Description
Mr. Anant Goenka, MD of CEAT Tyres Ltd. had just concluded hi s meeti ng wi th CEAT’s 2Wheeler
Task
Force.
The
objective
of
this
strategy
team
was
to
set
out
a
roadmap
to
achieve leadership in many areas of 2-Wheeler tyre segment. One of I ndi a’s youngest
MDs, Anant had highlighted the criticality of Task Force achieving its objectives in the
current year.
Mr. Nitin Nishant, who heads the 2/3 Wheeler category of tyres, was facing tough
challenges achieving the objective of the Task Force. No other manufacturer enjoyed
the economies of scale that MRF did, and hence, completely ascertaining the way the
capacity was used was essential to tackling this challenge.
Gripping the Market
Mr. Anant Goenka, MD of CEAT Tyres Ltd. had just concluded his meeting with CEAT’s 2-
Wheeler Task Force. The objective of this strategy team was to set out a roadmap to
achieve leadership in many areas of 2-Wheeler tyre segment. One of India’s youngest
MDs, Anant had highlighted the criticality of Task Force achieving its objectives in the
current year.
Mr. Nitin Nishant, who heads the 2/3 Wheeler category of tyres, was facing tough
challenges achieving the objective of the Task Force. No other manufacturer enjoyed
the economies of scale that MRF did, and hence, completely ascertaining the way the
capacity was used was essential to tackling this challenge.
Introduction
The size of the Indian tyre market is approximately Rs 35,000 crore in 2011. The market is
segmented as follows:
Category Market Share
Trucks 50%
Car/ Jeep 15%
L.C.V. 11%
Farm 8%
2/ 3 wheelers 14%
Others 3%
2/3 Wheeler Category consists of the Motorcycle, Scooter, Moped and 3 Wheeler
Segments. The biggest amongst these is the Motorcycle segment, which contributes to
nearly 70% of this category.
The major OEMs in the 2 Wheeler market are Hero Moto Corp. (HMC), Honda Motors
and Scooters India Limited (HMSIL), Bajaj Auto Limited (BAL), TVS and Suzuki.
Motorcycles or ‘Bikes’, as they are popularly known in India, are used for short distances
of 0 - 100 km where other modes of transportation are not very viable. For instance,
transportation from cities to surrounding villages with limited road infrastructure,
commuting for work, Leisure Trips. In India, it is frequently used for commuting with
Family to the nearby location.
The Market Size
As shown in Figure 1, 143 lakhs 2-wheelers were produced in Fy 11-12. The 2/3 Wheeler
category is growing @ of 10% & the growth is being lead by Scooters, which is projected
to grow by 25% (yoy) followed by Motorcycles at12%. Due to the current economic
scenario it is quite difficult to precisely predict the future growth of this segment.
Some of the factors that influence the growth and penetration of this segment in India
are:
1. GDP growth
2. Rural Development & Fund infusion in Rural India
3. Disposable income
4. Infrastructure Development (Mainly Roads)
Every year OEMs demand around 2.2 crore Motorcycle tyres, and the demand is lead
by Hero Honda & followed by Bajaj Auto Limited & Honda.
61
72
67 68
83
99
112
10 10.5 10.7
12.4
15.4
19.7
24.34
4 4.4 3.75 4.14
5.44 6.17 7
FY'05-06 FY'06-07 FY'07-08 FY'08-09 FY'09-10 FY'10-11 FY’11-12
Figure 1: The Total production of 2-Wheelers (lakhs/year)
MC SC Moped
CEAT Tyres Limited
CEAT is one of the leading tyre manufacturers in 2-wheeler segments. The sales of CEAT
are split across OEMs, Replacement Markets & Exports as follows:
Figure 3 shows that share of OEMs in industry sales has grown to nearly 50% up till 2011.
The 5
th
bar in the figure shows that the OEM share for CEAT in 2011 was only 22%. The
Replacement Markets have a greater share of sales as margins/unit are higher there,
ensuring greater levels of profitability for the company.
