CHAPTER 2

THE INDIAN TYRE INDUSTRY:

AN OVER VIEW

Nisha Rapheal. ”The Indian tyre industry:Financial and economic

analysis” Thesis. Department of Economics,University of Calicut.
2016
 CHAPTER II

THE INDIAN TYRE INDUSTRY: AN OVERVIEW

33
2.1 INTRODUCTION

The Indian auto components industry, which played a rather insignificant

role before economic liberalisation, has now carved out a niche for itself.
According to trend analyses by the Automotive Component Manufacturers
Association (ACMA), the industry recorded a 20 per cent growth in production
during financial year 2002-03 and a 38 per cent growth in exports. The strong
growth in the domestic market can be credited to the good performance of the
Indian vehicle sector in which production grew by 18.6 per cent in 2002-03 over
the previous fiscal year. Barring tractors, twoand three-wheeler vehicle production
grew by 20 per cent while four-wheeler production grew by 11 per cent. Like the
automobile sector of any country, the Indian vehicle industry’s growth is cyclical.
But despite ups and downs, growth has been fairly stable over a longer period in a
number of segments. the compound annual growth rate for passenger cars has
been 14 per cent over the past two decades, for commercial vehicles 4 per cent
and motorcycles 12 per cent. Exports during 2002-03 are estimated to be $ 800
million, as against $ 578 million in fiscal year 2001-02, and $ 625 million in
2000-01. Exports are expected to rise to $ 1 billion in 2005, and to $ 2.5 billion
for 2010. This is because primary cost pressures are driving vehicle-makers and
renowned tier 1 companies, mainly in the US and Europe, to source components
from India. According to authoritative sources, this remarkable performance of
the Indian auto components industry is not a temporary phenomenon, and the
future of the industry is bright.

Despite the challenges that the industry is facing in terms of competition

and operational factors, it is expected to emerge as a leading player in Asia. In
fact, the speed at which Indian auto component manufacturers are progressing in
improving their capabilities has been encouraging. Of course, India will have to
continue to face stiff competition from countries such as Thailand, Malaysia,
Brazil, Mexico, Turkey, China and some east European countries. Industry
sources say that though the sector is less dependent on government’s policies than
it was a decade ago, it will still need a push in terms of a conducive business
34
environment which the government could provide along with market forces. This
will boost investments in the industry and allow companies to better utilise their
capacities across a wide product range, leading to employment generation and
foreign exchange earnings through exports.

There is also no likelihood of a surfeit of auto components flooding the

market, according to authoritative sources, because what is produced is ‘pulled’
by market forces and quality systems standards require auto component
inventories to be kept to a minimum while manufacturing systems require ‘just-in-
time’ delivery of components by vehicle makers. the business environment India
needed in order to be a low-cost global source for auto components was a
qualitative improvement in infrastructure, comprehensive labour law reforms,
rationalized tax structures, investor-friendly and consistent policies in states,
encouragement of R and D through incentives and safety and environmental
norms on par with international standards.

On the plus side, he felt India had an advantage in its educated and skilled
labour, low-wage structure, strength in engineering and remote services, strong
service industry and its better legal systems vis-a-vis, for instance, China. He felt
that a focus area for Indian suppliers should be the development of product design
and low-cost testing capability, creating high quality input sources and evolving
globally competitive costs. He also felt that India’s supply base strengths
consisted of lowcost sourcing for low volume speciality models and low
automation technology based components. Friedman also said the Indian
consumer is representative of the global customer – if the product is right for
India, it is right for any other market. According to Friedman, suppliers with
strong global support can become full service suppliers and systems suppliers.
The key advantages for original equipment manufacturers in this lie in minimizing
the number of suppliers per vehicle, shortening the product development time and
the development of supplier commodity experts.

35
 Citing global trends in the industry, he pointed out that the number of full
service suppliers has been falling. Between 1986 and 2000, the number of full
service suppliers for PSA has fallen from 900 to 500, for BMW from 1,400 to
600, for Chrysler from 3,000 to 600 and for Ford from 2,400 to 1,200. One major
roadblock to the growth of the industry in India, of course, has been that the
automotive after-market in India has been plagued by a high incidence of
counterfeiting of auto parts. This phenomenon has been growing alarmingly over
the years. January 2000, counterfeits accounted for 37.6 per cent of the total
market size of the 12 after-market auto parts chosen for the all-India study. This
phenomenon has sometimes tended to mar the reputation of many genuine
manufacturers, but many products are still respected for their quality, especially
when they come from credible companies.

Authoritative sources say that joint ventures in the industry have been a
source of strength and innovation. Most joint ventures are said to be faring
extremely well as the purpose of their existence was realistically conceived as
well as the market strategies around which they have grown. There may have been
challenges initially, but most have matured and grown rather quickly. Overseas
partners have put together an intelligent mix of technology and financial backing
to sustain ventures in the market that is maturing and thus resemble any
contemporary industry. As the vehicle industry keeps growing worldwide and the
growing competitiveness of the industry and cost pressures push developed
countries to shift production to low-cost countries, India is likely to be a major
beneficiary. The auto components industry is slowly taking on the shape of a
major industry in India – one that is finding its true place in the sun.

Natural Rubber : Raw material

The major challenges facing the world natural rubber (NR) economy and
its responses since 1980s are different from the previous experiences in terms of
the net implications. This paper summarises the main features of the changing
dimensions of world natural rubber economy and outlines the priorities and

36
strategies relevant to India in the context of the new economic scenario. ONE of
the maifl objectives of the General Agreement on Tariffs and Trade (GAIT)
signed in April 1994 is to reform a highly distorted world trade characterised by
direct and indirect subsidies resulting in a deceptive comparative advantage and
inefficient use of world resources. However, the net effect of the increasing
globalisation of economic activity emanating from GATT treaty will vary across
countries, regions and different sectors of an economy. One of the crucial factors
determining the relative performance is the comparative advantage or efficiency
in the production and marketing of crops, products and services. Nevertheless,
during 1980s the developing countries which have a comparative advantage in the
export of agro-based products were adversely affected by a secular decline in the
real price indices in spite of various commodity agreements and price stabilisation
schemes [IMF 1990; UNCTAD 1992].

The major contributing factors for the secular decline in the terms of trade
of primary commodities vis-a-vis manufactures appear to be the organisational
and monopoly powers of the factors of production engaged in manufacturing,
development of synthetic substitutes, increasing de-materialisation of the
production process, direct increase in supply resulting from the entry of new
producers and productivity improvements arising from R and D efforts. In this
context the GATT treaty assumes significance as one of its professed objectives is
to correct the distortions in the world trade of agricultural commodities to promote
efficient allocation and use of world resources.

Natural rubber is one among the ten core commodities covered by the
Integrated Programme for Commodities (IPC) under the auspices of UNCTAD for
assistance. The case of NR is a classic example illustrating the vulnerability of the
developing countries to price fluctuations in the world market. The free market
price indices of NR declined to the extent of 40 percentage points in 1990 from its
1980 level [UNCTAD 1990], However, compared to the other three plantation
crops, viz, coffee, tea and cocoa among ten core commodities, NR displayed
better resilience in spite of volatile market conditions in the 1980s. Table 1 shows

37
the comparative performance of the four major plantation crops covered under the
IPC.

Implicitly, it is plausible to attribute a comparatively better performance of

NR to the International Natural Rubber Agreement (INRA) which was the only
active commodity pact in the 1980s and the buffer stock operations of the
International Natural Rubber Organisation (INRO) since 1980. However, the
producing countries are apprehensive about the efficiency of INRA in absorbing
steady increases in cost of production and stabilising prices at remunerative levels.
The Daily Market Indicator Price (DMIP) of the INRA is considered to be
unrealistic as it has emerged as the price signalling point in the world market
instead of its determination based on the movements of free market prices. In
1990s the major problems confronting the world NR economy in the context of
the increasing globalisation of economic activity are frequent fluctuations in free
market prices, dominance and structure of the synthetic rubber (SR) industry,
increase in supply of NR mainly due to the entry of new producers and erosion of
relative profit margins. Cost escalation on account of steady increases in the
prices of material inputs compared to increases in the productivity of NR
aggravated the emerging crisis [Sulieman 1991].

Though the response to the uncertainty confronting the NR sector varied

across the producing countries it is unique in terms of its net effect by instilling an
element of dynamism among the producers which was hitherto not so explicit.
The major sub-sectors of NR economy undergoing internal adjustments and
structural changes in response to the changing economic scenario are the
production, processing, consumption and the by-products sectors. In spite of the
differences in the extent of inter and intra-sectoral adjustments among the major
NR producing countries a common feature is efforts to capitalise available
opportunities for squeezing unit cost of production and exploring potential outlets
for increasing the net income per unit area.

38
 In this context, the developments in Malaysia is more illustrative compared
to other major NR producers. Till 1991 Malaysia was the leading producer and
exporter of NR and in 1990 the share of NR in its total export earnings declined to
3.8 per cent from 55 per cent in 1960. Major changes in the NR production sector
consisted ofswitchingoverto relatively more profitable and less labour-intensive
crops like oil palm and introduction of labour saving mechanisms at different
stages of NR production. In the processing sector, emphasis is on the
development, production and exports of value added forms of rubber and
commercialisation of processing wastes. Recently, Malaysian imports of raw
rubber from low cost producing countries like Vietnam is increasing and the
imported rubber is being processed into higher grades of NR. The estimated net
value added in this process is in the range of 20-25 per cent of the imported value
[Sulieman 1991]. Since the late 1980s domestic consumption of NR in Malaysia
registered steady increases fully utilising the locational advantages in the
manufacturing of NR latex based products such as gloves, elastic rubber thread
and catheters. the expansion of domestic rubber goods manufacturing sector.

Malaysia is also successful in the commercial exploitation of the by-

products, especially rubber wood. In 1992, the country's export earnings from
finished products based on rubber wood was US $ 157 million [ANRPC 1993].
Although the extent of commercial exploitation of the by-products vary among
the producing countries, earnest attempts are underway to tap ancillary sources of
income from the rubber plantations.

At a micro level considerable differences exist among the major NR

producing countries in terms of the priorities attached to net income augmenting
measures and cost saving mechanisms. To a large extent, the survival strategies
adopted by the NR producers varied depending mainly on the natural resource
endowments, size of the domestic market, level of technology and the extent of R
and D support. At a macro level, world NR economy is constrained by a well
defined structure of its production and consumption sectors. The two cardinal
features of world NR production are a high degree of regional and structural

39
concentration. Geographically, NR production shows a very high degree of
concentration and sectorwise concentration is characterised by the dominance of
rubber smallholdings. the major characteristics of the NR production sector.

