86.

RUBBER TYRE AND TUBES FOR VEHICLES

86 - 2

TABLE OF CONTENTS PAGE

I.

SUMMARY

86 -3

II.

PRODUCT DESCRIPTION & APPLICATION

86 - 3

III.

MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY B. PLANT CAPACITY & PRODUCTION PROGRAMME

86 - 3 86 - 3 86 - 9

IV.

MATERIALS AND INPUTS A. RAW & AUXILIARY MATERIALS B. UTILITIES

86 - 9 86 - 9 86 - 10

V.

TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING

86 - 11 86 - 11 86 - 12

VI.

MANPOWER & TRAINING REQUIREMENT A. MANPOWER REQUIREMENT B. TRAINING REQUIREMENT

86 - 13 86 - 13 86 - 14

VII.

FINANCIAL ANLYSIS A. TOTAL INITIAL INVESTMENT COST B. PRODUCTION COST C. FINANCIAL EVALUATION D. ECONOMIC BENEFITS

86 - 14 86 - 14 86 - 15 86 - 16 86 - 17

86 - 3 I. SUMMARY

This profile envisages the establishment of a plant for the production of rubber tyre and tubes for vehicles with a capacity of 10,220,000 pieces of tyre and 200,000 pieces of inner tubes per annum. The present demand for the proposed product is estimated at 665,000 pieces and 762 tonnes per annum for tyres and inner tubes, respectively. The demand is expected to reach at 2.65 million pieces and 2,408 tonnes by the year 2015. The plant will create employment opportunities for 104 persons.

The total investment requirement is estimated at about Birr 292.91million, out of which Birr 213.97 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 23.31 % and a net present value (NPV) of Birr 274.15 million discounted at 8.5%.

II.

PRODUCT DESCRIPTION & APPLICATION

Tyre is made of both natural and synthetic rubber with some more inputs. There are many types of tyres depending on the size, type of ply ( radial or bias) & road condition ( off road) agricultural, industrial ,snow).

III.

MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

The demand for vehicle tyres and tubes in Ethiopia is met through both domestic production and imports. The only tyre manufacturing plant in the country is Matador-Addis, which used to

86 - 4 be known as Addis Tyre S.C before the joint venture arrangement with Slovak Matador in April 2004.

The company, according to the management, used to produce 230,000 tyres annually, while its capacity was reckoned to be 240,000 tyres. Currently Matador Addis Tyre S.C has completed a 13.8 million dollar expansion, which includes the launch of Radial Brand tyres. This will increase annual production of tyres by the factory to 370,000 pieces in 2005 and 500,000 in 2006. According to Matador Addiss Management, the local demand is about 600,000 to 700,000 tyres a year. Imported tyres like Dunlop, Pirelli, Bridgestone and Kumbo currently meet 40% of the local market demand.

Although tyre production is the dominant activity of Matador Addis, inner tubes and general rubber goods like door mats, automotive accessories and out - soles are also produced.

Data on local production and imports of rubber tyres and tubes was also obtained from Customs Authoritys External Trade Statistics and Central Statistical Authoritys Annual Industrial Survey (see Table 3.1).

Table 3.1 shows that the claim made by Matador- Addis that the factory has been producing 230,000 tyres annually, is not consistent with the data extracted from CSAs, Industrial Survey. The latter source indicates that the annual production in the ten years period of time (19952004) was an average 160,000 tyres, and the average of the latest three years output was 190,000 tyres.

While the maximum number of tyres produced was only 208,592, in 2001, imports, however, have increased from year to year. In the most recent three years (2002-2004), the country has imported 714,000 tyres, on average, annually.

86 - 5

Table 3. 1 APPARENT CONSUMPTION OF RUBBER TYRES AND TUBES 1995 - 2004

Apparent Consumption Of Rubber Tyre Year Local Production (Pcs) Import (Pcs) Total (Pcs) Apparent Consumption Of Rubber Tubes Local Import Total Production (Ton) (Ton) (Ton)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

167,532 80,387 151,483 152,469 148,235 118,776 208,592 197,540 191,309 181,725

218,021 310,292 305,908 396,851 352,183 487,045 509,511 532,969 867,819 742,624

385,553 390,679 457,391 549,320 500,418 605,821 718,103 730,509 1059,128 924,349

10 45 45 64 63 53 106 79 64 91

189 201 235 276 805 446 437 406 863 958

199 246 280 340 868 499 543 485 927 1049

Source: 1. CSA, Report of the Survey of the Manufacturing and Electricity Industries, Annual issues 2. Customs Authority, External Trade Statistics, annual Issues. Given the foregoing nature of imports and domestic production of tyres during the 10 years period of time covered by the data set, it would be prudent to consider the average of the last three years total consumption as representative of the present effective demand. Accordingly, the present demand for tyres, on this approach, is estimated to be about 905,000. With the existing domestic capacity to produce 240,000 tyres, this level of total demand implies a supply short fall of 665,000 tyres as far as domestic capacity goes.

