KEY ISSUES CONCERNS OF INDIAN TYRE INDUSTRY

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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

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

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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 - 60 TURNOVER (Est.) - Rs. 43,000 Crores /US$ 7.7 billion EXPORTS - 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 Apr-Oct.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.

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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 2010-11 2011-12 Apr-Oct : 2012-13 /2011-12

Medium / Heavy CV Production 38% 11% (-)16%

Car Production 27% 2% 10%

Tractor Production 26% 27% (-)8%

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

Truck/Bus Tyre Production 3% 3% 0.4%

Car Tyre Production 29% 4% 4%

2/3 W Tyre Production 29% 6% (-)11%

Truck/Bus Tyre Export (-)2% 12% (-) 8%

(% Growth YoY)

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 revive demand & spur growth.

(per month figures)

Project(s) TBR (in units) PCR+LT (in units) OTR (in MT) 2W (in units) Others (in units)

Recently completed 26,200 1,28,000 7,00,000 4,167

Greenfield 4,73,000 20,14,500 17,700 25,000

Brownfield 1,25,000 7,30,000 6,448 2,50,000

Total 6,24,200 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

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

As of Sep12

Source: Smithers / ERJ

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.

Cumulative Investment

(approx.) Rs. 20, 000 Crore

Natural Rubber :

Inverted Duty Structure

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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) :

Table - 1

1996-97 2012-13

Tyre 50% 10%

Natural Rubber (NR) 20% 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.

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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:

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.

Table-II

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Month / Year

Intl NR Price (RSS-3) / (Rs. per Kg)

Customs Duty @ Rs. 20/Kg

Customs Duty on (%) basis @ Rs. 20 per kg / applied on prevailing NR Price

Apr11

260 20 7.7 % (Lower than tyres i.e. 10%)

Nov.12

165 20 12.1% (Higher than tyres i.e. 10%)

Basic & Preferential / Concessional Customs Duty on Natural Rubber in India

*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.

Ne

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16

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Ne

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6%

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il*)

Ne

gati

ve L

ist

Ne

gati

ve L

ist

0%

4%

8%

12%

16%

20%

Basic CustomsDuty

ASEAN FTA Asia Pacific TradeAgreement

Indo Sri Lanka SAFTA* India Singapore India - Malaysia

No Duty Concession

No Duty Concession

No Duty Concession

No Duty Concession

In India

20

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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).

(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

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10

%

10

%

10

%

10

%

10

%

7.5

% 1

0%

10

%

7.5

%

7.5

%

7.5

%

6%

4%

0%

5%

10%

15%

20%

CompoundRuuber

Nylon Tyre CordFabric

EPDM* Styrene ButadieneRubber (SBR)

PolybutadineRubber (PBR)

Rubber Chemicals Steel Tyre Core(STC)

India China

NIL

Steel Tyre Cord

*EPDM Ethylene- Propylene-non-conjugated Diene Rubber

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).

Major Raw Materials Scenario of Tyre Industry

RMs with Domestic Demand : Supply Gap - Reduction in Customs Duty

HS Code

Raw Material(s)

Domestic

Production (est.)

Domestic

Consumption (est.)

Shortfall / Deficit (i.e. Quantity to be

eligible for exemption from ADD)

MT / Year

590210 Nylon Tyre Cord 65000 131000 66000

381210 Rubber Chemicals 30000 43000 13000

731290 Steel Tyre Cord 12000 32000 20000

590220 Polyester Tyre Cord 3000 8000 5000

400220 Polybutadine Rubber (PBR) 80000 158000 78000

(Gap between Domestic Demand and Supply / Capacity OR NIL Domestic Production - ATMA Submission for Duty Reduction / Waiver )

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

400219 Styrene Butadiene Rubber (SBR) Tyre Grades

NIL 144000 100%

400231 Butyl Rubber NIL 58000 100%

4002700 EPDM Nil 3000 100%

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Key RMs of Tyre Industry Inadequate Domestic Capacity / Production

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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50

%

70

%

38

%

38

%

51

%

50

%

30

%

63

%

63

%

49

%

0%

30%

60%

90%

120%

Nylon Tyre Cord Rubber Chemicals Steel Tyre Cord Polyester Tyre Cord PolybutadieneRubber

Import as a % of Domestic Consumption Domestic Production (est.) as % of Domestic Consumption

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

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Raw Material Existing Duty Suggested / Proposed Duty

Nylon Tyre Cord Fabric (NTCF) 10% 5%

Poly Butadiene Rubber (PBR) 10% 5%

Rubber Chemicals 7.5% 2.5%

Polyester Tyre Cord 5% 2.5%

Steel Tyre Cord 10% 5%

Butyl Rubber* 5% Waive off

EPDM* 10% Waive off

Styrene Butadiene Rubber (SBR)* (Tyre Grades) 10% Waive off

* No Domestic Production

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):

Item

Normal /Basic Rate of Duty

in India ASEAN FTA

Asia Pacific Trade

Agreement (Bangkok

Agreement) Indo Sri Lanka SAFTA

India Singapore

India Malaysia

Tyre 10% 7% 8.60% Nil 6% / Nil* Nil

(Bias Tyre) 7%

(Radial Tyre)

NR

20% OR Rs.20/kg whichever is lower

Negative List (No Duty

Concession) 16% **

Negative List (No Duty

Concession) 6% / Nil*

Negative List (No Duty

Concession)

Negative List (No Duty

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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