Gripping the Market

Mr. Anant Goenka, MD of CEAT Tyres Ltd. had just concluded his meeting with CEATs 2Wheeler Task Force. The objective of this strategy team was to set out a roadmap to achieve leadership in many areas of 2-Wheeler tyre segment. One of Indias youngest MDs, Anant had highlighted the criticality of Task Force achieving its objectives in the current year. Mr. Nitin Nishant, who heads the 2/3 Wheeler category of tyres, was facing tough challenges achieving the objective of the Task Force. No other manufacturer enjoyed the economies of scale that MRF did, and hence, completely ascertaining the way the capacity was used was essential to tackling this challenge.

Introduction
The size of the Indian tyre market is approximately Rs 35,000 crore in 2011. The market is segmented as follows: Category Trucks Car/ Jeep L.C.V. Farm 2/ 3 wheelers Others Market Share 50% 15% 11% 8% 14% 3%

2/3 Wheeler Category consists of the Motorcycle, Scooter, Moped and 3 Wheeler Segments. The biggest amongst these is the Motorcycle segment, which contributes to nearly 70% of this category. The major OEMs in the 2 Wheeler market are Hero Moto Corp. (HMC), Honda Motors and Scooters India Limited (HMSIL), Bajaj Auto Limited (BAL), TVS and Suzuki. Motorcycles or Bikes, as they are popularly known in India, are used for short distances of 0 - 100 km where other modes of transportation are not very viable. For instance, transportation from cities to surrounding villages with limited road infrastructure, commuting for work, Leisure Trips. In India, it is frequently used for commuting with Family to the nearby location.

The Market Size

Figure 1: The Total production of 2-Wheelers (lakhs/year)
MC SC Moped 112 99 61 72 83 67 68

10

10.5

4.4

10.7 3.75 FY'07-08

12.4 4.14 FY'08-09

15.4 5.44 FY'09-10

19.7 6.17 FY'10-11

24.34

7
FY11-12

FY'05-06

FY'06-07

As shown in Figure 1, 143 lakhs 2-wheelers were produced in Fy 11-12. The 2/3 Wheeler category is growing @ of 10% & the growth is being lead by Scooters, which is projected to grow by 25% (yoy) followed by Motorcycles at12%. Due to the current economic scenario it is quite difficult to precisely predict the future growth of this segment. Some of the factors that influence the growth and penetration of this segment in India are: 1. 2. 3. 4. GDP growth Rural Development & Fund infusion in Rural India Disposable income Infrastructure Development (Mainly Roads)

Every year OEMs demand around 2.2 crore Motorcycle tyres, and the demand is lead by Hero Honda & followed by Bajaj Auto Limited & Honda.

Figure 2: OEM Market Share Motorcycle (%)

60 50 40 48.1 49.4 45.8
HHML

52.4

51.9

52.7

30 20 10 0

30.8

33.5

BAL

32.7

28

29.7

28

HMSI
TVS YML

13

13
9.4 9.3 7.6 2009-10

Others

7.1
2010-11

2005-06

2006-07

2007-08

2008-09

CEAT Tyres Limited

CEAT is one of the leading tyre manufacturers in 2-wheeler segments. The sales of CEAT are split across OEMs, Replacement Marketss & Exports as follows:

Original Equipment Manufacturer (78%)

Replacement Sales (22%)

Export (0%)

Figure 3 shows that share of OEMs in industry sales has grown to nearly 50% up till 2011. The 5th bar in the figure shows that the OEM share for CEAT in 2011 was only 22%. The Replacement Markets have a greater share of sales as margins/unit are higher there, ensuring greater levels of profitability for the company.

Figure 3: Category supply of tyres - MCY 100% 80% 60% 40%

1
52

2 53

1
51

1.73
49.9

78

20%
0%

47

45

48

48.37 22

2007-08

2008-09 OE

2009-10

2010-11 Export

CEAT

Replacement

Figure 4 shows the OEM Replacement Exports split for Scooters. For similar reasons as Motorcycles, Replacement Markets get a larger chunk of CEATs supply.

Figure 4: Category supply of tyres - SC 100% 80% 60% 40% 20% 0% 48 54 58 4 48 4 42

3
39

3.13
53.41

75

43.46
25

2007-08

2008-09 OE

2009-10

2010-11 Export

CEAT

Replacement

OEM demand is directly dependent on the manufacturing plan for their vehicles; however, the Replacement demand lags the OEM demand by 3 years. So once a new motorcycle is launched, tyre manufacturers supply tyres only to the OEMs for around 3 years before demand builds in Replacement Markets. This leads to the question of capacity allocation. While replacement markets are more profitable, supply to OEMs is essential to ensure demand for CEAT Tyres in the replacement markets. The following factors make this question complex:

1. CEAT has got a limited capacity of 5 lakh tyres/month, which is divided into Motorcycle and scooter. A maximum of 10% of capacity can be increased each year. 2. The Contribution margins for Motorcycles & Scooters in the Replacement Markets are approx. Rs 300 & Rs 160 respectively for replacement; while the contribution in OEMs sales is Rs 15 and Rs 40 respectively for Motorcycles & Scooters. 3. The OE demands are generally fixed and they adhere to the commitments until and unless there is some major fall back in the economic scenario. The focus within OEM Sales is predominantly on large volumes, and the costs are also oriented accordingly. 4. The Replacement market is a high margin & a competitive market. Any shortfall in demand in OE spills over to the Replacement market. This segment is also extremely dynamic. For a company like CEAT where there is no fixed plan with distributor & dealer this becomes tougher. Market leader MRF has a Letter of Understanding signed with their dealers and distributors, which confirms the number of units that the distributors and dealers will buy from MRF. No other manufacturers have such an agreement with their dealers. The sales teams of CEAT estimate the volume to be produced for given regions and periods. Consequently, there are possibilities of mismatch between these estimates and the actual quantity ordered by the dealers and distributors, affecting the bottom line in many ways. Given these scenarios, Nitin faces tough questions around the strategy to make CEAT the market leader in 2W category: 1. How can CEAT optimally allocate production capacity to Motorcycle and Scooter Tyres? 2. Furthermore, what should be the capacity allocation for OEMs and Replacement markets? 3. Which OEMs should be given priority?