As regards rubber tubes, the bulk of demand is being met through imports, the domestic supply covering less than 10% of the demand in most years. Average consumption during the most recent 3 years (2002-2004) was about 820 tonnes of rubber tubes, and this amount is considered

86 - 6 as a fair approximation of the present demand. As the domestic capacity for rubber tubes

manufacturing is about 100 tonnes per annum, the above estimation implies a supply short fall of about 720 tonnes of rubber tubes vis--vis domestic capacity. 2. Projected Demand

The future demand for tuber tyres and tubes depends on the growth of the fleet size of vehicles of various classifications in the country. The historical vehicle stock data of the country (see table 3.2) shows that there were a total 119020 vehicles in 2002, excluding police and Military vehicles.

Over the fifteen years period of time covered by the data set, the average annual growth of the total vehicle stock was 8%. Assuming, this growth rate will be maintained, the demand for tyre and tube is forecasted in the manner shown in Table 3.2.

86 - 7
Table 3.2 REGISTERED AND INSPECTED VEHICLES (1988-2002)
Y E A R S

Tyre Vehicle Type

Private cars Station wagons Taxi<5 seats Taxi 5-12 seats Bus <30 seats Bus > 30 seats Pick-ups & tucks(<=70 seats) Trucks(71-180 qtls) Track Tractor Tanker 1988 28329 10020 1936 1594 3027 1080 5314 6192 783 1128 59403 1989 27990 9656 1329 1281 2910 1291 5355 6303 836 957 57908 1990 26694 8832 931 1166 2996 471 6829 5206 717 855 54697 1991 28004 8811 920 2891 2448 724 6717 4733 584 715 56547 1992 26717 10421 1004 3267 2853 807 6813 5019 497 542 57940 1993 28423 5636 2070 3163 1491 551 10630 5590 737 908 59199 1994 30902 6094 1705 3164 5453 889 10347 5866 515 760 65695

1995 35686 6101 1850 4455 6994 1699 11069 8504 480 1191 78029

1996 35219 7847 1935 4660 7567 2387 11492 10713 1286 994 84100

1997 37906 8090 2057 4465 9635 2625 12286 10996 1108 1085 90253

1998 42293 5535 3786 6049 9778 2825 13983 10778 1005 1236 97268

1999 43358 5603 4179 5408 12076 2129 15193 10171 1028 905 100050

TOTAL

10

Source: Road Transport Authority

86 - 8 Table 3.3 PROJECTED DEMAND FOR RUBBER TYRES AND TUBES 2006-202O

Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Projected Tyre Demand (No.) 905,000 977,400 1,055,600 1,140,000 1,231,000 1,330,000 1,436,000 1,551,000 1,675,000 1,809,000 1,954,000 2.110,000 2,279,000 2,461,000 2,658,000

Projected Tube Demand (No.) 820 886 956 1033 1116 1205 1301 1405 1518 1639 1770 1912 2065 2230 2408

Unsatisfied Demand Tyre (No) 665,000 737,000 815,600 900,000 991,000 1,090,000 1,196,000 1,311,000 1,435,000 1,569,000 1,714,000 1,870,000 2,039,000 2,221,000 2,418,000 Tube (No) 100 166 236 313 396 485 581 685 798 919 1,050 1,192 1,345 1,510 1,688

3.

Pricing and Distribution

The price of tyres and inner tubes varies according to size and origin. For the purpose of financial analyses based current market price for the products an average a factory get price of Birr 375 for tyres and Birr 80 for inner tubes is adopted.

86 - 9 B. PLANT CAPACITY & PRODUCTION PROGRAMME

1.

Plant Capacity

The production capacity of the envisaged plant is estimated to be 220,000 pieces of tyrs and 200,000 pieces of inner tubes based on 300 working days per annum and three shifts per day.

