Re-Inflated

On 1st December 2017 by good2us

For nearly two decades the previously dominant global tyre brands have been fighting a losing battle against Chinese competitors but now seem to have a chance of winning back ground.

 The established tyre makers have advantages typical of the automotive industry – it’s not the original sale that matters but spares. Their margins outstrip even Germany’s luxury carmakers. Supplying manufacturers accounts for only a third of revenues of a typical tyre firm and even less of their profits. The real returns come from replacing tyres on vehicles on the road, which wear out every four years or so.

The expansion of the global vehicle ownership, forecast to grow by around 3.5% a year, helps to reduce dependency of tyre-makers on the cyclical new car market. Tyre-makers also benefit by selling most of their wares to thousands of distributors that are generally small and fragmented; weak compared with carmakers, and less able to drive hard bargains.

tyresAt one time the big tyre-makers could divide up this growing pie. In 2000 the top five (Bridgestone, Michelin, Continental, Goodyear and Pirelli) accounted for over two-thirds of the market. Their share has since shrunk to under half (see chart) as China’s domestic tyre industry grew as rapidly as its carmakers. Some estimates reckon there are 250 Chinese family-owned or state-run businesses (the biggest is Hangzhou Zhongce Rubber). Jean-Claude Kihn, Goodyear’s boss for Europe, Middle East and Africa, reckons there could be many more.

The lure of a trophy asset also tempted ChemChina, a Chinese chemicals giant, to acquire Pirelli, the sole supplier of tyres to Formula 1 motor racing, for €7.1bn ($7.7bn) in 2015.

Chinese tyres are cheap but aren’t of the same quality and lack performance or longevity. But. As in most things, knowledge is asymmetrical so price, selling for as little as half the price of premium tyres, and the incentive to push them, distributors made margins of up to 20% (compared with as little as 5% for established brands), made all the difference.

Premium manufacturers replied by cutting costs and moving production to cheaper places. Perversely, rising raw-material prices have helped. After some years of oversupply of natural rubber and low oil prices, the main ingredients of synthetic rubber, these costs rising made premium tyres more competitive. This will cause short-term pain for the big tyre-makers but these costs account for 30% of costs for big firms and 60% for China’s newcomers. Chinese tyre-makers will have much less scope to avoid putting up prices, eventually eroding their price advantage.

The clamour to drive SUVs, which accounted for two-thirds of car sales in America in 2016, and a vogue for putting larger rims on humdrum cars creates a demand for bigger wheels. The requisite tyres are at least twice as profitable as smaller ones. Those over 17 inches in diameter require the premium tyres mostly made by established firms. The big tyre-makers are making the largest investments in new capacity to meet the need. Larger Chinese tyre-makers are also spending to make bigger tyres. For China’s minnows, after years of competing furiously on price, there is little spare cash for such investment.

Tyre-making should also be largely immune from all the disruption in car making. Electric and autonomous cars will still need tyres. Fleets of robotaxis and shared vehicles will favour the established firms as fleet managers tend to go for their harder-wearing, safer tyres. For big tyre-makers the pressure applied by Chinese incomers is easing.

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