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China Tire Report – April 2018

This is the latest summary of our analysis of China’s tire industry. We publish a weekly report on the tire industry in China. It is the only source of information in the English language for those who want to keep up-to-date with commercial, legislative, policy and recycling developments in the tire industry in China.

Since this was distributed to our subscribers at the end of February, there has been some significant news affecting the China tire industry. Our subscribers knew about these developments at the start of April and can make decisions based on this intelligence, but readers of this column will have to wait another month before finding out.

Subscribers to our monthly newsletter also saw this column a few weeks ago.

China’s tire industry in March

March finished off with the China Rubber Industries Association (CRIA) meeting in Qingdao. That brought some updates on the group’s plans for the development of the China tire sector.

In particular, the CRIA is now benchmarking its various industries against those in other countries, notably Germany, Japan and the United States. These comparisons show that China’s industries need significant consolidation and restructuring if they are to be competitive with international competition.

Ahead of the CRIA meeting, the group released a series of ranking tables setting out the sales revenues of the top tire makers, carbon black makers, tire dealers rubber dealers and so on.

The group also gave an update on its labelling scheme, saying, “CRIA Labelling System has registered a total of 46 companies, and 22 companies have officially obtained 111 tire labels, covering C1/C2/C3 models.”

Double Star still in the race for Kumho Tire

The main story of the month was the on-going saga of Double Star’s possible acquisition of Kumho Tire. KDB and the banks resurrected the idea of finding a buyer for the financially-troubled Korean tire maker in late February and through March the saga has been playing itself out.

Essentially, the management, the creditors and various Korean government agencies have come to the conclusion that Kumho Tire is financially insolvent, lacking in options and desperately needs a buyer to take on its many problems. The only buyer in the frame, until the last week of March, was Qingdao Double Star. The creditors have done all the relevant due diligence checks and prepared legal agreements and other detailed work required before this kind of acquisition.

However, the unions (and some of the workers they represent) are against the Double Star option, due to fears that the deal would result in a ‘Dine and Dash’ stripping of assets.

The unions are threatening extensive strike action if their company is sold to the Chinese, while the Chinese are seeking no-strike guarantees before putting up the money.

Then, at the last minute, a local Korean tire retail chain has come on the scene. There are no legal agreements in place and no due diligence and at first sight, the tire retailer looks financially weak. But it is a Korean company, and that would satisfy honour all around.

The saga is likely to resolve itself during the fist week of April. Update – things are now looking much more solid on this story. We have published a deep analysis in the May newsletter.

Our analysis of the respective managements’ ability to make the best of the deal remain unchanged. We think that neither management team is up to the task of a difficult cross-cultural merger with strong labour opposition, deep financial troubles and

Shut-downs cause shortages – or not!

A series of rumours have confused tire markets around the world. Early in the month there were strong rumours that the meeting of the Shanghai Cooperation Organisation in Qingdao in June – probably on 9 June – would lead to wide-spread shut-downs of tire factories across Shandong Province during May and June. This spread to rumours that Qingdao Port would shut down over the same period, limiting exports.

We are confident that these are false. The worst-case scenario we can see is that many tire factories in the immediate area around Qingdao will be closed for two weeks ahead of the meeting.

The more likely scenario is that the smaller, more-polluting plants will be closed, while the cleaner ones continue as normal, perhaps with just a day or two of shut-downs.

However, there is truth in news of widespread shut-downs in the Dongying area due to high levels of pollution.

As we write, the area is still subject to emergency environmental measures, with air quality across much of Shandong at historical maxima of above 999 (where official measures do not even consider levels above 500, which is itself considered a significant hazard to health.)

This means factories are subject to restricted output and shut-downs.

This is leading to reduced production and therefore shortages, as wholesalers seek to re-stock ahead of the main buying season in March and April.

Tire factories and dealers are taking advantage of the temporary relief from over-supply and raising prices.

We believe these price increases will stick in the market, both domestically and overseas.

Management strategies

We saw two significant changes among top tire makers during the month.

In a surprise move, Wang Feng (not the chairman of Linglong) returned to Aeolus as CEO after leaving during a management re-shuffle a year ago. He replaces Guiseppe Pomati who is no longer with Prometeon. In the interim, Wang has been working with both Pirelli/Prometeon and with the CRIA to develop strategies for the Chinese tire industry in general and also for Aeolus and Prometeon in particular.

We think this is a positive move. Mr Wang has significant international experience. In our experience, every business relationship between a Chinese company and its Western subsidiaries needs a Chinese national who is respected by the Board, but who also understands Western culture and business methods sufficiently well to put the case for valid management changes or investments proposed by the Western partners. We think Mr Wang can fulfil this role. Without someone in that role, most Chinese ventures in overseas markets will struggle.

In particular, Linglong has told stock markets that it now expects to have 5 factories in China and 3 overseas. The company has, in effect, moved its focus from overseas, to the domestic agenda. Along with the change in strategy, Linglong announced that it would build its fourth factory in China: a USD930mn project to make PCR, TBR and OTR tires in Jingmen City, Hubei Province.

Linglong also announced an expansion in Thailand in mid-March.

The company is raising funds for the huge Hubei project and this big investment alongside a smaller investment in Thailand suggests that any European or US projects are on hold for the time being.

US eases duties on PCR tires; India launches probe

An obscure part of the US ITC website was updated on 12 March with the results of a review of US duties on PCR tires from China. The official document was posted in the Federal Register dated 16 March. This changes some of the anti-dumping and countervailing duties on light truck and passenger car tires imported into the US from China.

Meanwhile, India has added an investigation into possible countervailing duties on Chinese TBR tires. This adds to the anti-dumping duties imposed last September.

At the CRIA meeting, the group’s secretary-general, Xu Wen Ying said it is one of the CRIA’s priorities to defend the Chinese industry against both the EU investigations and the likely return of an investigation by the US into TBR tire imports.

She also mentioned the Indian investigations, but said this has little effect on most Chinese tire exporters.

 

– David Shaw

This article was printed in our monthly newsletter , published at the end of March, and summarises news and developments from our weekly report on the tire industry in China. For the latest information on the tire industry in China and the rest of the world, see our website at www.tireindustryresearch.com

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