2.

Production Programme

Table 4.1 indicates the production programme of the project. At the initial stage of production, the project may require some years to penetrate the market. Therefore, in the first and second year of production the capacity utilization rate will be 70% and 90%, respectively. In the third year and onwards, full capacity production shall be attained. Table 4.1 PRODUCTION PROGRAMME Production Year Product Tyres (pcs) Inner Tubes (pcs) Capacity Utilization Rate (%) 2008 154 140 70 2009 198,000 180,000 90 2010-2018 220,000 200,000 100

IV.

MATERIALS AND INPUTS

A.

RAW & AUXILIARY MATERIALS

The major raw & auxiliary materials for the production of tyres and inner tubes are natural and synthetic rubber, carbon black, cord and accelerator. The auxiliary materials are banker oil, softener and others. Annual requirements of both raw and auxiliary materials are given in Table 4.2.

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Table 4.2 RAW AND AUXILIARY MATERIAL REQUIREMENT AND COST Sr. No 1 2 3 4 5 6 7 8 Cost in Birr (000) Unit Ton Ton Ton Ton Ton Ton Drum Ton Qty. 1574 1402 1457 546 171 329 7986 567 FC 24,323 18,930 6,062 26,731.25 7,173.98 626.13 1,830.13 2362.5 88,038.99 LC 4865 3786 1212.1 5,346.25 1434.8 125.22 366.02 472.5 17,607.89 Total 29,188 22,716 7,274.1 32,077.5 8,608.78 751.35 2,196.15 2835 105,646.88

Description Natural rubber Synthetic Rubber Carbon black Cord Accelerator Softener Bunker oil Others

Grand Total

B.

UTILITIES

Major utilities of the project are electricity and water, and their annual requirement and cost is indicated in Table 4.2.

Table 4.2 UTILITIES REQUIRMENT AND COST Utilities Unit Qty. Cost (Birr) Electrical Energy Water Total KWh M3 5,010,000 20,000 2372.74 62 2434.74

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V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Process Production

The manufacturing process of tyre can be broadly be classified into three stages, mixing, building and vulcanizing process

In mixing process the crude and synthetic rubber are weighed and masticated. Mixing takes place in an open mill with a fixed volume for prescribed time depending upon its uses.

The tyre is built-up as a cylinder on a collapsible, round rotating drum. Layers of cords embedded in a proper compound are applied, one layer tying the heads together in one direction and another layer in another direction. The heads wire cables embedded in a tough, hard rubber are stitched to the tyre by folding the end of the cord fabric over. The tyre building drum is collapsed, and the cylindrical tyre removed and placed in a press. Hire an inflatable rubber bag, usually made from butye rubber and on a movable stem, is blown up inside the tyre; the press mould is simultaneously closed, and the tyre becomes a doughnut. Heat is applied through the mould and by steam inside the bag. After a timed cure at pre selected temperature, the tyre is formed. The green tyre is inserted into Auto form for an automatic vulcanization.

Tubes and flags are extruded, cut, spliced and cured in the same way as tyres. After completion of vulcanizing the product is taken out immediately for cooling. Finally the finished products are inspected and stored.

86 - 12 2. Source of Technology

The Technical data and information are compiled during a visit in Metador Addis Tyre Factory, review of the technical documents and discussion held with technical personnel of the Factory.

B. 1.

ENGINEERING Machinery & Equipment

The list of machinery and equipment is indicated in Table 5.1. The total cost of machinery is estimated at Birr 213,973 million. Out of which Birr 178.311 is in foreign currency. Table 5.1 MACHINERY AND EQUIPMENT REQUIREMENT Sr. No. 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2 2. Tyre plant Mixing section Equipment Calendaring Equipment Extruding Equipment Cutting Equipment Beading Equipment Banding & Building Equipment Curing Equipment Finishing Equipment Tube and flap section Description Qty. 1 1 -

Land, Building and Civil Works

The total area of the project is about 5,000 m2 out of which the built-up area will be 10,000 m2. Therefore, the total cost of building is estimated at Birr 15 Million. The lease value of land is Birr 29.34 million at a rate of 9.78 Birr per m2 for 60 years.

86 - 13 3. Proposed Location

For its access to potential market and infrastructure, Dire Dawa town is chosen as the best location of the project.

VI.

MANPOWER AND TRAINING REQUIREMENT

A.

