Michelin Considers Building Truck Tire Plant in India

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Researched by Industrial Info Resources (Sugar Land, Texas)--The world's second-largest tire maker, Michelin & Cie (Clermont-Ferrand, France) has indicated that it might invest up to $1.48 billion in India's tire industry over a period of 10 years. Michelin intends to manufacture and market radial tires and tubes for trucks and heavy engineering plants in India. About 50% of the products are likely to be exported in the future.

According to unnamed company sources, Michelin has sought approval from the Indian government to obtain a 100% stake in Michelin India Tamil Nadu Tyres (Chennai, Tamil Nadu), a company that was formed in April 2009. If approved, Michelin would set up the proposed greenfield manufacturing facility with an investment of more than $818 million in the first phase. According to Michelin's CEO Michel Rollier, the company hopes to open the facility within three years. Phase I construction would run until 2016. The company then might invest another $613.5 million after Phase I is complete. At present, Michelin is negotiating with the government of Tamil Nadu over the 290 acres that the company requires to set up the plant. The company is eyeing a site at the State Industries Promotion Corporation of Tamil Nadu's industrial park in Oragadam near Chennai.

The first phase of the project would create employment opportunities for more than 1,500 people in the state. If the second phase involves an investment of $613.5 million, the number of jobs would probably grow to 2,000.

The Indian project was proposed after the company announced that it would have to cut 2,900 jobs in France as part of a company reorganization strategy that involved greater focus on higher-margin tires. The job-cut would be spread over three years and would involve 1,093 direct job cuts and about 1,800 voluntary redundancies. Rollier has, however, denied any relation between the job cuts and the proposed project in India. According to company officials, plans to build a presence in India were announced in 2008.

The proposed project follows the failure of Michelin Apollo Tyre Limited (MATL) (New Delhi) to move ahead with its proposed bus and truck radial tires manufacturing unit in India because of the prevailing economic crisis. MATL was a joint venture formed with Apollo Tyres Limited (BSE:500877) (Gurgaon, Haryana) in 2004. Meanwhile, Apollo Tyres has already given Michelin a no-objection certificate to begin its own operations in India. Michelin had procured a 14.9% stake in Apollo Tyres in 2004 through a preferential allotment. Over time, the stake declined to 11% as Apollo Tyres sold stock to raise funds. Michelin's stake in Apollo Tyres now stands at 8% after it sold 3.3% of its stake in the open market.

Several international companies have announced projects in India, but most of them have either delayed investment or cancelled plans altogether. The primary reasons for this are the economic slowdown and the number of regulatory constraints on foreign direct investment (FDI) in India. Fortunately, there are no such restrictions in the tire industry, and Michelin's proposed project would be the largest FDI in the tire sector.

Although the demand for tires has declined considerably across most regions, especially in Europe and the U.S., where sales have fallen by more than 30%, the Indian market has not been as dismal. The sale of two-wheelers and passenger cars has grown, and in comparison to the global market, the demand for tires has increased significantly. However, the industry's growth has not been as smooth as the previous fiscal year. The 2008-09 period did see a fall in demand. While the first nine months of the 2007-08 fiscal year saw a tonnage growth of 7.38%, the same period of the 2008-09 fiscal saw a growth of only 2.19%. The Truck & Bus (T&B) tire sector saw a fall of 0.01% over the same period, while the supply to the original equipment manufacturers (OEMs) saw a decline of 6.17%. Further, the competition from China has increased to such an extent that the export market saw a fall of 9.82% during the same period.

All major Indian players have been forced to make production adjustments because of declining demand, and the government provided an external stimulus by reducing the excise duty on tires from 14% to 10% in December 2008. A further reduction to 8% was effected from February 2009. Although raw material prices declined from September 2008, the impact of the fall became visible only in the last quarter of the 2008-09 fiscal year.

Indian manufacturers are now exploring and expanding their presence in the overseas markets. While Apollo has undertaken an expansion at its Dunlop plant in South Africa, JK Tyres & Industries Limited (BSE:530007) (New Delhi) acquired Mexico's Hulera Tornel (Jalisco, Mexico) in 2008.

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