An important feature of the structure and pattern of world rubber

consumption is a very high degree of concentration. The structure of world rubber
consumption is characterised by the dominance of synthetic rubber (SR) and in
1992 the relative share of SR was 62.3 per cent [IRSG 1993]. Since 1960s SR has
systematically replaced NR in the world rubber market and the relative share of
SR reached its peak level in 1974 (70.6 per cent). Although its share has declined
to 62.3 per cent in 1992, the SR manufacturing industry occupies a pivotal
position in the world rubber market in terms of its unique advantage of both
backward and forward integration with petrochemical and automotive tyre
manufacturing industries, respectively. The world chemical, petrochemical and
tyre industries are reported to be dominated by less than ten firms which together
account for around 80 per cent of SR production capacity [Carr et al 1988], The
pattern of world rubber consumption and NR consumption is dominated by the
tyre and tyre products manufacturing sector as evident from the data available for
the major consuming countries .

Another important dimension of the consumption sector is the geographical

concentration in the consumption of rubber. Table 5 shows relative shares of
major consuming regions/countries. An important development having positive
implications on the NR production sector is the steady increases in the
consumption of NR in major producing countries, especially China, India and
Malaysia. The rise in consumption is mainly propelled by the boom in the
manufacturing of latex based products and growing relocation of manufacturing
activities to south east Asia since mid-1980s and the inherent locational
advantages for the NR producing countries. The dominance of the major NR
importing countries in the total rubber consumption is structurally rooted with the
pivotal position in the control on the production of automotive tyres and allied
products. However, in the context of growing integration of world rubber

40
economy, the comparative advantages associated with the raw material and labour
costs in the production of rubber products will have an important bearing on the
prospects of NR producers.

2.1.1 Natural Rubber Economy of India

India is the fourth largest producer of NR and its productivity is reported to

be the highest in the world. In 1993-94 its total production was 4,35,160 mt.
During the year the total area under cultivation has increased to 5,10,000 ha. An
important characteristic of NR cultivation in India is a very high degree of
geographical concentration. Table 6 illustrates the point.

One of the main features of NR cultivation in India is the dominance of

smallholdings sector as its share in area under cultivation and production is about
85 per cent. The dynamic growth of the industry during the last four decades and
projections for 1994-95 and 2000-01.

Compared to the three major NR producing countries, viz, Thailand,

Indonesia and Malaysia, India is having the unique advantage of a captive market
arising from a well developed rubber goods manufacturing sector. India has been
a net importer of NR since 1948 and at present India is ranked 8th among the
major rubber products manufacturing countries. The trends in NR consumption
are furnished.

An important feature of rubber consumption in India is a relatively higher

share of dry rubber products manufacturing sector accounting for about 86 per
cent in 1991 -92. Indian rubber goods manufacturing sector is basically inward
oriented catering to the internal market. The pattern of exports of rubber products
from India appears to be a honzontal ex tension of its existing industrial structure.
Table 9 shows the structure of rubber products exports from India during 1922-93.
More than 90 per cent of India's export earnings consists of dry rubber products
and therelativeshareof automotive tyres and allied products alone is 71.68 per
cent. India had been enjoying a favourable balance of trade in the foreign trade of

41
rubber products since 1971-72 to 1992-93 without any significant change in the
structure of exports! Mohanakumaretal 1994). However, in the emerging
economic scenario characterised by increasing integration of world market the
existing pattern of exports cannot be sustained mainly due to the changing global
market structure of the major products exported. Therefore, it is necessary to
outline the priorities and strategies for the NR production sector and the rubber
products manufacturing sector to face the challenges arising in the post-GATT
era.

2.2 ORIGIN AND GROWTH OF TYRE INDUSTRY IN INDIA

Transport is the life- blood of civilization and it plays a key role in the
economic, social, cultural and political progress of the economy. The
manufacturing of automobile tyres became an essential ancillary activity for the
development of the automobile sector.

The major raw material required by the tyre industry is rubber. Of all major
end- use markets for rubber, transportation is by far the largest single sector with
tyres and tyre products accounting alone for over 50percent of NR consumption.
Truck and bus tyres would represent the largest single outlet for NR, followed by
automobile tyres. The main consumers of natural rubber are tyre makers.
According to Automotive Tyre Manufacturers Association, there are 23 percent
growth in tyre manufacturing during the period from 2010 April to 2011
February.

In world scenario, the tyre industry’s turnover is more than $ 130 billion. It
employs more than 600,000 people directly and several millions indirectly. A
dozen global players dominate the tyre industry. The top five manufacturing
companies by revenue are Bridgestone, Michelin, Good Year, Continental AG,
Pirelli.

In 1846, Robert William Thomson invented and patented the pneumatic

tyre. Pneumatic tyres are manufactured according to relatively standardized

42
processes and machinery,in around 450 tyre factories in the world. Over 1 billion
tyres are manufactured annually, making the tyre industry the majority consumer
of natural rubber.

The origin of the Indian Tyre Industry dates back to 1926, when Dunlop
Rubber Limited set up the first tyre company in West Bengal. At present, there are
40 listed companies in the tyre sector in India. Major players are MRF, JK Tyres,
Apollo Tyres , CEAT, BIRLA, and GOOD YEAR which account for 63 percent
of the organized tyre market. Current level of radialization includes 95 percent
for all passenger car tyres, 12 percent for light commercial vehicles and 3 percent
for heavy vehicles (truck & bus). Restrictions were placed on the import of used/
retreaded tyres since April 2006. Import of new tyres and tubes is freely
allowed,except for radial tyres in the truck/bus segment which has been placed in
the restricted list since November 2008.

Indian tyre industry produces the complete range of tyres required by

the Indian automotive industry , except for aero types and some specialized
tyres.Domestic manufacturers produce tyres for trucks, buses, passenger cars,
jeeps, light trucks, tractors, ( front, rear,and trailer ),animal drawn vehicles ,
scooters, motor cycles, mopeds, bicycles, and off – the – road vehicles and
special defence vehicles.

The productivity of rubber in Kerala is the highest in the world. According

to Rubber Statistics 2006 published by the Rubber Board of India, the mean
annual productivity is 1726 kgs/ha, which is highest in the world. For a long time
now, domestic prices of rubber are much lower than international prices. India has
signed the ASEAN agreement. As per the industrial clauses of the project, the
Union Government will be compelled to take away the import duty of the rubber.
As Kerala contributes to the major chunk of the rubber production, Kerala will be
compelled to face competition from countries like Malaysia. Key tyre categories
tariff to be brought down to 5percent by 2016. Select raw materials of tyre
industry eligible for Nil/Concessional Customs duty from 2013 onwards. Indian

43
tyres have good acceptance in global market. The Compound Average Growth
Rate ( CAGR) of tyre exports in last one decade has been 8 percent. Export
to highly quality conscious US market is 17 percent.

2.3 INDIAN TYRE INDUSTRY: DEVELOPMENT AND STRUCTURE

The Early Phase : ( 1936 – 1959 ): Genesis of Indian Auto Tyre industry

The Automotive industry is one of the more important components

of the Rubber manufacturing industry as it accounts for just under three
quarter of the total net value of the industry . The Indian rubber industry is of
comparatively recent origin. The end of the first world war signalled the
genesis of the industry . The first rubber plant in the country was
commissioned in 1920 for the manufacture of certain technologically less
complex non – tyre products like water proofing of fabrics. Thereafter a few
concerns grew in quick succession in the Bengal presidency and elsewhere.
But it was only in the second half of the 1930’s that commercial production
of tyres commenced in the country.

Dunlop Rubber Company was the first to start commercial

production of tyres in the country; their plant was set up at Calcutta in 1936.
Dunlop was soon followed by a US based MNC by name Firestone Tyre and
Rubber Co. , with a plant at Bombay in 1939. In addition to these , two other
manufacturers , who were also subsidiaries of MNC s, viz., Good Year and
India Tyre and Rubber Co.( hereafter ITR ) also entered the fray. Of these ,
ITR was a subsidiary of Dunlop’s parent firm and it became a wholly
owned subsidiary of Dunlop India only in 1979. Both Good Year and ITR
were getting their tyres manufactured at Dunlop’s plant. In fact this mutual
interdependence between the firms in an explicit manner was common
business reaction to the economic vicissitudes of the depression years and
could be found elsewhere. For instance , Good Year had arrangements with
Dunlop in respect of several markets according to which one of them

44
manufactured tyres and tubes for the other where it had a prominent
position.

The second phase : ( 1960- 1974 )

The characteristic feature of this phase is the licensing of new units,

especially the Indian companies with foreign technical collaboration and the
consequent interaction between the established MNC s and the new Indian
companies. Though the entry of these new firms would have made the
industry more competitive ( domestically speaking) , the collusive
arrangements between the firms for fixing the prices and sharing the output
continued to play an important role , but this time with an important
difference .The commencement of this phase approximately corresponds to the
beginning of the Third five year plan . The target for the plan period ( i.e., the
likely capacity that would be created by the terminal year of the plan [ viz .,
1965 – 66] ) was fixed at 3.7 million tyres. Subsequently , five new units
were licensed. Of this, Good Year ( which was already operating in the
country as a trading company using Dunlop’s manufacturing facility ) and
Ceat were subsidiaries of MNC s and remaining three ( viz., Madras Rubber
Factory , Premier and Inchek ) were promoted by Indian enterprenuers in
technical collaboration with foreign companies. Among them , Madras
Rubber had a minority equity participation by its foreign collaborator.

The two existing companies and Good Year could implement their
licences much before the new companies could, in view of the former’s
command over financial and technical resources. As a result of these
substantial expansions and the new units going into commercial production ,
there was a temporary glut in the tyre market during the period 1963 through
1967 . The consumer preferences was for the established brand names and as
a result the new units found is extremely difficult to establish.

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The modern phase : ( 1975 – 1988 )

The distinguishing feature of this phase is the large scale entry of units
belonging to Indian Business Houses and the nature of vertical and horizontal
acquisitions . Here happens the exit of MNC s mainly due to external
conditions, ( viz., adverse performance of their respective parent companies
as a result of severe recessionary conditions in the western tyre industry )
which saw the exit of the companies from Indian scene. The industry
underwent a succession of changes which influenced the pattern of intra-
industry competition as well as affecting the market power of certain firms.

There are essentially seven new entrants into tyre industry during the
period .Of these , four large tyre manufacturers ( viz ., Modi, Apollo, J.K and
Vikrant ) and three were specialized manufacturers of smaller – sized tyres
like Scooter / Motor cycle (viz., Falcon , Srichakra and KTC ). Most of these
units belong to various Indian Business Houses (or MRTP ) like Modi,
Raunaq Singh , J.K and T.V.S . This was also the when there was direct
participation by the state in tyre production (e.g ., Vikrant) . Modi was the first
to commence commercial production by 1974 .Within a period of two years
or so , i.e ., by 1977 , the company was able to achieve a significant share
of the truck tyre market ( which is by far the most important segment ) and
emerge as the third largest manufacturer of truck tyres.