MANPOWER REQUIREMENT

The list of manpower and labour cost are indicated in Table 6.1. The total annual labour cost is estimated at Birr 939,000.

Table 6.1 MANPOWER REQUIRMENT AND LABROUR COST Sr. No 1 2 3 4 5 6 7 8 9 10 11 12 13 Secretary Commercial Manager Finance and Admin.Manager Production & Technic. Manager Quality control Head Accountant Clerks Forman Operators Assistant Operators Laborers Others Sub-Total Benefit Grand Total Req. No. 1 1 1 1 1 1 2 3 3 30 30 20 10 104 Salary Monthly (Birr) 4,500 900 3,000 3,000 3,000 2,000 3,000 1,200 3,000 18,000 12,000 6,000 3,000 62,600.00 15,640.00 78,250.00 Annual Salary (Birr) 54,000 10,800 36,000 36,000 36,000 24,000 36,000 14,400 36,000 216,000 144,000 72,000 36,000 751,200.00 187,800.00 939,000.00

Description General Manager

86 - 14 B. TRAINING REQUIRMENT

It is recommended that at least two engineers need training at machinery suppliers training centre for two months. Other manpower shall participate on-the-job training which may take place during plant erection and commissioning. The total cost of training is therefore estimated at Birr 200,000.

VII.

FINANCIAL ANALYSIS

The financial analysis of the rubber tyre and tubes for vehicles project is based on the data presented in the previous chapters and the following assumptions:-

Construction period Source of finance

1 year 30 % equity 70 % loan

Tax holidays Bank interest Discount cash flow Accounts receivable Raw material local Work in progress Finished products Cash in hand Accounts payable

3 years 8% 8.5% 30 days 30 days 2 days 30 days 5 days 30 days

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at about 292.91 million. The major breakdown of the total initial investment cost is shown in Table 7.1.

86 - 15 Table 7.1 INITIAL INVESTMENT COST

Sr. No. 1. 2. 3. 4. 5. 6. 7.

Cost Items

Total Cost ('000 Birr) 29,340 15,000 213,973 100 750 14768.01 18979.14 292,910.15 43.56%

Land lease value Building and Civil Work Plant Machinery and Equipment Office Furniture and Equipment Vehicle Pre-production Expenditure* Working Capital Total Investment cost Foreign share

B.

PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 146.01 million (see Table 7.2). The material and utility cost accounts for 74.02 per cent while repair and maintenance take 0.07 per cent of the production cost.

N.B Pre-production expenditure includes interest during construction ( Birr 14.5 thousand ) training ( Birr 150 thousand) and Birr 110 thousand costs of registration, licensing and formation of the company including legal fees, commissioning expenses, etc.

86 - 16 Table 7.2 ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR) Items Raw Material and Inputs Utilities Maintenance and repair Labour direct Factory overheads * Administration Cost ** Total Operating Costs Depreciation Cost of Finance Total Production Cost Cost 105,647 2434.74 100 450.72 187.8 300.48 109,120.62 23797.3 13096.75 146,014.67 % 72.35 1.67 0.07 0.31 0.13 0.21 74.73 16.30 8.97 100

C.

FINANCIAL EVALUATION

1.

Profitability

According to the projected income statement, the project will start generating profit in the first year of operation. Important ratios such as profit to total sales, net profit to equity

(Return on equity) and net profit plus interest on total investment (return on total investment) show an increasing trend during the life-time of the project.

The income statement and the other indicators of profitability show that the project is viable.

Factory overhead cost includes salaries and wages of supervisors, insurance of factory workers social costs on salaries of direct labour etc. Administrative cost includes salaries and wages, insurance, social costs, materials and services used by administrative staff etc.

**

86 - 17 2. Break-even Analysis

The break-even point of the project including cost of finance when it starts to operate at full capacity (year 3) is estimated by using income statement projection.

BE =

Fixed Cost Sales Variable Cost

= 43 %

3.

Pay-Back Period

The investment cost and income statement projection are used to project the pay-back period. The project's initial investment will be fully recovered within 5 years.

4.

Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 23.31% and the net present value at 8.5% discount rate is Birr 274.15million.

D.

ECONOMIC BENEFITS

The project can create employment for 104 persons. In addition to supply of the domestic needs, the project will generate Birr 20.53 thousand, per annum in terms of tax revenue. The establishment of such factory will have a foreign exchange saving effect to the country by substituting the current imports.

86 - 18