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 January, there has been some significant news affecting the China tire industry, including the EU requirement for registration (see below) and some significant closures and further news of consolidation. Our subscribers already know about this 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 couple of weeks ago.
China’s tire industry in January
January was a relatively quiet month in China – we have seen a number of reviews of the year, and the main themes of last year continue to move the industry forward: environmental legislation; consolidation and so on. The country is now on holiday marking the start of the lunar new Year
Profitability is falling
Toward the end of the month, tire companies started releasing their financial figures from 2017.
Profits are generally down. This is partly due to higher costs of raw materials in the early part of 2017 and partly to increased environmental costs in the second half. Despite modest prices rises during the year – notably in the January-April period –These cost increases have not fed through and been converted into higher selling prices, despite many announcements of price increases (see below).
Of the companies to have reported results so far, Linglong did best, reporting level profits on revenues up by 30%.
At the other end of the spectrum, Aeolus said on 27 January that it expects to report a loss of around CNY470mn for the full year 2017. This compares with a profit of CNY84.55mn for 2016. The company said it had been unable to raise selling prices to match its cost increases.
Earlier in January, Aeolus said it was no longer pursuing the full acquisition of Prometeon Tire Group (PTG) – the former truck tire unit of Pirelli. Aeolus has said the failure appears to be more administrative than strategic, but we think that the acquisition may have been delayed in order to prevent Aeolus’ figures looking even worse. We will bring you more news as we receive it.
In Taiwan, revenues are generally on the increase, though not as spectacular as Linglong. Hwa Fong saw revenues decline. Nankang’s results were positively affected by the a strong increase in value of some land in downtown Taipei. If the property is sold, it is likely to yield profits in the range of double-digit billions of Taiwan dollars.
Since this column was first published on 31 January, we have reported on results from a number of other companies. See our Weekly newsletter for more information.
We saw a series of further price announcements from the market during January. Buyers are resisting these prices hikes, though some increases have gone through in certain sizes. There will be more attempts to raise prices in February, notably after the New Year holidays.
The market is still reacting to the January announcements – some buyers felt that it was a Government-coordinated initiative, because of how all their main suppliers announced very similar price increases within days of each other.
We now feel that some modest price rises will go through in a limited range of sizes. Dealers will continue to fight these increases fiercely. The market situation is not the same as a year ago, with surplus tires on the market and new, high-tech capacity coming on stream as older, more polluting factories shut down. Average tire export prices from Shandong ports are about 6% higher than a year ago. Much of that is down to the prices rising in the first quarter of 2017.
Consolidation across the industry
We continue to note the consolidation of the industry. This is partly a government initiative. Both local and national governments have identified their top tire makers and are ‘encouraging’ those leading companies to take over failing companies through combinations of sticks and carrots. Since this was published at the end of January there has been some massive news in this area, but our subscribers have access to that information. If you want to be among the best-informed, you’ll need to subscribe to our newsletters
On the one hand, government is directing larger players to take over failing businesses. They do not want to do this, because the failing companies have bad equipment, bad working practices and less good products. On the other, there are also carrots in the form of grants and land concessions to help these emerging groups to build brand new factories. We believe these sticks and carrots were the subject of the discussions we reported between senior officials and tire makers over the Summer of 2017.
As we have been predicting for at least two years, the early part of 2018 is proving to be the beginning of a substantial wave of consolidation across China’s tire industry. This wave is being catalysed by government action in calling in loans and introducing high charges for power, water and other essentials to companies that do not meet various government criteria.
The process is not leading to carnage across the industry. Thanks to government interventions mentioned above, it is being managed to avoid severe disruption in the industry.
We are seeing a number of groups emerging from the mess. Among specific examples, Wanshine is being forced to restructure while Fengyuan has achieved a listing on China’s NEEQ market platform.
January is the season for dealer events, and many companies have announced new products and upgrading plans.
Among the international companies, Cooper is expanding Kunshan, while we have published some very detailed information about Continental’s expansion in Hefei following the publication of Continental’s Environmental Impact Statements.
Among the Chinese companies, Roadboss (Lubo Rubber Technology) is building a large CNY3000mn tire plant in Guangrao. Meanwhile some of the retail outlets for premium Western brands are suffering as domestic companies improve quality and offer better margins to dealers.
Changes in legislation
One of the biggest changes to affect the tire industry in China is the imposition from 1 Jan of fixed taxes for excessive emissions. This affects all industries across China, but the tire industry has become habituated to releasing VOCs as well as noxious smells from their factories.