48.1
45.8
49.4
52.4
51.9
52.7
30.8
33.5
32.7
28
29.7
28
13 13
9.4 9.3
7.6
7.1
0
10
20
30
40
50
60
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Figure 2: OEM Market Share – Motorcycle (%)
HHML
BAL
HMSI
TVS
YML
Others
Original Equipment Manufacturer (78%)
Replacement Sales (22%)
Export (0%)
Figure 4 shows the OEM – Replacement – Exports split for Scooters. For similar reasons as
Motorcycles, Replacement Markets get a larger chunk of CEAT’s supply.
OEM demand is directly dependent on the manufacturing plan for their vehicles;
however, the Replacement demand lags the OEM demand by 3 years. So once a new
motorcycle is launched, tyre manufacturers supply tyres only to the OEMs for around 3
years before demand builds in Replacement Markets.
This leads to the question of capacity allocation. While replacement markets are more
profitable, supply to OEMs is essential to ensure demand for CEAT Tyres in the
replacement markets. The following factors make this question complex:
47
45
48 48.37
22
52
53
51 49.9
78
1 2 1 1.73 0
0%
20%
40%
60%
80%
100%
2007-08 2008-09 2009-10 2010-11 CEAT
Figure 3: Category supply of tyres - MCY
OE Replacement Export
48
54
58
43.46
25
48
42
39
53.41
75
4 4 3 3.13
0
0%
20%
40%
60%
80%
100%
2007-08 2008-09 2009-10 2010-11 CEAT
Figure 4: Category supply of tyres - SC
OE Replacement Export
1. CEAT has got a limited capacity of 5 lakh tyres/month, which is divided into
Motorcycle and scooter. A maximum of 10% of capacity can be increased each
year.
2. The Contribution margins for Motorcycles & Scooters in the Replacement Markets
are approx. Rs 300 & Rs 160 respectively for replacement; while the contribution
in OEMs sales is Rs 15 and Rs 40 respectively for Motorcycles & Scooters.
3. The OE demands are generally fixed and they adhere to the commitments until
and unless there is some major fall back in the economic scenario. The focus
within OEM Sales is predominantly on large volumes, and the costs are also
oriented accordingly.
4. The Replacement market is a high margin & a competitive market. Any shortfall
in demand in OE spills over to the Replacement market. This segment is also
extremely dynamic. For a company like CEAT where there is no fixed plan with
distributor & dealer this becomes tougher.
Market leader MRF has a Letter of Understanding signed with their dealers and
distributors, which confirms the number of units that the distributors and dealers will buy
from MRF. No other manufacturers have such an agreement with their dealers. The
sales teams of CEAT estimate the volume to be produced for given regions and periods.
Consequently, there are possibilities of mismatch between these estimates and the
actual quantity ordered by the dealers and distributors, affecting the bottom line in
many ways.
Given these scenarios, Nitin faces tough questions around the strategy to make CEAT
the market leader in 2W category:
1. How can CEAT optimally allocate production capacity to Motorcycle and
Scooter Tyres?
2. Furthermore, what should be the capacity allocation for OEMs and
Replacement markets?
3. Which OEMs should be given priority?
Phase II
In continuation of our analyses in Phase I, let us assume that the targeted expansion
would be 300000 additional units per month for 2 wheeler, with an investment of Rs 150
Crore.
The congestion period for the project would be around 3 years.
Deliverables 2
1. Keeping the current market and economic scenario in mind, what would be the
market potential for Motorcycle, scooter and Moped in next 3 years?
2. What would be the targeted volume for CEAT to achieve the leadership position
in MCy in next 3 years?
3. What would be the replacement OE mix for next 3 years?
4. Considering the current level of contribution, what would be the payback period
for the project and IRR for the additional investment?
