The Hindu Business Line : JK Tyre adds a low-cost sourcing base

JK Tyre’s acquisition of Mexican tyre maker Tornel will take the company closer to emerging Latin American markets, besides providing a fillip to its exports to the US. But with an over Rs 1,000 crore capacity expansion plan already on hand, this acquisition (costing about Rs 270 crore) may impose some burden on its finances, as both these investments are to be met through internal accruals and debt. The acquisition cost is about a third of Tornel’s annual sales.

May aid outsourcing

Though JK Tyre was the first-mover in the manufacture of radial tyres for commercial vehicles, others such as Apollo, MRF and Ceat have been fast catching up with the company in ramping up radial tyre capacities. All of them have capacity expansion plans lined up.

An acquisition by JK Tyre at this juncture may be the quickest way to beat its peers in adding capacity. Although there is growing replacement demand for BIAS and cross-ply tyres both in the domestic and international markets, domestic tyre makers are increasingly looking to source their BIAS tyre requirements from low-cost locations such as China and instead shifting focus to expanding their presence in the OTR and Truck-Bus radial segment. JK Tyre too has already been sourcing its requirement of tyres for export markets from China and Vietnam.

Getting a foothold

With the demand from the South and South-East Asian markets taken care of through this arrangement, the company is now looking to gain foothold in the growing Latin American market. This is where Tornel, with its complete range of BIAS and Radial tyres, fits in. With this acquisition, JK Tyre will be able now get yet another sourcing base in Mexico to cater to exports. It will also be able to spread its wings to emerging Latin American markets like Brazil and Argentina and gain greater access to North America, a key market for tyres.

JK Tyres has already been exporting to both North and South America. This acquisition will further strengthen its position. Statistics available show that the US is the biggest market for exports from Mexico, with Tornel among the top ten exporters of tyres to the US. Besides, Mexico, US and Canada are allied by the NAFTA (North American Free Trade Agreement), which may facilitate free and low cost trade between these countries.

The cost advantage that JK Tyre can command through this buy, assumes significance because Apollo Tyres too, has announced the setting up of a Rs 1,160 crore unit at Hungary to serve as a hub for the US and European passenger car radial market. Tornel’s strong sales and distribution network too will stand the company in good stead.

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