Table 2.1
Composition pattern of major rawmaterials by Indian tyre industry
2011-12
Natural Rubber 44%
Nylon Tyre Cord Fabric 19%
Carbon Black 12%
Rubber Chemicals 5%
Butyl Rubber 4%
PBR 5%
SBR 5%
Others 6%
Source: Automotive tyre manufacturer’s association

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 The following figure shows that composition pattern of major raw
materials by Indian tyre industry 2011-12, natural rubber contribute 44% , nylon
tyre cord fabric of 19%, carbon black of 12% .
Figure 2.1
Composition pattern of major rawmaterials by Indian tyre industry
2011-12

Raw material composition of Indian

tyre industry 2011-12
Others
SBR 6%
PBR 5%
Rubber
5%
Chemicals Butyl
5% Rubber Natural
4% Rubber
44%
Carbon Black
12%
Nylon Tyre
Cord Fabric
19%

2.4 NATURAL RUBBER -ENHANCED PERFORMANCE

The growth in tyre production has led to the changing ratio of NR-SR
consumption in India over the last one decade. India’s NR-SR ratio which stood
at78:22 in 2001-02 shifted to 70:30 in 2010-11 while the global NR-SR ratio
shifted from 42:58 to 44:56 during the same period. This shows that there is a
gradual and consistent shift towards SR – a trend which is likely to continue in the
future as well. To improve and enhance the quality of tyres, researches have come
out with several innovative designs ideas. Finite element analysis is deployed to
design tyres that deliver optimum performance, including durability, tread wear,
noise, vibration, traction and rolling resistance.

Tyre problems stem from the use of composite materials that show
nonlinear and load dependent behaviour. It involves complex geometry, and
contact conditions which demand innovative approaches for dealing with static,
transient and steady rolling, it involves finding solution to multi-field, multi-

47
scaled problems. More than ever, up to date computational approaches are needed
to address these issues realistically and efficiently. One of the key tyre
performance indicators is the tread wear which in turn affects the durability of the
tyre. The noise vibration road grip in different pavement conditions and tyre
handling have become important issues that determine tyre properties. All these
are certainly influenced by the tread changes in tread profile. The wear rate
depends not only on the material parameters but has definite influence on the
forces resulting out of the footprint. The frictional energy distribution in tyre foot
print is being correlated to tread wear.

The following table shows that in the year 2012-13 , production of natural
rubber , constitute 9,12,200 .Natural rubber consumption of tyre sector is 65 %
in the year 2012-13. In the year 2004-05, consumption of tyre sector is 54 % ,
and it increases upto 65 % in the following years.

Table 2.2
Natural rubber production and consumption share by Indian Tyre
sector
Tyre Sector
Year Production
Consumption Percentage
2004-05 749660 406220 54%
2005-06 802625 442921 55%
2006-07 852895 462081 56%
2007-08 825345 495577 58%
2008-09 864500 508121 58%
2009-10 831400 576210 62%
2010-11 861950 597623 63%
2011-12 903700 631410 65%
2012-13 912200 631800 65%
Source : Automotive tyre manufacturer’s association

Finite element analysis is being used for prediction of the shape of

footprint (FP) and the pressure distribution at different levels of the tyre deflection
through incorporation of visco elastic model at low and high strain and computing

48
the FP pressure distribution in tyres Tyre noise, likewise, has its influencing
element emerging out of the shape and sizes of the tread elements and the grooves
that separate since each of the tread element passes via the FP. An ideal geometry
of tread pattern given sound in a wide frequency spectrum thereby giving rise to
an even distribution of sound. The finite element analysis as well as the boundary
element methods have been used to predict tyre noise over design changes since
they can treat the complexities of shapes.

Indian tyre industry at an inflection point. The radialisation drive is

gathering further momentum. The next 20 years will definitely witness a sea
change in the industry scenario. A few leading firms are looking beyond Indian
shores as a few majors are strengthening presence in India. These are indeed
exciting times.

2.5 RISE IN AUTOMOBILE CAPACITY BOOSTS TYRE INDUSTRY

While global automobile majors are eying to invest in India, the Indian
automobile, components and tyre majors are making international forays by
acquiring foreign companies and setting up porduction/assembly lines abroad.
India’s rising share in global automobile production and global invsetments in
tyre industry projects are pointers to the shape of things to come in the medium
and long term. While global automobile majors are making a pit stop for India,
the Indian automobile, components and tyre players are reaching out to the
world.According to global consultants Booz & Co., India is expected to account
for nearly 50% of the increase in global automobile capacity between 2007 and
2012. Improvement in road/infrastructure and increase in rural spending are
positive factors for the tyre industry. However, rise in interest rates, high inflation
and increase in vehicle, fuel and tyres prices are dampeners.

49
 Table 2.3
India’s YoY Growth - GDP, Tyre , Vehicle Production

Vehicle
Tyre industry
GDP Growth industry
growth
growth
2005-06 9.5 9.9 15
2006-07 9.7 11.4 14
2007-08 9.2 10.3 -2
2008-09 6.7 1.2 3
2009-10 7.4 18.3 26
2010-11 8.5 29 31

Source : ATMA (Automotive tyre manufacturer’s association 2011)

The following figure shows that , The dip in growth of GDP to 6.7% in 2008-
09 has been restored in 2009- 10 with a GDP growth of 7.4% and the prospects
of higher GDP growth in 2010-11 of 8.5 to 8.75 % and a still higher GDP growth
is expected in 2011-12.
Figure 2.2
India’s YoY Growth - GDP, Tyre , Vehicle Production

35

31
30
29

26
25

20
18.3 GDP Growth
15 15 Tyre industry growth
14
Vehicle industry growth
11.4
10 9.9 9.7 10.3
9.5 9.2 8.5
6.7 7.4
5
3
1.2
0
2005-06 2006-07 2007-08
-2 2008-09 2009-10 2010-11

-5

50
2.6 GLOBAL FORAYS

Tata Motors’ acquisition of Jaguar and Land Rover (JLR) and

establishment of a 300,000 capacity motor cycle plant in Indonesia by TVS
Motors at an investment of $ l00 million over three years represent two major
forays by Indian companies into the global automobile sector.Bajaj Auto, India’s
second largest two-wheeler manufacturer plans to set up a 2W/2W plant in
Indonesia by end 2013. The world’s largest two-wheeler producer, Hero
Honda(rechristened Hero Corp after split between Honda of Japan and Hero
Group of India), is set to replicate its domestic success story on a global
platform. It aims to introduce new bikes for new export markets.According to
Tata Motors, SAARC, ASEAN and Latin American regions are important markets
for the Nano with strong possibility for setting up assembly lines. Taiwan based
TECO Group is keen to introduce Nano in Taiwan. Malaysian Government is in
talks with the Tata’s to introduce Nano in Malaysia.

Auto component sector

In the auto component sector, Amtek Auto Ltg ($1.3bn) has bought an
aluminium foundry in the ;UK ($40mm) and Technical Alliance with Autech
Autech Corop of South Korea for Speciality Vehicles. Bharat Forge has entered
into JV with David Brown Systems, global leaders in gearbox and transmissions.
Motherson Sumi Systems Ltd@ 2.7bn turnover) has a presence in 23 countries
with over90 manufacturing facilities.The Ruia Group (which acquired Dunlop in
India in 2005) acquired two companies overseas in 2010 – Turkey’s Standard
Profil and Germany’s Meteor with a combined turnover of euro 400mn.

Growth in tyre output

The steady rise in automobile capacity has aided the growth of the tyre
industry in India. Growth in tyre production (2008-2010)in India outstripped the
global growth. The share of passenger car tyre production in India (as percentage
of total tyre production) has increased from 48%(2008) to 55%(2010). The

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current global share of car type production is 72%.Share of medium and heavy
vehicle tyre production declined from 37% (2008) to 33%(2010). Global share of
M&HCV tyre production is on 11%.The Indian tyre majors too are making
overseas forays to expand their production capacity. Apollo Tyres has acquired
two tyre plants in South Africa and one each in Zimbabwe and the Netherlands.
Nearly one third of its revenues come from overseas operations. Besides, JK Tyre
has acquired Tornel in Mexico and Ceat Tyres (of India) has acquired global
rights of brand Ceat from Italian tyre major Pirelli for Euro 9 million.

2.7 HIGH NR COST DRAGS DOWN INDIAN TYRE FIRMS STOCK

PRICES

Rising input costs, mainly that of natural rubber, coupled with slackening
demand from the automobile sector, have hit the margins of Indian tyre
companies and that is clearly reflected on their dismal performance on the
bourses. A study, which ahs been undertaken to evaluate the performance of the
tyre companies stocks between September1, 2010, and August 30, 2011. Indicates
that shares of these companies have plunged 15% -75% compared with a 9% fall
of the Bombay Stock Exchange (BSE) index, Sensex, (value weighted index
comprising 30 stocks)Stocks of major tyre companies- Apollo Tyres Ltd and
MRF Ltd- have fallen by 19% and 13% respectively, while those of JK Tyre and
Industries Ltd and CEAT Ltd plunged 49% and 44% respectively during the
period. The Auto index of automobile companies, including Tata Motors, Maruti
Suzuki and Mahindra & Mahindra has fallen by around 5% during the period.

Sharp Decline in Profits

According to the latest research report from credit rating agency ICRA,
even as the industry benefitted from the strong revenue growth during 2010-11,
higher input costs, especially that of natural rubber, led to a sharp 19% decline in
operating profits and 37% decline in net profits. Industry wide, operating margins
declined to 9.2% in fiscal 2010-11 as against 14.4% in fiscal 2009-10.Besides
grappling with high input costs and slackening automobile demand, domestic

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players are expected to face additional pressure with the lift6ing of anti-dumping
duty (ADD), effective from August 2011, on truck and bus radials (TBRs)
imported from China and Thailand. While this move is expected to be contested
by the industry players, the lifting of ADD makes the imported TBRs cheaper by
around 15-20% limiting domestic demand and pricing power.The stocks of the
tyre companies are on the decline as their profits at the operating level have been
narrowing thanks to rising input cost, mainly natural rubber, and that has caused a
400-500 bps drop in margins of the tyre companies,” Yaresh Kothari, an analyst,
Mumbai based Angel Broking Ltd, told Rubber Asia. Natural rubber contributes
more than 40% of the cost of a tyre

Impact of High NR Price

According to the Rubber Board of India, average natural rubber price

(RSS4) in September 2010 at the Kottayam market was Rs. 16,645 per 100kg.
However, in April 2011 rubber prices touched Rs. 24,300 per 100 kg, an increase
of 46%. In the financial year 2011, rubber prices soared by 37%.Initially, to
maintain tyre numbers on the balance sheet, the tyre companies had increased
prices of their products in tune with the rising input costs. However, the tyre
producers could not raise their product prices commensurate with the rising prices
of natural rubber. Hence they had to compromise on their profit margins as they
could not pass on the entire price hike to their customers. “Since last two
quarters, the profit margins of the tyre companies have come down between 1%
and 2%,”.“With the threat of imports limiting the ability of tyre makers to fully
pass on the increase in costs, we expect operating margins of tyre companies to
decline by 50-80 bps in 2011-12.