5. Explore and comment on the export opportunities.
doc_503112767.pdf
Mr. Anant Goenka, MD of CEAT Tyres Ltd. had just concluded hi s meeti ng wi th CEAT’s 2Wheeler
Task
Force.
The
objective
of
this
strategy
team
was
to
set
out
a
roadmap
to
achieve leadership in many areas of 2-Wheeler tyre segment. One of I ndi a’s youngest
MDs, Anant had highlighted the criticality of Task Force achieving its objectives in the
current year.
Mr. Nitin Nishant, who heads the 2/3 Wheeler category of tyres, was facing tough
challenges achieving the objective of the Task Force. No other manufacturer enjoyed
the economies of scale that MRF did, and hence, completely ascertaining the way the
capacity was used was essential to tackling this challenge.
Gripping the Market
Mr. Anant Goenka, MD of CEAT Tyres Ltd. had just concluded his meeting with CEAT’s 2-
Wheeler Task Force. The objective of this strategy team was to set out a roadmap to
achieve leadership in many areas of 2-Wheeler tyre segment. One of India’s youngest
MDs, Anant had highlighted the criticality of Task Force achieving its objectives in the
current year.
Mr. Nitin Nishant, who heads the 2/3 Wheeler category of tyres, was facing tough
challenges achieving the objective of the Task Force. No other manufacturer enjoyed
the economies of scale that MRF did, and hence, completely ascertaining the way the
capacity was used was essential to tackling this challenge.
Introduction
The size of the Indian tyre market is approximately Rs 35,000 crore in 2011. The market is
segmented as follows:
Category Market Share
Trucks 50%
Car/ Jeep 15%
L.C.V. 11%
Farm 8%
2/ 3 wheelers 14%
Others 3%
2/3 Wheeler Category consists of the Motorcycle, Scooter, Moped and 3 Wheeler
Segments. The biggest amongst these is the Motorcycle segment, which contributes to
nearly 70% of this category.
The major OEMs in the 2 Wheeler market are Hero Moto Corp. (HMC), Honda Motors
and Scooters India Limited (HMSIL), Bajaj Auto Limited (BAL), TVS and Suzuki.
Motorcycles or ‘Bikes’, as they are popularly known in India, are used for short distances
of 0 - 100 km where other modes of transportation are not very viable. For instance,
transportation from cities to surrounding villages with limited road infrastructure,
commuting for work, Leisure Trips. In India, it is frequently used for commuting with
Family to the nearby location.
The Market Size
As shown in Figure 1, 143 lakhs 2-wheelers were produced in Fy 11-12. The 2/3 Wheeler
category is growing @ of 10% & the growth is being lead by Scooters, which is projected
to grow by 25% (yoy) followed by Motorcycles at12%. Due to the current economic
scenario it is quite difficult to precisely predict the future growth of this segment.
Some of the factors that influence the growth and penetration of this segment in India
are:
1. GDP growth
2. Rural Development & Fund infusion in Rural India
3. Disposable income
4. Infrastructure Development (Mainly Roads)
Every year OEMs demand around 2.2 crore Motorcycle tyres, and the demand is lead
by Hero Honda & followed by Bajaj Auto Limited & Honda.
61
72
67 68
83
99
112
10 10.5 10.7
12.4
15.4
19.7
24.34
4 4.4 3.75 4.14
5.44 6.17 7
FY'05-06 FY'06-07 FY'07-08 FY'08-09 FY'09-10 FY'10-11 FY’11-12
Figure 1: The Total production of 2-Wheelers (lakhs/year)
MC SC Moped
CEAT Tyres Limited
CEAT is one of the leading tyre manufacturers in 2-wheeler segments. The sales of CEAT
are split across OEMs, Replacement Markets & Exports as follows:
Figure 3 shows that share of OEMs in industry sales has grown to nearly 50% up till 2011.
The 5
th
bar in the figure shows that the OEM share for CEAT in 2011 was only 22%. The
Replacement Markets have a greater share of sales as margins/unit are higher there,
ensuring greater levels of profitability for the company.
