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Rolling out a new challenge

Surajeet Das Gupta | November 22, 2003

It has become a ritual for Apollo Tyres chairman Onkar Kanwar. Every few months for the last five years he has travelled to Singapore to visit his daughter who lives in the city-state.

During these trips he always made it a point to drop in at Michelin's Asia headquarters and stay in touch with top executives in the region. The world's largest tyre company, however, was totally focused on China where it was trying to ensure returns on huge investments. India simply wasn't on the company's horizon.

Michelin buys 14.9% stake in Apollo Tyres
Michelin chief expects big paybacks from India

Six months ago Kanwar realised that the mood had changed. Michelin was now well established in China and was suddenly ready to burn up the roads in India. At last, Kanwar's courtesy calls and relentless networking were about to pay rich dividends.

Michelin's new-found interest in India led to months of intense negotiations. But this week the over Rs 2,000 crore (Rs 20 billion) Apollo Tyres finally tied the knot with the French tyre giant. The two will set up a joint venture in India to manufacture bus and truck radial tyres.

Michelin on the move
Can Michelin do in India what it has just done in China? In the last three years the demand for radial truck tyres has zoomed in China. Company executives say it's because Chinese truck owners are discovering that they get better value with radial tyres. It's important to remember that Chinese road conditions are similar to India and their trucks are just as overloaded.

The fact is that Michelin has been a big hit in China. The French company has grabbed around 30 per cent of the replacement market and become the country's largest tyre manufacturer. Since China is one of the world's fastest growing automobile markets, there's every likelihood that Michelin will grow with it.

India and China are two of Asia's key markets, so Michelin would be in an extraordinarily strong position in the continent if it could build up its strength here.

A strong position in Asia would help Groupe Michelin in a big way. The tyre industry worldwide is brutally competitive and the top three players are constantly jostling for the top spot. Till recently Michelin, was the top player with around 19 per cent of the world market and over a billion dollars in profits.

Now, however, it has been overtaken by Goodyear-Sumitomo with a share of 22 per cent. The other top player in the industry is Bridgestone. Making sure that Michelin is extremely profitable has been a key goal for 39-year-old Edouard Michelin who took over the company in 1999 from his father who ranit for 44 years.

The only question is whether India will become a key part of his future strategy

Also, Michelin will pick up a 14.9 per cent stake in Apollo Tyres for around Rs 129 crore (Rs 1.29 billion). The JV in which Michelin will have a 51 per cent equity stake will invest over Rs 350 crore (Rs 3.5 billion) to roll out Michelin tyres.

The deal catapults Apollo -- the country's third largest tyre manufacturer after MRF and JK Tyres -- into the big league of the truck radial tyre market where it is conspicuous by its absence. And it will put the hard-driving company on a collision course with JK Tyres -- which currently has 98 per cent of the radial tyre market. JK sells over 120,000 radial truck tyres in India.

Apollo's moves will also impact the tyre industry in another way. The manufacturers who now produce large quantities of bus and truck cross-ply tyres will now have to compete with a world-class international alternative.

Kanwar is already blowing the bugles of war to rally the troops. "We will have 60 per cent of the market from day one of our operation in the bus and tyre radial market. That's because we have the best quality and the world's best brand," says an upbeat Kanwar. He adds confidently, that he doesn't see much competition from entrenched players like JK tyres.

That's not all. He and Michelin aim to alter the market and seize the leadership position from JK Tyres. They hope to convince customers to switch from truck cross-ply (truck and bus constitutes over 70 per cent of the tyre market) to radial tyres within the next five years.

Kanwar is convinced that radials will grab 10 per cent of the truck tyre market within five years from the current 1.5 per cent. Says Edouard Michelin, head, Groupe Michelin: "We have been looking at India for over 40 years. But the time is now ripe for the growth of radialisation in India."

Apollo has already charted out an ambitious course of action. To begin with it will start selling imported Michelin radial tyres from April 2004. And it will start producing tyres in the next 18 months with an initial capacity of 100,000 tyres a year. That will be quickly be ramped up to 1 million in three to four years.

But Apollo can't expect a smooth ride to the top. JK Tyres is getting ready to hit back. The company is already in negotiations with its technical partner Continental and is open to letting the foreign giant pick up a financial stake.

Says an equally confident Raghupati Singhania, vice chairman, JK Tyres: "We have a four-year lead over Michelin. And our products already compete with their imported tyres successfully. That's why we are exporting a large part of our radial tyres capacity."

JK has ambitious growth targets for its truck radials. It expects sales to climb three-fold to 25,000 tyres a month in three years. The company's confidence is reflected in the fact that it is investing Rs 80 crore (Rs 800 million) to increase radial capacity by 100,000 tyres per annum. Singhania says he is confident that JK will continue to maintain an over 60 per cent market share despite new competitors like Michelin.