2.8 FALL IN AUTOMOBILE SALES

Overall sentiment for tyre companies remained gloomy over the past few
months. Auto companies are struggling to increase sales figures as rising fuel
prices and interest rates have dampened buyers, sentiments. According to the
latest figures released by Society of Indian Automobile Manufacturers (SIAM),

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domestic car sales in August this year fell by 12.5% to 144,000 units compared
with 160,000 units in the same month of last year due to slow demand as the
double-digit inflation and high interest rates affected consumers buying potential.
SIAM does not seem much optimistic about future sales as it has revised its sales
outlook for this fiscal to 10% -12% from 16-18% which was predicted earlier.
Analysts expect another downward revision by SIAM as there is no pick-up
demand.

Most analysts. However, say the worst is over for the tyre companies at
least in the near term as natural rubber prices have shown some softening. During
the first four months of FY11-12, prices of natural rubber declined by 11%.
According to market pundits, prices are expected to drop in the future. Domestic
natural rubber prices are expected to decline from current levels of Rs. 215/kg to
levels of 190/kg by the fourth quarter of 2011-12 in line with a decline in
international prices. Higher supplies from major rubber producing countries like
Thailand and Indonesia and a moderation in auto demand will lead to a decline in
international prices. The decline in NR prices will lead to an improvement in the
operating margins of tyre companies in the fourth quarter of 2011-12. However,
for the whole year (2011-12) average NR prices will be higher by 11-13% which
will put pressure on the margins of tyre companies.

2.9 QUIET EFFICIENCY

One of the top priorities before researchers at the Harishankar Singhania

Elastomer & tyre research Institute (HASETRI) is to develop efficient and safer
tyres as they believe that tyres are important factors in passenger vehicle energy
use.Imporvements in tyre energy efficiency could reduce fuel consumption by 3-
5% across existing passenger vehicle fleets. It would result in a global reduction
in greenhouse gas emissions by more than 100 million tonnes annually. This can
be achieved by development of more efficient tyres without sacrificing safety and
other performance parameters’.One of the ways to develop efficiency of the tyre
is by reducing rolling resistance.

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 There are different approaches to reduce rolling resistance: Material
approach, Design Approach, Tyre Maintenance Approach. Around 40% rolling
resistance contribution of the tyre is from the tread compound. So developing low
rolling resistance compound is one of the research areas from material aspect’.
Silica mixing technology itself is a breakthrough research for producing low
rolling resistance tyre treasd compound. Development of polymers with varying
microstructure, low volatile silane coupling agents helped tyre industries to
develop low RR tyre tread compounds.Functionalised polymers interact strongly
with silica, which reduces the amount of free dangling chain ends, cause low
hysteresis loss and improved dispersion of silica. This results in low rolling
resistance. Innovative silance also improves dispersion of silica, and help to
reduce rolling resistance.

2.10 LABELLING REQUIREMENTS

From the design point of view, research on adaptive patterns can help to
reduce the rolling resistance of tyre.. “High radial stiffness, flexible
circumferential stiffness and high lateral stiffness are development areas related to
design for achieving improved rolling resistance. There are other design related
research to reduce rolling resistance like contour layout, void distribution of tread
design, belt movement and pattern deformation etc.Tyre pressure monitoring
system is the research activity in the area of tyre maintenance outcome to improve
the tyre efficiency by reducing rolling resistance. He thinks research on RR would
pick up pace amid growing regulations on sustainable mobility. The EC based
labelling system that will be in force in 2012 will see a surge in technologies that
would reduce RR, improve wet skid resistance and slash tyre noise. “The EC
based labelling systems of tyres according to their wet grip, fuel efficiency and
noise performance have made a great impact on the tyre manufacturing companies
with respect to technology.

The labelling scheme will grant consumers access to independently

verified information on tyre performance for the firsit time. The most fuel-

55
efficient (low rolling resistant) tyres currently on the market can reduce fuel
consumption and therefore CO2 emissions of 10% compared to todays worst
performers. Quieter tyres can cut road traffic noise by half. Tyre/road contact is
the dominant source of road traffic noise, so quieter tyres are especially important
to the vast majority of Europeans who live urban areas and near highways. Wet
grip represents the ability to safely brake on a wet road, and it is a safety
parameter of great concern. “Wet grip as it is measured in ECE R117 is not the
only most critical safety parameter: it is just the one which is the easiest to
measure.”With the introduction of tyre labelling system, it has become mandatory
to improve the fuel efficiency, improve the wet grip and reduce the noise level of
the tyre. To address these parameters tyres are to be properly designed with
improved construction technology and superior compounding technology.

2.11 POLYMERS RESEARCH

Besides tyre design factors, there have been major breakthroughs in

polymer research field and coupling agents that will have a great impact on rolling
resistance. “In the polymer field several developmental activities are going on to
meet the requirement of rolling resistance. One such development is the solution
SBR (SSBR) SSBR with functionalisation that can help to reduce the heat
generation in the compound resulting in improved product life. It also offers
opportunities to fine tune different properties like damping, dynamic stiffness on
the basis of the microstructure. Some more breakthrough researches in the front of
polymers are modification of polymer molecular weight, modification of polymer
microstructure etc to achieve improved rolling resistance characteristics of the
compound. Research is also going on to develop coupling of elastomer
intermediates with different coupling agents to reduce the hysteresis energy loss.
Functionalisation of polymers is also being developed to improve better polymer
filler interaction with silica fillers.

Changing the viscoelastic behaviour of polymer by modifying through

chain branching, introduction of polarity in the polymer chain, introduction of

56
reactive functional groups in the polymer chain, are some of the recent activities
in the field of polymer development to achieve lower rolling resistance in
tyre.Silica based tread compound helps to reduce the rolling resistance of the tyre.
However, silica has difficulty in dispersion with general purpose rubber
compounds. For better dispersion of silica, it needs coupling agents. Year old
silica coupling agent is Si-69 However, with the improvement in mixing
technology as well as invention of new generation polymers, different types of
innovative silanes are also being developed. “With such new silane, sillica
dispersion has improved drastically and helps in reducing the rolling resistance.

2.12 TYRE FILLERS

The currents technology trends in the development and application of tyre

filer compounds point to development possibility of tyres with lower rolling
resistance, better grip and generally more environment-friendly.Fillers are
generally used in tyre compounds to improve the reinforcement characteristics.
“To achieve reinforcement, fillers needs better dispersion. Better dispersion of
filler needs better interaction between polymer and filler. Reinforcing filler plays
an important role to improve rolling resistance, wet grip and wear.New carbon
black with improved surface roughness, carbon black-silica dual phase filler and
highly dispersible silica filler are some of the new development of fillers to
lowering rolling resistance and improvement of grip properties of the
compound.Ultra-high structure soft black for tread base application helps to
maintain the dynamic stiffness and simultaneously reduce the rolling resistance of
the tyre.Another important area in carbon black research to reduce the rolling
resistance is wide aggregate size distribution technology. This helps to widen the
aggregate size at same surface area of carbon black. This helps decrease the
filler- filler network strength and maintains same average strength of polymer-
filler interactions.

“Chemical modifications of carbon black are also an important research

area to reduce the hysteresis of the rubber compound without affecting the

57
reinforcement properties.With the advent of silica technology green tyre concept
was introduced with highly dispersible silica with a silane coupling agent. This is
one of the environment-friendly technologies. This technology can help to
improve the tyre fuel-efficiency.

2.13 TWIN CHALLENGES

Commenting on the role of fillers that could influence rolling resistance

and durability of the tyres that can be made more environment-friendly as well.
Dr. Gupta came out with many interesting points. Fillers are generally used to
improve tread wear/. Improving rolling resistance as well as grip properties.
“Payne Effect generally governs the ultimate performance properties of the
compound. Filler-filler interaction is the main influencing parameter for the
Payne Effect and affecting the rolling resistance. Reduction of rolling resistance
means reduction in Payne Effect. Aggregate size distribution of filler and volume
fraction of the filler has an important role in reducing rolling resistance as well as
wear characteristics. High surface roughness of the filler improves the polymer-
filler interaction and reduces the hysteresis loss. This also helps to improve the
rolling resistance and tread wear. “High surface area highly dispersible silica
improves the dynamic stiffness, results in improvement in wear performance of
the tyre. Hard blacks with tailor-made particle morphology can balance tyre
rolling resistance and wear. Ultra high structure soft black has a potential to
adjust stiffness and hysteresis of tire body compounds.

Low surface Area Highly Dispersible silica can be used to optimise wet
grip, rolling resistance. DR Gupta asserted. High Surface Area Highly
Dispersible silica can be used in High performance and Ultra High Performance
tyres to balance tyre wear, rolling resistance and dynamic properties. Use of silica
filler also helps development of environment friendly tyres. “However, there is a
trade-off between durability and safety. If the consumer selects tyres with high
wear resistance, he may use such a tyre for an extended period of time, may be 10
years or longer” But during such a time, the chemical ageing of tyres may

58
increase the tyre stiffness by 15-20 units of Shore A. This will generally mean a
significant impairment in the tyres safety performance. A durability test will not
able to show this effect . So one has to be ready for the trade-off.

2.14 A LOOK AT MARKET BEHAVIOUR

For anyone connected with the rubber sector, is an impeccable source of

industry trend and analysis, relied on for forecast and price trends, particularly at
this time when prices are soaring to dizzying heights. “Many market participants
had not expected such a quick recovery in demand.After the perceived worst crisis
in many decades, accompanied by problems on the supply side, the market is now
faced with this high level of NR prices.Has been involved in analysing and
forecasting supply and demand of NR and synthetic rubber (SR) for the past
many decades. This was done both at the Economic and Social Institute of Free
University, Amsterdam, and during his tenure as Secretary-General of the
International Rubber Study Group (IRISG), 2005-2009.During these years, he had
concentrated on setting up and improving models for forecasting demand, supply
and prices of NR and SR. Today busy using his vast international exposure and 35
years of experience in modelling and forecasting to provide services such as in-
depth analysis and outlook for rubber supply, demand and prices at country,
regional or world levels.outlook for the rubber economy at in-company seminars
besides offering in-house training in analysing and modelling the rubber
economy. Dr. Smit’s consultancy work, is designed to help stakeholders in the
market to better understand the current situation, as draws up scenarious for the
future and shows the consequences for NR and SR demand, supply and prices.