48.1
45.8
49.4
52.4
51.9
52.7
30.8
33.5
32.7
28
29.7
28
13 13
9.4 9.3
7.6
7.1
0
10
20
30
40
50
60
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Figure 2: OEM Market Share – Motorcycle (%)
HHML
BAL
HMSI
TVS
YML
Others
Original Equipment Manufacturer (78%)
Replacement Sales (22%)
Export (0%)
Figure 4 shows the OEM – Replacement – Exports split for Scooters. For similar reasons as
Motorcycles, Replacement Markets get a larger chunk of CEAT’s supply.
OEM demand is directly dependent on the manufacturing plan for their vehicles;
however, the Replacement demand lags the OEM demand by 3 years. So once a new
motorcycle is launched, tyre manufacturers supply tyres only to the OEMs for around 3
years before demand builds in Replacement Markets.
This leads to the question of capacity allocation. While replacement markets are more
profitable, supply to OEMs is essential to ensure demand for CEAT Tyres in the
replacement markets. The following factors make this question complex:
47
45
48 48.37
22
52
53
51 49.9
78
1 2 1 1.73 0
0%
20%
40%
60%
80%
100%
2007-08 2008-09 2009-10 2010-11 CEAT
Figure 3: Category supply of tyres - MCY
OE Replacement Export
48
54
58
43.46
25
48
42
39
53.41
75
4 4 3 3.13
0
0%
20%
40%
60%
80%
100%
2007-08 2008-09 2009-10 2010-11 CEAT
Figure 4: Category supply of tyres - SC
OE Replacement Export
1. CEAT has got a limited capacity of 5 lakh tyres/month, which is divided into
Motorcycle and scooter. A maximum of 10% of capacity can be increased each
year.
2. The Contribution margins for Motorcycles & Scooters in the Replacement Markets
are approx. Rs 300 & Rs 160 respectively for replacement; while the contribution
in OEMs sales is Rs 15 and Rs 40 respectively for Motorcycles & Scooters.
3. The OE demands are generally fixed and they adhere to the commitments until
and unless there is some major fall back in the economic scenario. The focus
within OEM Sales is predominantly on large volumes, and the costs are also
oriented accordingly.
4. The Replacement market is a high margin & a competitive market. Any shortfall
in demand in OE spills over to the Replacement market. This segment is also
extremely dynamic. For a company like CEAT where there is no fixed plan with
distributor & dealer this becomes tougher.
Market leader MRF has a Letter of Understanding signed with their dealers and
distributors, which confirms the number of units that the distributors and dealers will buy
from MRF. No other manufacturers have such an agreement with their dealers. The
sales teams of CEAT estimate the volume to be produced for given regions and periods.
Consequently, there are possibilities of mismatch between these estimates and the
actual quantity ordered by the dealers and distributors, affecting the bottom line in
many ways.
Given these scenarios, Nitin faces tough questions around the strategy to make CEAT
the market leader in 2W category:
1. How can CEAT optimally allocate production capacity to Motorcycle and
Scooter Tyres?
2. Furthermore, what should be the capacity allocation for OEMs and
Replacement markets?
3. Which OEMs should be given priority?
Phase II
In continuation of our analyses in Phase I, let us assume that the targeted expansion
would be 300000 additional units per month for 2 wheeler, with an investment of Rs 150
Crore.
The congestion period for the project would be around 3 years.
Deliverables 2
1. Keeping the current market and economic scenario in mind, what would be the
market potential for Motorcycle, scooter and Moped in next 3 years?
2. What would be the targeted volume for CEAT to achieve the leadership position
in MCy in next 3 years?
3. What would be the replacement OE mix for next 3 years?
4. Considering the current level of contribution, what would be the payback period
for the project and IRR for the additional investment?
5. Explore and comment on the export opportunities.
doc_503112767.pdf