negative List

Negative List

6% (or Nil*)

No Duty Concession

No Duty Concession

No Duty Concession
Negative List

No Duty Concession
Negative List

Basic Customs Duty In India

ASEAN FTA

Asia Pacific Trade Indo Sri Lanka Agreement

SAFTA*

India Singapore India - Malaysia

*Under SAFTA, 6% concessional duty for NR applies for imports from Pakistan & Sri Lanka. However, the tariff is Nil for imports from other SAFTA nations.

(To Allow) Limited Quantity of Natural Rubber (NR)

Import on a Tariff Rate Quota (TRQ) Basis
During FY 2011-12, the gap between domestic NR Production and Consumption was 60,715 MT and for FY 2012-13, the gap is expected to exceed 76,000 MT. As per Industry estimates, during the next fiscal (FY 2013-14) the gap is likely to be over 100,000 MT. This quantity (to bridge the demand-supply gap) of NR has to be imported into India. Submission

Department to consider allowing import of limited quantity of NR (say 100,000 MT) under a Tariff Rate Quota (TRQ) basis for FY 2013-14 at a concessional rate of duty of 7.5% OR Rs. 10 per kg, whichever is lower. In Dec.`10, Finance Ministry has allowed 40,000 MT of NR at 7.5% concessional duty on TRQ basis .

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 Major Raw Materials (RM) of Tyre Industry

Demand Supply Gap ATMA Submission on Proposed Duty

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Customs Duty on Raw Materials India vs. China

China and India, both emerging economies and highly competitive, have different duty structures for various Raw Materials (China has a lower duty structure for most raw materials, in comparison to India, giving the Chinese manufacturers competitive edge over Indian tyre manufactures, especially in common overseas markers).
For example, Compound Rubber, which accounts for 90% of the rubber imports in China, is @ NIL Customs Duty vs. 20% customs duty on Natural Rubber in India (such duty benefits give a competitive edge to China over India).
20%

15%

10%

10%

10%

10%

10%

10%

7.5%

7.5%

7.5%

10%

7.5%

6%

10%

5%

0%
Compound Ruuber Nylon Tyre Cord Fabric EPDM* Styrene Butadiene Rubber (SBR) Polybutadine Rubber (PBR) Rubber Chemicals Steel SteelTyre Tyre Cord Core (STC)

NIL

India

China
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*EPDM Ethylene- Propylene-non-conjugated Diene Rubber

4%

Major Raw Materials Scenario of Tyre Industry

(Gap between Domestic Demand and Supply / Capacity OR NIL Domestic Production - ATMA Submission for Duty Reduction / Waiver ) RMs with Domestic Demand : Supply Gap - Reduction in Customs Duty
HS Code
Raw Material(s) Domestic Production (est.) Domestic Consumption (est.)
MT / Year

Shortfall / Deficit (i.e. Quantity to be eligible for exemption from ADD)

590210 381210 731290

Nylon Tyre Cord Rubber Chemicals Steel Tyre Cord

65000 30000 12000

131000 43000 32000

66000 13000 20000

590220
400220

Polyester Tyre Cord

Polybutadine Rubber (PBR)

3000
80000

8000
158000

5000
78000

RMs of Tyre Industry having no Domestic Production Exemption from Customs Duty
400219
400231 4002700

Styrene Butadiene Rubber (SBR) Tyre Grades

Butyl Rubber EPDM

NIL
NIL Nil

144000
58000 3000

100%
100% 100%
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Key RMs of Tyre Industry Inadequate Domestic Capacity / Production

120% 30% 90% 50% 60% 50% 30% 0% Nylon Tyre Cord Rubber Chemicals Steel Tyre Cord Polyester Tyre Cord Polybutadiene Rubber 70%

63%

63%

38%

Import as a % of Domestic Consumption

Domestic Production (est.) as % of Domestic Consumption

It would be seen from the above graph that a significant percentage of import of key Raw Materials (RMs) of Tyre Industry is imperative. Hence, the need to consider lowering / waiver of Custom Duty to make operations of Domestic Tyre Industry more competitive.
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38%

51%

49%

Proposal for Reduction of Customs Duty on Raw-Materials having gap (shortfall) in domestic Capacity : Consumption & Waiver of Customs Duty on Raw - Materials of Tyre Industry NOT manufactured domestically
Raw Material Nylon Tyre Cord Fabric (NTCF) Poly Butadiene Rubber (PBR) Existing Duty 10% 10% Suggested / Proposed Duty 5% 5%

Rubber Chemicals
Polyester Tyre Cord Steel Tyre Cord Butyl Rubber* EPDM*

7.5%
5% 10% 5% 10%

2.5%
2.5% 5% Waive off Waive off

Styrene Butadiene Rubber (SBR)* (Tyre Grades)

* No Domestic Production

10%

Waive off

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Customs Duty on Tyres

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Bound Rate on Tyres

There is no WTO Bound Rate for Automotive Tyres

Hence, based on compelling need and circumstances, the Government of India can increase the customs duty on tyres from existing rate of 10% (to a higher rate of duty) without any corresponding action / explanation to the world body (WTO).

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Customs Duty on Tyres under Trade Agreements

Although the current basic customs duty on tyres is 10%, it is worthwhile mentioning that the same under various Trade Agreements is actually even lower than the basic rate of customs duty (as is evident from Table below):
Asia Pacific Trade Agreement (Bangkok Agreement) 8.60%

Normal /Basic Rate of Duty Item in India Tyre 10%

ASEAN FTA 7%

Indo Sri Lanka Nil

SAFTA 6% / Nil*

India Singapore

India Malaysia

Nil 7% (Bias Tyre) (Radial Tyre)

NR

20% OR Rs.20/kg whichever is lower

Negative List (No Duty Concession)

Negative List (No Duty 16% ** Concession)

Negative List Negative List (No Duty (No Duty 6% / Nil* Concession) Concession)

* Under SAFTA 6% concessional duty for Tyre & NR when imports from Pakistan & Sri Lanka ,imports from other SAFTA countries Nil Duty. ** Under APTA although NR is at a concessional duty of 16% ,there is no NR production in APTA countries, except Sri Lanka. Negligible imports of NR from Sri Lanka to India. NR production in Sri Lanka is small quantity and primarily for self consumption

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Customs Duty on Tyres under Trade Agreementscontd

A significant percentage of Tyre Imports into India is from countries which are signatories to RTAs / FTAs allowing Tyre imports at a lower rate of duty. In other words, the effective rate of customs duty on tyres is even lower than 10%.(ranging between nil to 8.6%). Hence, there is an urgent need and justification to increase the rate of customs duty on Tyres. Since most of the concessional duty rates are on an ad-valorem basis, the corresponding reduction in customs duty for imports against the RTAS will still be applicable. Submission

Customs duty on Tyres be enhanced from existing 10% to a suggested rate of 20%.
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Summing Up
To allow import of limited quantity of NR (say 100,000 MT) under a Tariff Rate Quota (TRQ) basis for FY 2013-14 at a concessional rate of duty of 7.5% OR Rs. 10 per kg, whichever is lower. Need to re-examine the customs duty on Natural Rubber (NR) or increase the existing customs duty on Tyres to correct duty inversion. Reduction of Customs Duty on Raw-Materials having gap (shortfall) in domestic Capacity : Consumption Waiver of Customs Duty on Raw - Materials of Tyre Industry NOT manufactured domestically Customs duty on Tyres be enhanced from existing 10% to a suggested rate of 20%.
***
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