2.15 TYRE INDUSTRY WOES

Commenting on the current woes faced by the tyre industry because of

what it calls unsustainable NR Prices. captive rubber plantations would not be an
effective answer to supply problems as some would suggest.Large rubber
plantations provide only a small part of NR supply following the historic trend
towards a dominant share of smallholder production”.Captive rubber plantations

59
can only provide a small part of rubber supply to the tyre producer. Having your
own plantation may help on the cost side: it may also help ensuring that the
quality you want is received at the time you want it.When asked whether weather
is the villain for the current supply demand mismatch, he commented that it did
play a role: be it short-term disturbances or more long-term climate change related
developments.

2.16 MARKET TRENDS

“However, consumption of rubber increased strongly during the recent

period. In fact since 2005 total rubber consumption grew faster than natural
rubber production capacity, even leading to a tight market during this ‘crisis-
period’ 2008-2009.This low increase in NR production capacity is the result of
low levels of planting after the Asian crisis in 1997 stretching well into the first
decade of this century. “Only then were farmers and other decision makers
convinced again of the good opportunities offered by NR.There are three main
groups of factors that determine the outlook for prices. They are first, economic
growth which impacts vehicle, tyre and rubber consumption scenario, including
the effect of availability of oil and climate change on vehicle usage and sales.

Second, the impact on NR production potential scenario as a result of

planting policy implementation, productivity improvement and labour availability
including the influence of climate change on NR production.Third the effect of oil
price, which will affect Butadiene-SR scenario. One has to see the availability
and how this will affect prices.“For each of these groups of factors, scenarios for
future development may be drawn up. This can best be done in interaction with
the stakeholder, who should feel comfortable with the sets of assumptions”,.On
the current trends, one has to dwell on a few aspects: On the economic growth
side, the future looks a lot better than in early 2009. However, there are still many
uncertainties which may lead to a slower recovery in parts of the world, e.g.
Europe, and lower growth in high growth countries. This may spoil the good
outlook to some extent.Another aspect that he notes is the massive new planting

60
by rubber farmers during 2005-2008. This will have a significant effect on the
supply situation starting in 2011-2012.A third aspect that would influence rubber
prices is the likely increase in oil prices that could pose potential problems
surrounding the availability of Butadiene, “It is then most likely that SR price will
increase further.

Prices of natural rubber will continue to remain quite high well into 2011:
the effect of new planting during 2005-2008 will presumably result on somewhat
lower prices starting from 2012 onwards, but it is most unlikely that prices will
collapse”.However, this conclusion is very sensitive to the assumptions made and
the resulting scenarios. Individual stakeholders may wish to select different
scenarios for each of the groups of factors, with will lead to different price
forecasts. One may also wish to see the sensitivity of price forecasts for each
scenario. “It is interest in” when asked whether rubber producers and consuming
industries had failed to anticipate and take appropriate measures to prevent the
present price situation. “What is required to anticipate and take appropriate
measures’ is the availability of appropriate forecasts.The industry should be ready
to accept such forecasts as targets for policy formulation and develop appropriate
policies and then implement the required policies.

2.17 FORECASTING EXERCISE

About the availability of appropriate forecasts, that after he took over as

IRSG Secretary General in January 2005 the World Rubber Sumit (or
International Rubber Forum, as it was called at that time) was held in May 2005.
At that Conference it was the first time that IRSG presented long term forecasts,.
Before 2005 IRSTG did not have the forecasting methodology to do so.At that
time the total rubber consumption was projected to reach 23.5 million tonnes in
2010. The current IRESG forecast for 2010 as published in its April-June
2010 Rubber Industry Report is 23.7 million to9nnes. The forecast for total
rubber consumption made in 2005, proved to be quite accurate.In the same
presentation, an old set of forecasts presented in 1996 before the Asian crisis by

61
Burger and Smit was reviewed, Forecasts given by them for 2010 were 22.9m,
declining from 23.2m because of a projected recession in 2010.

These 1996 forecasts had shown rubber consumption increase to 27.6m in

2015 recovering from the recession,. “One may conclude that appropriate world
rubber consumption forecasts are and were available.The forecast for 2010 for the
price of oil as it was used by the IRSG in the 2005 presentation in Colombo was
only US$54 per barrel. This was acceptable at that time, but turned out to be too
low: it should have been some 30% higher.At that conference it was not yet
discussed and decided that IRSG Should not give price forecasts. The forecasts
presented in 2005 for the price of SBR in 2010 were US$ 1.85 per kg which
turned out to be too low because for the low oil price assumption. Adding the
same 3-% as for oil would give an SBR price for 2010 of US$ 2.49.Actually the
comparable price of SBR was US$2.51 in 2008 and US$1.94 in2009. The 2005
projections for the NR price in 2010was US$ 2.23 per kg. Adding the same 30%
to this price forecasts resulted in a Price forecast for 2010 of US$ 2.90.

2.18 DIFFICULT TASK

“Forecasting NR production was quite difficult, especially because of data

availability”. The IRSG has over the last couple of years put a lot of time and
energy in providing the industry with better statistics and forecasts.This was partly
done through enhanced cooperation with the Association of Natural Rubber
Producing Countries. (ANRPC) and with the NR producing countries.In 2005, the
estimates and forecasts of NR production were too low at 9.2m tonnes by 2010,as
against the current IRSG forecasts of 10.2 mt. These higher recent projections are
the result of better data on the NR production side and higher NR prices,
stimulating farmers to produce more.2009 on the extent of additional planting
during the high price period 2005-2008 and the consequence for the market. In
very broad terms, the conclusion was that all additional output could easily be
absorbed by a strongly recovering market.The initiative by the ANRPC to have its
members implement a common methodology to come up with sound data and

62
realistic forecasts is laudable and crucial to develop an appropriate set of
forecasts, which are acceptable to policy makers and other stakeholders. “Only
then can appropriate policies be developed to reach an optimal position for NR on
the market for the future.

Regarding futures trading as a method to avert market uncertainty, it could

be among other measures that might be very useful to reduce short terms price
risk. “It cannot cure more structural shortages or Surpluses in the market.On
whether there is a likelihood of a significant drop in NR use following new tyre-
making technologies, including new compounding, as part of efforts to reduce
costs, input of raw materials, including NR, will continue to be carefully looked
at. “As such NR (and SR) may be affected”.IRSG and their stakeholders in the
industry will undoubtedly monitor emerging trends in alternatives and incorporate
the results in their, forecasts, by looking at tyre weights in particular.So far do not
yet foresee a significant drop in NR use: potentially only a somewhat lower
growth. When asked about the trends that he saw in SR industry that would leave
a considerable impact on the NR market in the coming decade. that he did not see
developments on the SR side which would have a considerable impact on the NR
market.The renowned rubber economy analyst also shared his views on the impact
of alternatives to Asian NR from Russian dandelion and guayule.

Guayule is produced on a small scale and I do not yet foresee large-scale

production, although very high NR prices will definitely help.Regarding Russian
dandelion, the other alternative that is being considered as a substitute for NR.this
is at the research stage. It will take quite some time for this to be proven to be
commercially viable. “It that would be the case, years will be required to achieve
large scale production”., however the most crucial aspect in this will be the kind
of signals coming from NR Hevea such as whether there will be enough planting,
how will productivity develop, will the number of workers be sufficient, what will
be the effect of climate change and will the disease side be under control. . “It is
of utmost importance that these aspects are studied and reported upon in a realistic
way, without considering what would have been nice or politically useful.Only

63
then will this be credible prompting development of appropriate policies to be
implemented by all stakeholders in the rubber industry.

2.19 GROWING DEMAND FOR SYNTHETIC RUBBER

Despite several constraints, including land availability, global warming for

NR and butadiene availability for SR, global consumption of rubber continues to
rise. While presenting his paper of the Indian Synthetic rubber industry at the
International Rubber Conference organized by Rubber Board in November while
the global demand rose by 3.7% for NR and 2.8% for SR, it was 2.8% for NR and
11.1% for SR in India.The global natural rubber consumption in 2011-12-around
25.5 MTA remained mostly dependent on natural rubber. In India it was 68% of
the total 1.4MTA. Natural rubber production is estimated to increase to about
12.5 million metric tonnes in 2013 but would decelerate in the coming years,
which will further open possibilities for SR.According to Rubber Board of India,
synthetic rubber consumption in the country rose by 16% to 36,345 tonnes in
November. 2011. There was a marginal rise of production, which reached 8,636
tonnes during the same month. The automobile and tyre industry remain the
biggest consumers of SR. Official figures show that the auto tyre industry
consumed 2,04,283 tonnes of synthetic rubber in April-November 2011, as
against 2,94,931 tonnes in the corresponding period of the previous year.

With a number of big players entering the field, the production capacity for
synthetic rubber has remarkably increased, facilitating faster growth, Rathod
pointed out. The Reliance –SIBUR joint venture for butyl rubber production
(Reliance SIBUR Elastomers) has been a major landmark in India’s synthetic
rubber industry, which would make butyl locally available.Reliance had already
enjoyed excellent relationship with the Indian tyre industry by virtue of being a
reliable supplier of quality poly butadiene rubber. The tie-up with the Russian
major SIBUR for a butyl rubber plant in Jamnagar in the western Indian state of
Gujarat is seen as a catalyst

64
 for substantial availability of SR, The plant, which is expected to be fully
commissioned by mid-2014is projected to have capacity of 100,000 tonnes per
annum.SIBUR operates across the entire petrochemical process chain from gas
processing, production of monomers. Plastics. It is a vertically integrated
company with its gas processing facilities providing feedstock for its
petrochemical production.

Reliance operates the world’s largest refining complex and associated

chemical plants at Jamnagar., The partnership with SIBUR, Eastern Europe’s
biggest petrochemicals producer, was first announced in May 2010 and the project
holds a lot of opportunities for continual growth.The Indian conglomerate has
been among the early adopters in Asia of butyl rubber based inner tubers in spite
of steep import duties, while pointing out the fact that there had been perceptible
reluctance in India in switching over to synthetic rubber.

2.20 TYRE SECTOR

The tyre sector is the largest end-use sector for synthetic rubber in India.
Styrene Butadiene Rubber (SBR) which accounts for 40% of the total synthetic
rubber demand is consumed mostly in the tyre sector. As the tyre production ion
India is increasing at a fast pace, the synthetic rubber consumption will also
increase. To fulfill increasing demand for synthetic rubber many new plants have
been planned in India, which will reduce India’s import dependency.In terms of
application, natural rubber and synthetic rubber are complimentary to each other.
Both have own unique properties. While natural rubber is a must for treads in
commercial tyres, Halo Butyl is a must for the inner lining of tubeless tyres. Also,
a PBR-NR blend is a must for tyre sidewalls. This complimentary nature has
bracketed both rubbers together for the overall growth of tyre industry.

