Chinese tire manufacturers are marking up their prices, responding to price increases over the past few months for both raw materials and U.S.-made tires. However, higher prices, along with over-production and declining exports are hurting the profitability of tire makers in China, according to local media reports.
International tire manufacturers, such as Michelin, Bridgestone, Goodyear and Kumho, have recently announced upcoming price increases of 5-10 percent in China. According to industry analysts, these hikes could just be a prelude for even greater markups that are needed as the price of raw materials has already shot up by 40 percent year-on-year.
According to Alex Koi, general manager of Cooper Tire China, “the price advance of rubber futures was the direct cause of the price mark-up, for the 20 percent price increase of rubber in the international market placed great pressure on tire manufacturers.”
Punitive tariffs levied by the U.S. have also contributed to the price increase. But Koi also believes that greater demand for truck and bus tires, attributable to China’s ¥4,000 billion ($588 billion) economic stimulus package last year, was the main catalyst for the massive price hike.
“Many tire manufacturers have planned to increase capacity this year, stimulated by great sales increase last year,” Koi was quoted as saying by a Huaxia Shibao (China Times) reporter.
Competition and declining exports
Market competition is getting fiercer among the 300 tire manufacturers in China. At the same time, the top 11 tire manufacturers like Bridgestone and Goodyear have all built tire plants in the country, forming a total tire production capacity of 150 million units. Plants under construction or pending development promise 50-60 million additional units of capacity.
China’s RMB appreciation also affects export profitability. According to analysis, an appreciation of 2-5 percent would reduce profits of tire makers to zero. The 43 main tire manufacturers actually saw their profits decrease 9.4 percent in the first half of this year, with a big slump of 22.7 percent in May month-on-month.
China exported 15.14 million passenger car tires to the U.S. in the first half of 2010, a decrease of 24 percent year-on-year. The export value totaled $477 million, a slip of 24.6 percent compared to the previous year. Exports surged in May and June, with a respective 9.9 and 13.9 percent increase month-on-month, indicating comparatively larger demand. According to Zou Yongzhi, general manager of Wanli Tire, the sustainability of this demand is unpredictable, as U.S. dealers are now destocking and they took a wait-and-see attitude on tire sourcing in July and August, which led to a big drop in tire demand in these two months. Profits have thus been going down.
The U.S. remains the primary export market for China’s heavy-duty tires, with a steady increase of 31.6 and 44.2 percent respectively in export volume and export value in the January-June period.
Now Europe has become a new main export destination for Chinese passenger tires. In the first half of the year, China exported 21 million tires to Europe, a 57.1 percent increase year-on-year. The export value was $538 million, a 64 percent growth compared to the previous year. Because of the depreciation of the Euro and the grim economic environment, tire exports went down 2.2 percent month-on-month in June, despite a 41.2 percent year-on-year growth. Heavy-duty tire exports saw an increase of 0.9 percent in June month-on-month, but a 3.9 percent drop in value.
As more and more vehicles dot the landscape in China, the market prospect of replacement tires is very promising, according to Koi. The current vehicle population in China is about 15-20 million units. Assuming one car has 1.5 tires changed per year, total market demand for the replacements would be 35-40 million annually.
Cooper Tire, for example, has concentrated exclusively on the replacement tire market in China, and has kept a much higher retail sales growth than the industry average.
Developing tires designed exclusively for the Chinese market can also help tire manufacturers improve their market shares. In June this year, Cooper Tire released its Discover ATS tire, an off-road tire specially designed for Chinese road conditions. Goodyear’s Eagle EfficientGrip, claimed the quietest tire model developed using a breakthrough tread design technology for China’s luxury cars, has also entered the market this year since July.