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China’s tire industry in 2017

This week marks a year since we introduced our China Tire Intelligence report. We remain the only publication that routinely tracks Chinese-language news coming out of China’s tire industry and then merges that intelligence with international news affecting the sector. We report on more than 50 stories each week, far more than any other publication. Not only that, but we have the acknowledged global expert, David Shaw, offering his views on the situation in China – as with this analysis

In short, if you want to learn about China’s tire industry and even more, understand it, this is by far the best publication to do that. It is also excellent value for money. Discover more at this link.

The industry has noticed this and we now distribute to customers all around the world. These include tire dealers and traders; tire manufacturers and upstream suppliers.

In the last year we have reported on new legislation; mergers & acquisitions; bankruptcies; expansions and given a tonne of statistics.

Seven themes in China’s tire industry

Over the year, however, a few themes stand out.

  • The steady recovery of the big names in the China tire industry.
  • The need for tire makers to raise large sums of capital as bank credit dries up
  • The fashion for ‘industry 4.0’ projects
  • Much greater emphasis on environmentalism with strong legislation being enforced
  • The developing realisation that management and marketing are the two biggest weaknesses in the China tire industry.
  • China’s response to US duties on truck & bus tires
  • A developing, long-term strategy for global competitiveness

I can probably pick out others, but these seem to highlight the most important developments seen in the China tire industry over the last 12 months. China’s tire industry cannot exist outside the global tire industry and our 2016 analysis of the global tire industry can be seen here.

Returning to China, the last of these seven themes brings all the others together.

Developing a global strategy for China’s tire industry

I am sure we are watching China’s government develop a strategic plan to create larger tire makers, with stronger management and exploiting Western marketing skills and technologies.

As that plan comes to fruition, I think it almost inevitable that history will repeat itself and international tire makers will gradually find themselves squeezed out of the Chinese manufacturing space.

Earlier this week, the Wall Street Journal published an article critical of President-Elect Trump’s policies on China as demonstrated by the appointment of Peter Navarro, the Harvard-trained economist designated to head the new White House National Trade Council.

Andrew Browne, author of that piece, is an experienced China-watcher and Pullitzer prize winner.

Although the article was written from the perspective of a wider trade picture, everything rang true for the tire industry.

The myth of China as a low-cost, low-tech, heavily polluting economy is out-dated. Future trade skirmishes between the US and China will not be fought on price and the race to the bottom of the manufacturing cost tables.

They will be fought on brand strength, technical merit and sophisticated marketing. Just like skirmishes between the US and Europe or any other advanced economy.

I agree with Mr Browne that erecting simplistic trade barriers is more likely to be counter-productive. But that’s primarily a domestic US issue, and Mr. Browne is more than capable of discussing that aspect of the world.

China’s tire industry and how it is developing

Since around 2013, China has been laying the foundations for a stronger tire industry. The policies set out at that time were relatively simplistic; relying as they did primarily on upgrading technology. It was called the ‘new normal’ – lower annual growth, and making the industry strong as well as big.

This limited vision was because the industrial councils that set the policies are staffed mainly by the chairmen of tire makers. They are primarily older men trained in technology, or party officials with little understanding of the global tire industry or international commerce.

I like to think that my presentations out there nudged those councils a little toward understanding that marketing, branding and distribution are just as important –probably more so– than technology.

Nowadays, there is a much more sophisticated understanding of what needs to be done, but still, I think there is a lack of understanding that management needs to be substantially upgraded. Meanwhile corporate management also needs to adopt a less monocultural perspective. That is starting to change as a younger generation of Western-educated 30- and 40-year olds come into positions of power.

Regulations on labels and green tires

In any case, the plan is unfolding with regulations on ‘green’ tires; on high-tech manufacturing as well as government support for overseas expansion and upgrading of technology.

I’m expecting a lot of bankruptcies among second- and third-tier tire makers in the next eight weeks.