The outlook remains very positive. One of the main driving forces for this
optimism is the continuing growth of India’s automobile sector which is the
biggest source of demand for rubber both synthetic and natural. Figures provided
by the Society of Indian Automobile Manufactures (SIAM) show that the auto

65
sector recorded a production growth of 13.83% year-too-year as per the
cumulative production data for April-March 2012.

Eyeing this positive trend, major companies like reliance and Indian Oil
Corporation have announced expansion plans. Overall Indian capacity of
synthetic rubber could be raising by almost 400 KTA.

2.21 THEORIES RELATED TO THE STUDY :

1. Baumol’s sales maximization

2. Cyert & March ( firm behavioral theory)
3. A.P.Lerner ( measurement approach)
4. Cournot –equilibrium model
5. Farrell – Productive efficiency theory
6. Williamson model of transaction cost
7. Efficiency criterion
8. Choice theory –and decision making –

Besides the above theories there are contemporary theories of management

which also exert much influenc on the present study. such contemporary theories
the management are the following

a. contingency theory
b. systems theory
c. Chaos Theory

Baumol’s findings of oligopoly firms in America reveal that they follow the
sales maximisation objective. According to Baumol, with the separation of
ownership and control in modem corporations, managers seek prestige and higher
salaries by trying to expand company sales even at the expense of profits.Being a
consultant to a number of firms, Baumol observes that when asked how their
business went last year, the business managers often responded, “our sales were
up to three million dollars.” Thus, according to Baumol, revenue or sales
maximisation rather than profit maximisation is consistent with the actual

66
behaviour of firms. Baumol cites evidence to suggest that short-run revenue
maximisation may be consistent with long-run profit maximisation. But sales
maximisation is regarded as the short-run and long-run goal of the management.
Sales maximisation is not only a means but an end in itself He gives a number of
arguments in support of his theory. The firm also needs minimum profits to
finance future sales. Further, they are essential for a firm for paying dividends on
share capital and for meeting other financial requirements. Thus minimum profits
serve as a constraint on the maximisation of a firm’s revenue. “Maximum revenue
will be obtained only”, according to Baumol, “at an output at which the elasticity
of demand is unity, i.e., at which marginal revenue is zero. This is the condition
which replaces the “marginal cost equals marginal revenue profit maximisation
rule.”
Cyert and March have put forth a systematic behavioural theory of the
firm. In a modem large multiproduct firm, ownership is separate from
management. Here the firm is not considered as a single entity with a single goal
of profit maximisation by a single decision-maker, called the entrepreneur.
Instead, Cyert and March regard the modem business firm as a group of
individuals who are engaged in the decision-making process relating to its internal
structure having multiple goals.They deal not only with the internal organisation
of the firm but also with the problem of uncertainty. They reject the assumption of
certainty in the neo-classical theory of the firm. They emphasise that the modem
busi-ness firm is so complex that individuals within it have limited information
and imperfect foresight with respect to both internal and external developments.
The following are the key elements of the model.
Professor A.P. Lerner has put forward a measure of monopoly power
which has gained great popularity and is most widely cited. Lerner takes perfect
competition as the basis of departure for measuring monopoly power.He regards
pure or perfect competition as the state of social optimum or maximum welfare
and any departure from it would indicate the presence of some monopoly power
leading to misallocation of resources or state of less than social optimum.As we
know, in perfect competition price is equal to marginal cost of the product in the

67
equilibrium position. And it is this equality of price with marginal cost under
perfect competition that ensures maximum social welfare or optimum allocation
of resources.Now, when competition is less than pure or perfect the demand curve
facing a firm will be sloping downward and marginal revenue curve will lie below
it. Consequently, when competition is less than pure (perfect), that is, when it is
imperfect, in a seller’s equilibrium position; marginal cost will be equal to
marginal revenue but price will stand higher than marginal cost or marginal
revenue.This divergence between price and marginal cost, according to Professor
Lerner, is the indicator of the existence of monopoly power. The greater this
divergence between price and marginal cost, the greater the degree of monopoly
power possessed by the seller.Based on this, Lerner has given the following
precise index of the degree of monopoly power:Degree of monopoly power = P –
MC/P.
'Cournot Competition' An economic model that describes an industry
structure in which competing firms that make the same homogeneous and
undifferentiated product choose a quantity to produce independently and
simultaneously. An essential assumption of this model is the "not conjecture" that
each firm aims to maximize profits, based on the expectation that its own output
decision will not have an effect on the decisions of its rivals. Price is a commonly
known decreasing function of total output. All firms know N, the total number of
firms in the market, and take the output of the others as given. Each firm has a
cost function c_i(q_i). Normally the cost functions are treated as common
knowledge. The cost functions may be the same or different among firms. The
market price is set at a level such that demand equals the total quantity produced
by all firms. Each firm takes the quantity set by its competitors as a given,
evaluates its residual demand, and then behaves as a monopoly.
Farrell indexes of productive efficiency to nonhomothetic production
technologies, and at the same time maintain the cost interpretation of the Farrell
measures. Since the generalized indexes rely heavily on recent developments in
the estimation of frontier cost and production functions, several frontier models
are reviewed. In addition to generalized indexes of technical, allocative, and

68
overall productive efficiency, a variety of single-factor efficiency measures are
discussed.
Williamson argues that asset specificity is the most important dimension.
This is in part because actors are assumed to be opportunistic, and a transaction
regarding a specific asset puts people in both sides in a vulnerable position. In the
case of one supplier, for example, a buyer can be forced to pay a higher price and
if there is only one seller, the opposite situation is in play. In Williamson's terms,
under high asset specificity, "buyer and seller are effectively operating in a
bilateral (or at least quasi-bilateral) exchange relation for a considerable period
thereafter." In general, Williamson claims that high specificity will drive
transaction costs up. Essentially, firms are attempting to design "efficient"
boundaries in a world where there is a firm-market dichotomy. Firms allow
hierarchy to invoke fiat to resolve differences to provide better access to
information. Similarly, increased uncertainty may drive the firm to internalize
resources and/or work upon which it is dependent.Williamson argues that his
model also applies to human assets. For example, if a company is investing in
firm-specific skills, it won't want to lose employees with those skills. It might
therefore choose to focus on internal labor markets.
Economic efficiency is essentially just a theoretical one; a limit that can be
approached but never reached. Instead, economists look at the amount of waste
(or loss) between pure efficiency and reality to see how efficiently an economy is
functioning.
Measuring economic efficiency is often subjective, relying on assumptions
about the social good created and how well that serves consumers. Basic market
forces like the level of prices, employment rates and interest rates can be analyzed
to determine the relative improvements made toward economic efficiency from
one point in time to another.
A broad term that implies an economic state in which every resource is
optimally allocated to serve each person in the best way while minimizing waste
and inefficiency. When an economy is economically efficient, any changes made
to assist one person would harm another. In terms of production, goods are

69
produced at their lowest possible cost, as are the variable inputs of production.
Some terms that encompass phases of economic efficiency include allocational
efficiency, production efficiency and Pareto efficiency.

Choice theory and decision-making

Research on choice theory and decision-making ,culture and context have

great influence in making purchase decisions and suggested that American,
European or Japanese companies that want to operate in India should have Indians
on the ground to help them penetrate the market. implications in emerging
countries such as China and India where there is a surge in the number of young
people with disposable income. As consumer markets emerge in countries such as
these, increased income and the introduction of new products and marketing
strategies create major changes in the choices.

One could predict how increasing disposable income might change

spending habits in emerging markets, younger generations may respond
differently to choice than older generation as the cultures in these countries
continue to be affected by globalisation. However, my recent research has shown
that urban Chinese are more similar to urban Indians than rural Chinese in terms
of how many choices they want and how important choices are to them.

2.22 CONTEMPORARY THEORIES OF MANAGEMENT

Contingency Theory

Basically, contingency theory asserts that when managers make a decision,

they must take into account all aspects of the current situation and act on those
aspects that are key to the situation at hand. Basically, it’s the approach that “it
depends.” For example, the continuing effort to identify the best leadership or
management style might now conclude that the best style depends on the
situation. If one is leading troops in the Persian Gulf, an autocratic style is
probably best (of course, many might argue here, too). If one is leading a hospital

70
or university, a more participative and facilitative leadership style is probably
best.

Systems Theory

Systems theory has had a significant effect on management science and

understanding organizations. First, let’s look at “what is a system?” A system is a
collection of part unified to accomplish an overall goal. If one part of the system
is removed, the nature of the system is changed as well. For example, a pile of
sand is not a system. If one removes a sand particle, you’ve still got a pile of sand.
However, a functioning car is a system. Remove the carburetor and you’ve no
longer got a working car. A system can be looked at as having inputs, processes,
outputs and outcomes. Systems share feedback among each of these four aspects
of the systems.

Let’s look at an organization. Inputs would include resources such as raw

materials, money, technologies and people. These inputs go through a process
where they’re planned, organized, motivated and controlled, ultimately to meet
the organization’s goals. Outputs would be products or services to a market.
Outcomes would be, e.g., enhanced quality of life or productivity for
customers/clients, productivity. Feedback would be information from human
resources carrying out the process, customers/clients using the products, etc.
Feedback also comes from the larger environment of the organization, e.g.,
influences from government, society, economics, and technologies. This overall
system framework applies to any system, including subsystems (departments,
programs, etc.) in the overall organization.

Systems theory may seem quite basic. Yet, decades of management

training and practices in the workplace have not followed this theory. Only
recently, with tremendous changes facing organizations and how they operate,
have educators and managers come to face this new way of looking at things. This

71
interpretation has brought about a significant change (or paradigm shift) in the
way management studies and approaches organizations.

The effect of systems theory in management is that writers, educators,

consultants, etc. are helping managers to look at the organization from a broader
perspective. Systems theory has brought a new perspective for managers to
interpret patterns and events in the workplace. They recognize the various parts of
the organization, and, in particular, the interrelations of the parts, e.g., the
coordination of central administration with its programs, engineering with
manufacturing, supervisors with workers, etc. This is a major development. In the
past, managers typically took one part and focused on that. Then they moved all
attention to another part. The problem was that an organization could, e.g., have a
wonderful central administration and wonderful set of teachers, but the
departments didn’t synchronize at all. See the category Systems Thinking

Chaos Theory

As chaotic and random as world events seem today, they seem as chaotic in
organizations, too. Yet for decades, managers have acted on the basis that
organizational events can always be controlled. A new theory (or some say
“science”), chaos theory, recognizes that events indeed are rarely controlled.
Many chaos theorists (as do systems theorists) refer to biological systems when
explaining their theory. They suggest that systems naturally go to more
complexity, and as they do so, these systems become more volatile (or susceptible
to cataclysmic events) and must expend more energy to maintain that complexity.
As they expend more energy, they seek more structure to maintain stability. This
trend continues until the system splits, combines with another complex system or
falls apart entirely. Sound familiar? This trend is what many see as the trend in
life, in organizations and the world in general.