So, how serious is the Apollo-Michelin challenge? Tyre manufacturers dependent on only cross-ply truck and bus tyres better watch out. Says a Mumbai based analyst: "With large volumes of radial tyres in the market there will be price pressure on cross-ply truck and bus tyre prices and margins will get squeezed."

It could be a double-whammy too. Once the shift to radial takes place domestically, exports will also suffer. That's because the domestic economies of scale, which make Indian exports competitive will be hit (25 per cent of the cross-ply tyres are exported).

Adds another tyre analyst: "The Michelin brand name is very strong. JK Tyres does not have the same brand value and will not be able to command the same price."

Many tyre manufacturers, however, do not foresee any immediate cause of worry -- and they aren't planning to jump onto the radial tyre bandwagon. Says a Ceat spokesperson: "We do not see any major growth coming from this segment. It is a very nascent market and its growth will take time."

He has a point. So how will Apollo woo fleet owners and convince them to shift to radial tyres? After all, fleet owners have avoided going radial because the tyres cost about 30 per cent to 60 per cent more than cross-ply tyres.

There's another problems unique to Indian roads and truckers. Overloading is an everyday fact of life in the trucking industry and radial tyres cannot take that pressure. Also, the tires require better-quality roads (they aren't effective on a dusty track, for instance). And for efficient use they need trucks and buses with power steering, which again aren't common on Indian roads.

Michelin is well aware of the challenges. Says Jean-Marc Francois, president Asia-Pacific, Michelin: "We will build products which cater to Indian roads and fleet. Also, we will train dealers to undertake concept selling of radials rather than sell it as another commodity, which is the way cross-ply tyres are sold." Michelin hopes that the revolution which happened in the Indian passenger car tyre industry (where 75 per cent of the tyres sold are radials) will spill over to the truck and bus market.

Michelin has already developed a radial tyre that caters to the peculiar characteristics of Indian roads and can cope with overloads of twice the actual capacity of the vehicle.

Secondly, the company will drill home the message that the tyres cost more but are a saving in the long run. Their productive life is also 150 per cent more than a cross-ply tyre. It will also offer attractive financing schemes to woo customers.

Besides, Michelin and Apollo hope to push the fuel economy angle. Radial tyres help to boost mileage considerably and the result is a net saving of around 10 per cent on fuel bills. That's not a small amount considering that fuel costs account for 40 per cent of the cost of operation for trucks and buses.

The two companies are also working on a complete overhaul of the distribution system. So for instance only a few of the 5,000 strong dealers will be offered the radial tyres -- this will depend on their service abilities and their customers. Two, the company is planning to set up around 20 special outlets where demonstrations will be held to show the advantages of radial tyres.

Company executives aren't talking about branding strategies for now, but customers will probably be offered Michelin radial brands at the upper end of the market while the Apollo brand will be positioned in the middle segment.

Analysts point out that the tie-up has other rub offs. Says one: "It will help Apollo improve cost efficiencies. Rubber prices are rising and Michelin can help in improving processes which will lead to cost savings."

But Apollo's moves don't seem to impress its competitors. Says Singhania: "Offering a tyre which can take overloads is a given, not an innovation. All our tyres can take loads twice that which is stipulated."

JK Tyres will, in fact, be leveraging its strong after-sales force, which Apollo cannot match yet. For instance, it has set up over 14 service centres (to be upped to 50 this year) across the country which offer customers spare tyres free of cost if their radial tyres are damaged within the first 100,000 km. Customers can use the spare tyres till the original tyres are repaired.

In order to ensure proper usage of the radials JK has introduced a "training for the fitters" scheme under which over 1,000 personnel have been trained on how to fit the tyre properly.

Also, unlike Apollo, which is focusing on the end-user, JK is already pushing companies to make the changeover to radials. Singhania says it has already supplied tyres to Volvo and is in talks with Telco and Ashok Leyland. It hopes that three years down the line, 20 per cent of its radial truck sales will come from original equipment manufacturers.

JK is also clearly aware that global brands like Michelin have a pull, which desi brands cannot match. Acknowledges Singhania: "We would be kidding if we claimed our brands were as strong as the global players." That is one key reason why Singhania is open to talks with Continental for a financial tie up.

Will the Michelin entry be the harbinger of a shake-up in the Indian tyre industry? One thing seems certain for now: radial tyres will soon be pushing the older cross-ply tyres off the road. Another thing's also certain: a furious battle is about to break out.

Additional reporting: Arti Sharma

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