  • Environmental legislation is being strongly enforced.
  • Bank loans are being called in
  • The US will announce its decision on duties on China-made truck tires
  • Out-dated manufacturing capacity will be forcibly closed
  • The two-week Spring holiday in February will mean companies lose revenues.
  • Raw material prices are set to increase further.
  • Taxes are due at some companies. These are based on turnover; not profits.

Dozens to go bust

Although I expect dozens of companies to go bust in the next couple of weeks, that is still not enough to eliminate the over-capacity issues that plague the industry. As one correspondent said to me, with China, you always have to look for the long game.

Looking for the long game

The long game in China’s tire industry is to eliminate the out-dated capacity; reduce the number of tire makers to well under 100, and ensure those that survive grow much bigger. Many of those that survive will be State-owned enterprises.

An example is Aeolus following its merger with the industrial division of Pirelli. Aeolus has acquired the shares of Yellow Sea and Double Happiness. Pirelli engineers have been crawling all over those factories, installing control systems; adapting recipes; calibrating temperature gauges and standardising processes.

Meanwhile the corporate managers have been developing new product portfolios; assessing brand strengths and building a global branding policy. They have been talking with distributors and agents around the world and setting up new contracts, or cancelling them.

This looks to me like a sophisticated, advanced global company. It happens to be based in China.

One future for China’s truck tire industry

And that, dear readers, is one future for the tire industry.

It is the vision set out in a series of Chinese-language policy documents that I have been reading and absorbing over the last few years. It is hard, even for experienced China-watchers to assess how much of this strategic and technical knowledge will be shared among the other State-owned tire makers in China.

My suspicion is quite a lot, but it will have to go through the interpretation from Italian or English into Chinese and then on to others and I suspect it will lose something in the translation.

Nevertheless, I can see China becoming a major global force in the truck, bus and off-road tire industry. First through Aeolus and Pireli and then through other State-owned enterprises with some private companies along for the ride.

Car tire developments

The path to becoming a force in passenger car tires is less clear.

My view is that there needs to be a bit more cooperation on the original equipment side.

Split between replacement and OE

Throughout the tire industry, there is a split between companies that meet the needs of the replacement market and those that strive to meet the needs of the premium vehicle makers.

The first group is driven largely by price, since that is the main factor in building sales volume or not.

The second group – OE suppliers – have another driver. Technology.

This is a requirement for supplying the top vehicle makers. That technology and the appearance on a premium vehicle adds to brand value.

If tire makers in China can win OE contracts and further build on that brand positioning with advertising, sponsorships, and other brand-building effort, they can increase prices and margins sufficiently to compete effectively with the majors across a range of product segments.

The challenge will be management and developing the right relationships; the right technologies, the right brand strength and the right sales and distribution networks.

Chinese tire makers are today dominated by the engineering function and by politics. I do not know of any in which a professionally-managed marketing department has been allowed to thrive and play a part in strategic planning. On the contrary, I know of quite a few where that future has been actively denied by senior management.

Nevertheless, like many things in China, that is changing. The government and the Party are starting to accept that these skills are necessary for wider global success.

Outlook for 2017

I do not think for a moment that 2017 will be an easy year in the China tire industry. However, I do think that the industry will be in a much stronger position at the end of 2017, compared with today.

A year ago, the mood in China was terrible. Companies were making losses; revenues were down; the full impact of US duties was being felt along with a downturn in local demand. Investment in China plunged and companies were laying off workers and staff.

Today that picture has largely reversed, and especially for the larger tire makers and those that have invested in off-shore capacity. They are learning about the management challenges of working in different cultures and this is building a cadre of younger managers who are adaptable. More important, they are now making money again and feeling much more optimistic.

With a government determined to encourage consolidation in the industry and support overseas expansion, the mood among the bigger tire makers is getting more optimistic as time goes forward.

This analysis is based on our weekly China Tire Intelligence Report. Each week we publish dozens of stories that are not published anywhere else outside China, together with analysis and comment prepared by our team in China and edited in the UK by tire industry experts. This is the only such regular newsletter in the English language containing current information on the tire industry and upstream suppliers in China.

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