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2.23 BEHAVIORAL MANAGEMENT THEORY: UNDERSTANDING
EMPLOYEE BEHAVIOR & MOTIVATION

Behavioral management theory was developed in response to the need to account

for employee behavior and motivation. The shift moved management from a
production-orientation (classical leadership theory) to a leadership style focused on the
workers' human need for work-related satisfaction and good working conditions.

A Shift in Theories

Long before theorists started writing about employee satisfaction and good
working conditions, management considered classical leadership, with its sole
interest in high production and efficiency, to be the most important to an
organization's success. Later, it was concern for worker satisfaction and good
working conditions that formed the foundation for behavioral management theory.

Behavioral management theory relies on the notion that managers will

better understand the human aspect to workers and treat employees as important
assets to achieve goals. Management taking a special interest in workers makes
them feel like part of a special group.

As time went on, thinking shifted, and management started looking at

employee satisfaction and working conditions as a way to increase productivity.
Theorists like Elton Mayo and others studied employee productivity under
different conditions to determine a connection.

Mayo's Hawthorne experiment provides a good example of this. In the

Hawthorne experiment, a group of telephone line workers were separated and
observed working in a private room. During their workday, the group members
were given special privileges, like freedom to leave their workstations, changes in
pay rates, and even company-sponsored lunch. What they discovered was the
control group produced more than the other employees. The rationale for this

73
increased production was that the group felt that management was interested in
their well-being.

This began the human relations movement for management. If all

management had to do was spend time, express interest in workers' personal well-
being, and reward them for a job well done, workers would feel motivation to
work harder. In fact, behavior towards work would be positive.

Behavior and Motivation

Let's see how behavioral management theory works in a modern day

telephone line company. Total Telephone Line Company workers perform the
monotonous job of weaving telephone lines together. Managers know the work is
boring and often results in poor productivity and absenteeism.

Percy oversees the workers as they weave away, making sure each set of
wires is perfect. Workers like Lucy and Marcy chit-chat during most of their shift,
getting very little done. Daphne daydreams about working as a fashion designer
and uses much of her workday sketching haute couture on lunch napkins.

Percy used to yell at the ladies and banish them to silence. Daphne even
had her pencils taken away from her on several occasions. But productivity did
not increase. In fact, it decreased. Percy knew she had to try something new. She
had a tough challenge. She is responsible for high productivity. After all, Total
Telephone Wire is profit motivated.

Percy researched ways to improve productivity and came across a book on

behavioral management theory. She found that a greater concern for employee
needs leads to higher satisfaction levels and better overall performance, which
leads to behavioral changes in their response to work.

Percy changed the way she managed the ladies. She asked questions about
their work environment. She even took suggestions about how they can perform

74
their job more efficiently. What Percy discovered is that the more she connected
with the ladies, the more motivated they were to perform and do a good job. This
changed their behavior towards Percy's drilling orders, and it increased their
productivity.

Behavior is defined as the way a person conducts themselves towards

others. When workers are treated as humans rather than machines, they respond to
their particular work situation in a positive way - by increasing individual
productivity.

Percy read the work of theorists who described the things that inspire
people to go to work. What she learned was astonishing. While salary is
important, it is not the only important consideration. Workers had more intrinsic
motives for working, like:

 Self fulfillment
 Autonomy and empowerment
 Social status
 Personal relations with co-workers

In terms of market structure, market reforms can be seen as a movement

from the public and private sector monopolies to a competitive market. In the
static framework of microeconomics, a shift to a competitive market structure can
be seen simply as a movement on a given cost curve (a given technology) towards
the lowest point on the average cost curve. If there were global economies of
scale, the market structure would be a natural monopoly or a natural oligopoly
depending on the size of the market. In such a case6 contestability of the market
(threat of new entry) forces a monopolist to price at average cost and operate with
full capacity utilization. Market reforms also reduce X-inefficiency of large firms
with market power induced by increased contestability of the market (Patibandla,
1998). In dynamic terms, the issue is impact of market reforms that drives firms to
undertake technological and organizational efforts, which cause downward shifts

75
in cost curves and increase in productivity. The market reforms initiated since the
mid-80s have led to the entry of quite a few multinational firms into several
Indian industries. Intangible asset theory of TNCs shows that TNCs possess
superior technological and organizational practices in comparison to local firms in
developing economies.

The entry of TNCs and implications for industrial productivity operate at

several levels. At one level, the new entry increases competitive conditions, which
should induce local firms to replace inefficient technologies and organizational
practices through imports of capital goods and R&D efforts (Patibandla, 2001)
and in turn increase overall industrial productivity. However if the market
expands at a lower rate than increase in capacity due to new entry, new entrant
TNCs can cut into the market shares of local firms. In such a case it could result in
decline in average industrial productivity as local firms operate at suboptimal
scales. On the other hand if the number of firms increase under the increasing
demand conditions without any loss of scale, the increase in the number of firms
could result in external economies at the industry level which shifts cost curves
down for all the firms (Rotenberg and Saloner, 2000). This effect will be more
dominant if firms belonging to an industry form into a dynamic industry cluster
(Patibandla and Petersen 2001).

Larger number of firms would be able to support a larger production of

differentiated intermediate godsend also increases demonstration effect of
superior practices. If the demand increases slowly or stays the same, competition
through R&D and advertising races could increase degree of concentration as
firms spread the fixed costs of R&D and advertising over larger sales (Sutton,
1991). In other words, given the market size an industry will become a natural
oligopoly of anew large players if there are economies of scale in production,
R&D and advertising. If there were continuous R&D races among the incumbents
to protect their market share, it would increase productivity over time. The sunk
costs of R&D and advertising could be a source of entry barriers and long run
market power to incumbents especially if there is implicit collusion among the

76
few large players. In such a case one of the ways to increase the contestability of
the market and force the incumbent to make continuous technological efforts is to
allow free imports of the final goods.

Another implication of the entry of TNCs on productivity is spillover

effects. Property rights on intangible assets being underdeveloped, they are
partially public goods and others can use the assets developed by one firm at a
small cost (Caves, 1996). If local firms, through deliberate effort or spillover,
obtain the superior practices of MNCs, it would improve overall industrial
productivity (Grossman andHelpman,1991; Branstetter, 2000; Kokko (1994).
Local firms would be able to internalize these spillovers. One good example is the
software industry cluster in Bangalore and newly forming cluster of automobile
and absorb them effectively if they make technological efforts in terms of
investing in R&D and adapting imported technologies efficiently. A major part of
the reforms is opening up of the economy to international trade: devaluation of the
currency, reduction in import duties and gradual removal of quantitative
restrictions on imports. The new growth theory shows trade openness is a
significant source of long run growth for developing economies. On one side there
are a static gains in resource allocation- resources will be allocated on the basis of
comparative advantage. On the other side is the dynamic gain of learning by
doing, technological and informational externalities associated with free
international trade. International trade extends the market size and allows firms to
realize static and dynamic economies. International trade also facilitates free flow
of new ideas and technologies and reduces the idea-gap which is a major source of
spillovers and growth (Romer, 1990). This argument is especially important for
developing economies because most of the new ideas and technologies are
developed in the developed economies and trade with them helps in realizing
these dynamic gains. Imports of differentiated intermediate and capital goods and
technologies with non rivalries properties improve productivity.

On the other hand, free international trade for a developing economy could
lead to specialization in those sectors with limited learning economies on the basis

77
of static comparative advantage which will result in the economy being get stuck
at low level growth (Lucas, 1988, Patibandla and Petersen 2001).Lucas (1988)
shows how a natural (comparative) advantage in specializing can backfire in the
long run. He shows a world in which an initial comparative advantage in farming
can cause a region to become a food producer. Growth potential may, however, lie
not in farming but in industrial goods, goods that people living in regions that do
not have good farmland will turn to. People in these countries will eventually
come expert manufacturers, whereas farmers will in the long run lag far behind
because they are specialized in a good with no growth potential. Following from
this line of reasoning, a developing country needs to have a certain level of initial
industrial and human capital endowments in order to realize the dynamic gains
associated with free trade with developed economies. One of the important
determinants of firm-level productivity is firm-level organizational practice.
Williamson’s (1985) theory of transaction costs shows that in the presence of high
market transaction cost sowing to incomplete contracts and opportunistic behavior
of agents, firms pursue vertical integration. Inefficient market institutions cause
high market transaction costs that make firms to adopt a high degree of vertical
integration and diversification strategies. There are organizational costs associated
with integrated operations- a large firm faces internal informational imperfections
and loss of organizational control. The efficiency loss associated with integrated
strategies gets magnified if firms adopt centralized organizational structure. This
had been the case in India in the pre-reforms period large diversified and family-
run firms with a highly centralized organizational structure ( Patibandla,
1998).The market reforms can be seen as a partial shift in the market institutions
to a more efficient mode. The removal of industrial licensing policies would
imply lower transaction costs for dealing with government and for entry of new
firms into industries. Greater the entry of new firms, higher the scope for firms to
adopt specialized operations. This provides opportunities for firms to do
outsourcing and take advantage of economies of specialization, which should
contribute, positively to productivity. However, on the technology side if there are

78
strong economies of scope for firms in producing different related products,
integrated operations will contribute to higher productivity.

While the tyre industry is mainly dominated by the organised sector, the
unorganised sector holds sway in bicycles tyre. The major players in the organised
tyre segment consist of MRF, Apollo tyres, Ceat and J.K. Industries, which
account for 63 percent of the organised tyre market. The other key players include
Modi Rubber, Kerosin Industries and Goodyear India with 11percent, 7 percent
and 6 percent share respectively. Dunlop, Falcon, Tyre Corporation of India
Limited (TCIP), TVS-Srichakra, Metro tyres and Balkrishan Tyre are some of the
other players in the industry. MRF the largest tyre manufacturer in the country has
strong equity. Whiles it rules supreme in the industry, other player have created
niche markets of their own.

Choice theory and decision-making

Research on choice theory and decision-making ,culture and context have

great influence in making purchase decisions and suggested that American,
European or Japanese companies that want to operate in India should have Indians
on the ground to help them penetrate the market. implications in emerging
countries such as China and India where there is a surge in the number of young
people with disposable income. As consumer markets emerge in countries such as
these, increased income and the introduction of new products and marketing
strategies create major changes in the choices.