The new rules encourage local people to inform the authorities over factories that are excessive environmental polluters. Often the population are concerned over smells and noise at night, more than technical emissions of VOCs and suchlike. As a result some big name companies have appeared on the pollution registers. Specifically, Giti Hefei is in trouble over emissions, despite announcing plans for environmental upgrading.
Furthermore, Sumitomo’s plant in Changshu City, Jiangsu Province has appeared on the official list of enterprises illegally discharging VOCs. Michelin’s Shanghai factory has also appeared on Shanghai’s list of key polluters. Often Chinese authorities will first find fault with the international companies as a way to warn domestic companies that changes are on the way.
Meanwhile Yangshan has had its environmental upgrades approved.
In other changes, China has now formally rolled out its new TPMS legislation that makes a TPMS system compulsory on various vehicles from 1 January this year, and more vehicle types are being phased in until 2020.
More seriously, perhaps is the news that the government and customs authorities are stepping up surveillance of non-CCC marked tires and have said they will send back any tires without the correct CCC markings.
Consumer complaints are down
Early in the month, the authorities released data on consumer complaints against tires. Overall, complaints are down in 2017 compared to 2016, but this reflects the very high level of complaints in 2016 against Bridgestone tires.
EC says Chinese TBR tires are being dumped
A week ago, the EC issued an important update on its investigation into trade measures against TBR tires made in China. We gave our commentaries on this on 3 February in our monthly global newsletter and also in our weekly on China.
The document, published in the Official Journal of the European Union on 2 February confirms that the EC has found evidence of dumping and evidence of subsidies in TBR tires imported to the EC from China.
Further, it brings forward the retro-active period for which duties may be charged.
All relevant imports from 2 February will have to be registered with EC customs authorities so that the authorities can collect duties on all imports dated on or after 2 February, as soon as duties (if any) are announced.
Previously, tires imported from 12 Feb were at risk of duties. That date has been brought forward to 2 Feb. Although this is only a few days’ difference, the new document significantly increases the probability of duties being applied.
Prior to this publication, most people in the industry thought there was a high chance that the EC would impose new duties, but there was some small hope that somehow the duties would not go through.
Since publication of the new document, only the most determined optimists will have any hope that new duties won’t be applied.
There is a consultation period of 21 days (expires on 23 Feb) during which interested parties are invited to make their views known in writing, to provide supporting evidence or to request to be heard. (Article 1, para 3)
Evidence of dumping and subsidies
The EC says it has, “sufficient evidence that imports of the product concerned from PRC are being dumped.” (Para 10)
That evidence is based on estimates of the cost of TBR production in the United States, which the EC has chosen as the analogue country, and the selling price of those tires.
The EC further says it has, “sufficient evidence that imports of the product concerned from the PRC are being subsidised.” (Para 18) The EC continues, “Therefore, the available evidence at this stage tends to indicate that the exports of the product concerned are benefiting from countervailable subsidies.” (Para 20)
Amount of duties
The EC has demanded that importers register all tires imported from 2 February onwards. It says, “should the investigation result in findings leading to the imposition of anti-dumping and/or countervailing duties, those duties can, if the necessary conditions are fulfilled, be levied retroactively on the registered imports in accordance with the applicable legal provisions.”
This means any tires imported from that date could be hit with retro-active duties. This adds a substantial risk for importers who do not know how much they will have to pass on to potential customers.
The EC is still collecting evidence on the amount of duties, but using the USA as the analogue country suggests that the EC will apply high anti-dumping penalties.
The EC says the amount of future liability for anti-dumping duties is set at 26%-37% of the import value. (Para 28). The complainants (“the coalition against unfair tyres imports”) requested anti-dumping duties of between 74% and 152%
The amount relating to anti-subsidy duties has not been determined, but the complainant has requested a further 26%-37%. (Para 29)
This means the combined duties (if imposed) are likely to be at least 52%, up to 78%, but could be up to 189%.
What happens now?
Importers must take appropriate steps to “register imports into the European Union of new and retreaded tyres for buses or lorries with a load index exceeding 121, currently falling within China codes 4011 20 90 and ex 4012 12 00 (TARIC code 4012 12 00 10) and originating in the People’s Republic of China.) (Article 1, para 1).
– David Shaw
This article was printed in our monthly newsletter , published at the end of January, 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