By David Shaw
It’s traditional at this time of year to review the last 12 months and look forward to the coming year.
For the last 12 months, there have been a lot of stories, but I think five main themes stand out:
- Increasing trade protectionism, especially against China-made tires
- Greater globalism in the manufacturing and marketing footprint
- Development of online sales channels & web interfaces
- Moving toward a data-based business model
- Increasing raw materials costs
As always with the tire industry, there is a link between these different themes, but it is sometimes hard to work out how these themes are related, simply because the industry is – to my mind – becoming even more compartmentalised than it has been in the past.
Let’s begin with the increase in trade protectionism, as I think this is one of the key drivers in the global tire industry today.
Although there has always been a low level of trade disputes around the world of tires, the events that pushed trade policy to the top of the agenda was the United States’ allegations of dumping of PCR tires made in China. These were formally issued in June 2014. The investigations lasted until August 2015, when the final ruling was announced. The US would impose extra duties up to 100% or more on PCR tires made in China and exported to the United States. Almost immediately, exports of tires from China to the US were stopped, or dramatically reduced.
Within weeks of the 2014 investigations beginning, tire makers in China were seeking ways to get around the expected barriers and this triggered a wave of investments in South-East Asia.
The situation was made worse when in January this year the United States’ DoC announced investigations into TBR tires coming out of China.
Meanwhile Russia and some of its satellite states imposed restrictions on China-made TBR tires; Brazil did the same and India launched an investigation. The EU also carried out an investigation, but that concluded that local tire makers in the EU had not suffered due to Chinese imports.
Risks due to trade barriers
All this activity highlighted the business risks associated with trade barriers. Within a year or so, an allegation of dumping can result in large target markets imposing 100% tariffs. That kind of change in selling price has a huge effect on sales at the lower end of the market, where sales volumes are largely driven by pricing.
Greater globalism in the manufacturing and marketing footprint
The big-name tire makers have a global manufacturing footprint and can largely manage their production systems to make tires in the most advantageous locations with respect to trade barriers, tariffs and other duties. Furthermore, they are less prone to losing sales due to a change in the initial purchase price. Their argument has always been on total cost of ownership, including fuel costs and other factors.
But at the lower end of the business, price is a key factor in sales volume. In the opaque world of tire trading, a series of global tire dealers will buy tires on price, with little thought about quality or lifetime or brand.
Chinese tire makers build overseas
As a result of the new trade tariffs, the fastest and wealthiest companies in China – Zhongce Group; Sailun-Jinyu; Sentury; Linglong and a few others have built tire factories in Thailand and other parts of S E Asia and now those same companies are discussing putting new capacity into the United States in a bid first to overcome trade barriers and second as a step on the way to winning OE contracts with international vehicle makers.
Although these investments are relatively small, they have permitted these companies almost unfettered access to the US market, following the introduction of tariffs on their competition.
Under the US Obama administration, the Trans-Pacific Partnership (TPP) would have strengthened these investments still further as these countries won essentially free trade access to the US Markets. The inauguration of President Trump in January will likely see the TPP being scrapped.
The traffic was not only one way
The Chinese business model is to make large volumes of tires and export around half of production. As in India, the business is gradually evolving from a domination by industrial tires toward a consumer-based market. For a variety of reasons, the international companies have done well in the Chinese passenger car and SUV segments, but less well in the truck tire segment. One of the key reasons for that is that the fleet operations in China have been one-man operations. Those operations tend to buy cheap goods at the best initial purchase price.
As in India, that is changing, and changing fast. In India logistics companies are setting up to deliver excellent service, and this is taking business away from the one-man, one-truck operators.
In China the same process is being driven by new rules on over-loading and also on anti-pollution rules. Trucks have to be less environmentally damaging, and these larger, higher-tech trucks are expensive. As a result of these rules and a boom in demand for internet delivery services, the traditional one-man-one-truck operations are being over-taken by increasingly large fleets funded either by the internet entrepreneurs themselves, or by specialist logistics companies.
This will give an opportunity to the international tire makers to expand their business in China – unless the impending trade war between the US and China disrupts their plans.
We have seen large investments in China by Continental with a huge facility in Hefei; by Goodyear with another huge investment in Pulandian; by Cooper with its 2016 purchase of a 60% stake in GRT. Pirelli’s truck tire operations are being merged with those of Aeolus, Double Happiness and Yellow Sea into a restructured company that offers a modern product portfolio; Western marketing skills and close relations with the Chinese government.
China’s tire makers getting more competent
One final aspect of this discussion is the increasing competence of the tire factories in China. Today, I do not rate much of the management in Chinese tire factories. Some are good: Wanli; Zhongce; Sentury; Sailun; Linglong; Prinx Chengshan. Others are still stuck in the dark ages of managing by diktat and fear rather than empowerment and encouragement. The vast majority, however, appear unable to understand that different customers have certain very specific needs in terms of availability, brand reputation; consistent quality as well as pure technology and pricing.