One could predict how increasing disposable income might change

spending habits in emerging markets, younger generations may respond
differently to choice than older generation as the cultures in these countries
continue to be affected by globalisation. However, my recent research has shown
that urban Chinese are more similar to urban Indians than rural Chinese in terms
of how many choices they want and how important choices are to them.

79
2.24 FIRM SPECIFIC MONOPOLY POWER IN DIFFERENTIATED
OLIGOPOLY

In the context of differentiated oligopoly the monopoly power of any one

firm is determined by its ability to develop non-price strategies while taking the
reactions of the rivals into account. However, in current practice, estimates of firm
level monopoly power account for only differences of prices over costs measured
in different ways. Further, these differences are always attributed to the demand
conditions and the associated elasticity of demand for the differentiated products.
That is, it is presumed that firms maximize their profits based on margins rather
than volumes or other aspects that shift their demand curves. By way of contrast,
the present study acknowledges that the elasticity of demand per se may not be the
only source of monopoly power. Hence, an attempt has been made to develop an
empirical procedure to identify firm specific monopoly power incorporating non-
price dimensions.

From a practical standpoint it must be acknowledged that every firm

operates in a market that can be characterized as differentiated oligopoly. As a
result, it may be argued that each of the firms in such a market will have a certain
monopoly power relative to its competitors in the market. Clearly, aggregate
measures of monopoly power, as of now very few attempts have been made to
address this issue in any meaningful fashion. The Lerner measure approaches the
measurement of firm specific monopoly power in the following manner. A unique
product, though the products of rival firms can be substitutable to some extent,
creates a certain inelasticity of demand. This is acknowledged as the source of
monopoly power. For all practical purposes this implies an exclusive dependence
on price cost margins in the firm’s quest to maximize profits. Product
differentiation is generally acknowledged as the distinguishing feature of
differentiated oligopoly. It enables a firm to create a niche for itself in the market
or carve out a greater share of the market instead of (or, in addition to) changing
its elasticity of demand. Product differentiation may be along many dimensions.
In particular, product diversification may offer some advantage to the firm. For,

80
by offering a wide range of substitutable, or complementary, products the firm
may be in a position to capture a larger share of the market.2Similarly, the firm
may indulge in non-price competition to gain some market advantage. There is a
consensus that even advertising by a firm enables it to improve its market share
instead of price cost margins. Basically, therefore, it must be acknowledged that
the firm may depend on the volume of sales, rather than high price cost margins,
in its efforts to maximize profits. This approach emphasizes the shifts in the
demand curves rather than changes in the elasticity of demand. However, a
measure of firm specific monopoly power based on this logic is not available as
yet.

Several studies indicated that the current approaches, to the study of

monopoly power of firms in differentiated oligopoly, are inadequate.Cairns
(1999), in particular, suggested that characteristics of the industry, such as the
elasticity of demand and conjectural variation, may not be the ultimate sources of
profits that firms make in differentiated oligopoly. Similarly, Fischer
andKamerschen (2003) acknowledged that observed variations in the behavior of
firms cannot be explained by assuming that all of them compete along the same
dimensions or characteristics. In a basic sense the differentiating characteristics
and the decisions regarding their quantitative magnitudes are the fundamental
source of monopoly power of firms. It is therefore necessary to define firm level
monopoly power keeping the differences in the strategies and choices of the firm
in perspective. Hence, it is important to identify these sources of monopoly power
in the first instance. Following up on this the measurement of monopoly power
should emphasize these differences alone. Fundamentally, as Classens (2009)
pointed out, there is a necessity to develop new concepts designed to address
changes that are typical of the structure of differentiated oligopoly.

Assume that the Lerner measure defined to capture firm specific monopoly
power indicates significant differences across firms. It would be pertinent to
investigate the sources of such an outcome. To illustrate this viewpoint consider
the following. First, a firm may be able to sustain high price cost margins by

81
efficient production organization or advertising and sales promotion. Second, the
firm may choose to make profits by increasing the volume of sales instead of
depending on price cost margins. It may achieve this by implementing several
non-price strategies. From an analytical perspective it is necessary to identify the
monopoly advantages of a firm with respect to specific non-price strategies as
well. More to the point, the analysis should highlight the monopoly advantages of
specific non-price decisions that enabled the firm to pursue its profit maximizing
strategy. It would then be natural to argue that a firm has monopoly power with
respect to a certain non-price choice if a suitably defined index is the highest for
that firm relative to all other firms.

The present study defines a procedure for identifying these underlying

monopoly advantages of firms in differentiated oligopoly. The primary purpose of
this study is to set up an appropriate framework in this context. identifies the
direction in the change of emphasis more specifically. presents an approach based
on market shares of firms. procedures based on non-price decisions by means of
which firm level monopoly power can be disentangled. some dimensions of the
problem that require further analysis.

It is necessary to make the Cournot assumption that all firms take the
output decisions of the rival firms as parametric. See, for example, Kiyota et al
(2009). Otherwise it must be presumed that the above reduced form specification
already accounts for the conjectural variation across firms in the market.The effect
of product differentiation on the demand curve of a firm is sometimes captured by
utilizing the notion of conjectural variation. See, for example, Fischer and
Kamerschen (2003b). For, it can be argued that this is the essential aspect of
competition and that the changes in elasticity of demand, if any, are incidental to
it. Most studies, however, find it difficult to clearly identify this effect. For, if the
product differentiation results in less substitutability from the perspective of the
consumer it will be expected that the conjectural variation will be low. Quite the
contrary, Classens and Laeven (2004) pointed out that differential oligopoly may
be a contestable market. That is, competition between incumbent firms, combined

82
with competition made possible by entry and exit, may make firms more
competitive. This tends to increase the conjectural variation. There is hardly any
consensus on this aspect of monopoly power of firms in differentiated oligopoly.

Most of the studies assume that the firm is efficient in its use of inputs and
hence the marginal cost is minimal for a given level of output. However, a variety
of recent studies made attempts to investigate the inefficiency in the choices of the
firm and its implications for the measurement of monopoly power. See, for
example, Brissimis et al (2008) and Delis and Tsionas (2009). Two distinct
strands of thought are discernible. First, the Panzar and Rosse (1987) method
postulates that firms in differentiated oligopoly may also have some monopoly
power in factor markets. Hence, the marginal cost of a firm varies with factor
prices. Consider a change in the price of one of the factors of production. This
creates a certain change in marginal cost. Further, observe that there will be
differential changes in factor prices and distinct changes in marginal cost
corresponding to each such change. Hence, rather than aggregate all such changes
into one measure of marginal cost the Panzar and Rosse approach suggests
calculating the elasticity of marginal cost with respect to each of the factor prices
distinctly and aggregating them to obtain the measure of firm specific monopoly
power. Second, efficiency in production, or the lack of it, and its effect on the
profits of the firm has also been a subject of fairly extensive analysis. Studies of
regulated markets adopt the lead of Hausman and Sadak (2007) and Hausman et
al (2009). Their approach estimates the minimum long run marginal cost,
representing the welfare maximizing efficient pricing, and utilizes the Lerner
index to redefine monopoly power.In addition, the changes in the marginal costs
per se have received a great deal of attention. The contention of such studies is
that a firm may exhibit a high price cost margin not necessarily due to the
inelasticity of demand but because they will not pass on all their cost reduction,
perhaps achieved by their efficient operations, to the consumers. The extent of
pass through may depend on the number of firms in the market in addition to
other differentiating features. In general, the consumers have no way of

83
identifying such cost reductions achieved by a firm or to alter the nature of
demand for the product. See, for example, Zimmerman and Carlson (2010).

Non-price Decisions

In the context of differentiated oligopoly the non-price choices of firms

may be along a variety of dimensions. For instance, the range of products the firm
offers, the nature of such products (substitutable or complementary either in
demand or in production), quantum and type of advertising, distribution networks,
and the entire method of supply chain management, and soon.10 Studies relating
to the performance of firms find it difficult to incorporate the vast amount of
choices, of the firm under consideration and all its existing and/or potential rivals,
into the analysis. Concentration and diversification measures, have not been
adequately generalized to deal with the type of data that differentiated oligopoly
presents. The multidimensional nature of the data is at the apex of the problem.In
general, the data is of the following form. For each of the n firms in the industry
the data relates to p characteristics. Let x be the resulting nxp matrix. The basic
problem is to define the monopoly power of a firm that can summarize the
information contained in the characteristics of any one firm as they relate to the
competitiveness reflected in the data regarding the rest of the firms. As Rao
(2009) pointed out, in the context of defining industry level monopoly power, two
broad approaches are discernible. The first is reflected in the work of Martin and
Voltes-Dorta (2004). The basic strategy is to define a Her findahl type of index on
each of the characteristics and then aggregate the indices over all the
characteristics. The second approach can be developed from Bossert et al (2008).
The basic principle underlying this approach is to compare any two firms at a time
utilizing a distance metric over all the characteristics and then aggregating such a
measure over all firms.

Landes and Posner (1981) was perhaps the first to utilize the market share
as a measure of monopoly power. It emphasizes the position of a firm relative to

84
its rivals in the market. A firm may not increase profits by increasing its price
relative to other firms. Instead it may do so by improving its volume of sales.

Elzinga and Mills (2011) documented the following features from a

historic perspective. First, p = MC is a social optimum only if the products of all
the firms in the market are homogenous, perfect competition prevails, and
production exhibits constant returns to scale. Second, firms may have monopsony
power in factor markets and MC does not represent cost minimizing behavior.
Subsequent studies, such as Hausman and Sadak (2007) and Hausman et al
(2009), preferred estimating a long run cost curve and utilizing the implied MC
for calculating the Lerner index. Third, MC is not an adequate measure if the
firms incur fixed costs. In such a case p = MC pricing is not feasible. The Lerner
index may reflect the need to cover the fixed cost and, consequently, may not
signal the firm’s ability to increase prices or reduce output. Fourth, the Lerner
measure is static and does not convey the possible changes in a dynamic market
where entry and exit are prevalent. Fundamentally, therefore, the Lerner measure
is an indication of market inefficiency and cannot capture the relative monopoly
power of a firm vis-à-vis its rivals in a market that has firms offering
differentiated products.

Many recent studies defined measures of industry level monopoly power

taking nonprice decisions and oligopolistic interaction into account. Lijesen
(2004), Genevicius and Cirba (2007), Morgenroth (2008), Genevicius (2009), Aw
and Li (2009), Shi and Chavas (2009), Bailey and Taylor (2009), and Rao (2009)
is the exhaustive list of relevant references. Practically all these studies utilize
pairwise comparisons of market share and/or other nonprice choices of firms.
Morgenroth (2008) prefers statistical measures of the distance between the firms
taken together. Most of the methods proposed are not amenable to adaptation at
the firm level.

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