By Radhika Dhawan

It's a strategy with a hole. And even as the company adds more rubber to its tyres, the hole gets bigger. While the recent moves--which include the acquisition of the Kerala-based Rado Tyres (Rado) in December, 1997, and an alliance with the Hyderabad-based Stallion Tyres (Stallion)--made by the Rs 1,317.14-crore Ceat Tyres (Ceat) indicate that it is consolidating its tyres business, the gap left by the lack of radials in its product portfolio remains unfilled.

Although Harsh Goenka, 39, vice-chairman, Ceat, says: "We are trying to increase our marketshare in every possible manner," Rado's acquisition will only beef up Ceat's manufacture of conventional cross-ply tyres. What is missing, crucially, is an aggressive attempt to strengthen its presence in the fast-growing Rs 400-crore radial tyres business, which is climbing at 33 per cent versus the 11 per cent of the Rs 9,000-crore tyres market. In fact, the lack of a radial strategy may well force Ceat off the track. Especially if one considers that Ceat is losing grip over its only radial-manufacturing facility: the Rs 42-crore South Asia Tyres, which is a 50:50 joint venture with the US-based $13.11-billion Goodyear Tire & Rubber (Goodyear), and has an annual production capacity of 6.76 lakh car radials every year.

For, bt learns that Goodyear, which competes directly with Ceat in the Indian market through its Indian subsidiary, the Rs 547-crore Goodyear India, is likely to terminate its relationship since its proposal to acquire a majority control over the venture is not acceptable to the Goenkas. S. Samuel, 63, managing director, Ceat, underplays the tensions, however: "When both the partners are competing in the same market, there are some pressures." And he is quick to add that the partners "have reached an understanding." Says R.L. Swanson, 53, CEO, Goodyear India: "Given the current state of the tyres industry, it will not be appropriate for any company to disclose its competitive strategy."

But there is no denying that the Rs 6,198-crore rpg Group, which has decided to concentrate on, inter alia, its core business of tyres, is faced with a predicament. By turning down Goodyear's proposal of raising its stake in South Asia Tyres, the group may also have jeopardised its chances of activating the dormant radial-manufacturing facility. And with the partnership breaking down, the company will now be forced to go shopping for the radial technology.

But Ceat will find it difficult to finalise a tie-up with the other two tyres majors--the $13.10-billion Michelin of France and the $12.90-billion Bridgestone, Japan--which, together with Goodyear, account for 60 per cent of the global tyres mart. Bridgestone has already joined hands with the Rs 2,414-crore Associated Cement Companies, while Ceat's talks with Michelin did not yield concrete results. Of course, Michelin, whose joint venture with the Rs 2,033-crore MRF fell through three years ago, is still on the lookout for an Indian partner.

If the Goenkas fail to rope in Michelin, they will have to settle for second-rung players like the $4.68-billion Continental of Germany--which already has technical tie-ups with three Indian companies: the Rs 1,430.10-crore Apollo Tyres, the Rs 784-crore JK Corp., and the Rs 1,064.60-crore Modi Rubber--or the $4-billion Sumitomo, which has a technology agreement with the Rs 566.06-crore Dunlop India.

What makes radials crucial to a tyres manufacturer's scheme of things is the fact that, in 1996-97, radial tyres constituted nearly 47.34 per cent of the 38 lakh car tyres sold in India. Samuel feels this figure will rise to 75 per cent within the next three to five years. Obviously, the next step will be the radialisation of bus and truck tyres. To survive, Ceat--which, ironically, was the first to manufacture radial tyres in 1982-83 using Japanese technology--has to develop its own technology if it fails to rope in a foreign partner. But that's easier said than done. Explains Sundeep Dhingra, 28, an analyst with the Mumbai-based SSKI Securities: "Indian companies can manage with in-house technology only if they have had some experience in manufacturing radials on their own."

Samuel, however, dismisses the conventional wisdom that to compete in the radial business one needs a foreign collaborator. "It's a preferable alternative, but not a do-or-die scenario," he explains. For example, MRF, which is the market leader in radial tyres with a 35 per cent share, has managed to thrive even after its break-up with Michelin. In fact, it is setting up a new factory with an annual capacity of 8 lakh car radials in Pondicherry.

Says a confident Philip Eapen, 60, vice-president (marketing), MRF: "The fact that we are the sole suppliers of radials for models such as the Opel Astra and the Ford Escort is proof of our success." If MRF can do it, can Ceat follow suit? Avers a guarded Samuel: "I can't say that our radial technology is complete. But on a scale of 0 to 100, we will be starting from a base of 75, instead of zero."

What could help the Goenkas is that their agreement with Goodyear specifies that if the US partner pulls out, it will have to provide technology to the joint venture company for another five years. By that time, Ceat's alliance with Kelani Tyres (Sri Lanka), which manufactures radials and cross-ply tyres without a foreign technology collaboration, may provide enough experience to master the radial technology. The agreement, signed in October, 1997, states that Ceat's Sri Lankan venture, the Rs 37-crore Associated Ceat Pvt. Ltd (ACPL), will initially manage the Kelani Tyres' plant for six months. Later, Kelani Tyres will be merged with acpl, and the Goenkas will have a majority stake in the merged entity.

For Ceat, the merger with Kelani Tyres will be in line with the recommendations of management consultants, McKinsey & Co., in 1992, to concentrate on its core business. Late last year, Ceat invested Rs 13 crore to purchase a 51 per cent stake in the ailing Rado, and entered into a production alliance with Stallion. Explains Samuel: "We are looking for growth through alliances, acquisitions, sourcing arrangements, and not through greenfield ventures."

The idea behind these moves is to increase Ceat's capacity in the two- and three-wheeler tyres segments, where it has a 25 per cent marketshare compared to MRF's 30 per cent. Rado, which has supplied tyres to Ceat since 1995, can manufacture 3 lakh tonnes of tyres a year, which is likely to rise to 20 lakh tonnes over the next three years.

Together, Rado and Stallion will enable Ceat to increase its annual capacity of two- and three-wheeler tyres by over 77 per cent to 49.20 lakh tyres by 2000. At the same time, the company is cutting down on new-product development, and will aim to lift its share in the Rs 5,070-crore truck tyres segment from 14 to 20 per cent by 2002.

The three deals also provide locational advantages to Ceat. Two group companies--the Rs 158.90-crore Harrisons Malyalam and the Rs 256.70-crore Phillips Carbon, which make rubber and carbon black, respectively--have their manufacturing bases in Kerala. Therefore, the lower costs of transporting these two crucial raw materials to the three tyres units may translate into higher profits.

Indeed, improving its margins has become crucial for Ceat, whose history of financial mismanagement has made it difficult for the company to ride the current slowdown. For instance, in 1996-97, sales dipped by 24 per cent to Rs 1,317.14 crore, while net profits slid to Rs 6.60 crore from Rs 11.81 crore in 1995-96 (annualised from an 18-month period). In fact, without the hefty income of Rs 113.70 crore from non-operational sources--including profits on sale of investments in Hilltop Investments and Jubilee Investments--Ceat would have probably declared a net loss in 1996-97.

But improving the bottomline will not help unless the company can get a grip on radial technology. For, if Goodyear walks out of the joint venture, Ceat may slip further behind competitors like MRF and JK Corp., which are miles ahead in terms of both marketshae and technology in the car radial segment. Even if the Goenkas take a few years to master the radial technology, they will be reduced to a peripheral player in the car radial market. Obviously, Ceat needs to tackle the problem radially rather than head-on.

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