As these tire makers become more competent; secure world-class technology and set up factories overseas, and take control of their own distribution networks and respond to feedback about their products directly from consumers, they become an increasing threat to the premium brands.
Today, the volume of these quality tires coming out of Chinese-controlled companies is not so great, but it will only get bigger and those companies will only get better.
Controlling their own distribution is key
However, even today, the price gap between say a Wanli and a premium brand does not justify the performance gap. As soon as the better Chinese tire makers get access to customer feedback and respond to it, their product quality is going to improve rapidly, and with it, their selling prices – provided they can establish their own distribution networks.
The better companies are already this; Hankook began this trend a couple of decades ago and a series of companies from GiTi to Apollo, Nexen and others have learned the lesson. Now Sailun, Sentury, Prinx and other leading Chinese tire makers are distributing for themselves. In the very near future, I expect to see the same moves from other tire makers such as Zhongce, Wanli, Linglong.
As the price/performance ratio improves still further, more and more customers are going to work out that the price/performance of a premium brand is no longer worth it.
Already, I know that some premium German car makers are courting those names as potential global OE suppliers.
If I have seen this coming, then the premium brands surely have also seen it. The question is how to respond.
How do premium tire makers respond?
Fighting for an ever-shrinking super-premium segment is not a sustainable response.
One short-term response is to set up online shops in which the consumer is guided toward a particular brand of tire.
Development of online sales channels & web interfaces
The last 12 months has seen a great deal of this from the tire makers. Once, they sought to divest their retail chains, arguing that they are not property developers, buying or leasing real estate in different parts of town and setting up tire stores. Instead, they set up franchise models.
Unfortunately, as tire makers seek more and more data on the buying habits of their customers, the franchise model was not good enough. So now we have websites that glean customer data and click-paths; we have new franchise software that sends data back to base on all kinds of aspects of different customers.
None of these is a truly disrupting influence. Even Black Circles and Delticom are little more than web-enabled front-ends to a traditional business.
Webshops are not disruptive
If we are to see real disruption – and I think that there may well be an announcement in this area early in 2017 – it will require a web front end that connects buyers with third-party warehouses and logistics providers as well as fitters.
The benefit at this stage for the change-resistant tire industry is that the corporate-owned webshops try to control the message received by the consumer. Customers today walk into a tire store and the tire dealer persuades them to buy a cheap import. This is damaging the business of the premium manufacturers.
In response, they are investing in web front ends that provide information on tires. Information that steers customers way from cheap imports and towards the safety and security of known brand values. And then offers them a big, bright, ‘buy now’ button.
Michelin tried offering a sole brand service in the United States, but it did not work; customers want the freedom to choose between multiple brands. So we are seeing premium manufacturers investing more in their secondary and tertiary brands, as preparation for a brand battle with the Chinese companies.
Meanwhile, the webshops are collecting data on click-paths and what aspects of the offer are important prior to the buying decision.
This is helping those brands to understand exactly how consumers buy tires. Information that is today lacking among the Chinese brands; many of whom do not even realise they need this data, or how to make use of it, even if they had it.
Moving toward a data-based business model
While the online webshops are the latest way premium brands can manage the message received by consumers, it is only a short term step. The longer term desire is to understand the real needs of consumers for mobility.
This brings us onto the fourth key trend: moving toward a data-driven business model.
Michelin, Pirelli and Continental have most obviously embraced this new idea.
The concept is relatively simple, but the implementation is difficult.
People do not want to own cars; they want to get to their destination and back with the minimum of expense and fuss and delay.
At present, most cars in the developed world are in use for less than 5% of the time. The rest is spent parked on a driveway or a corporate parking slot or outside a shop or restaurant. This is very inefficient in terms of both the vehicle and larger-scale societal resources.
Over the longer term, these leading tire makers are seeking to make the tire only a small part of their wider business offer.
While I am sure we will see the main tire makers adding building blocks toward new ways of doing business, it is still a long-term goal for all the main tire makers. Nevertheless, it is not so far away. We already see new businesses in telematics; in ride sharing and restaurant review sites. These all aim to understand how to gather, use and analyse big data relating to consumer trends.
Rising raw materials prices
In the middle of December, I wrote an article looking at tire pricing and raw materials pricing. It generated a fair amount of interest in the tire community globally. My expectation is that input prices will continue to rise in the first quarter of 2017.
Today we have seen little impact on retail prices, but that will surely change in the first quarter of 2017. This is having a small impact on premium brands, but a much greater effect on the low-cost imported brands.
This analysis is based on our monthly Global Tire Intelligence Report. Each month we print a digest of all the most important news in the industry, together with analysis of the most important stories.