Rough Road Lies Ahead for Chinese Tire Makers Despite Heady Growth

Along with explosive expansion of the Chinese automotive market, so has the nation's tire market been growing at extraordinary pace in recent years.

Following the 11% growth in the Chinese tire market in 2006, among the highest worldwide, 2007 has been a year of challenge for the Chinese auto-tire industry, due to the implementation of new tire standards in the U.S. and Europe, the lowering of tire-export tax rebates by the Chinese government, and rising competition due to major international tire makers setting foot in the Chinese market.

Europe and U.S. Demand Better Tires

On June 1, 2008, the U.S. and Europe, the two largest markets for Chinese-made tires, implemented new standards, with the U.S. FMVSS139 featuring higher safety requirements and the European Union's REACH (Registration, Evaluation, and Authorization of Chemicals) imposing stricter regulations on chemical contents of tires.

Despite their effects on Chinese tire exports, the new standards, though, may also goad Chinese tire makers to upgrade their production. Compared with the original FMVSS119, FMVSS139 stipulates stricter requirement for safety, raising the high-speed performance testing under low inflation pressure to 140 kph, 150 kph, and 160 kph, from the original 121 kph, 129 kph, and 137 kph, with the distance for endurance testing also increasing 50% to 4,080 km. In addition, requirements are also much stricter regarding peeling, aging, air permeability, and road danger, with the new standard being applicable to tires for 4.5-ton-or-less vehicles.

Meanwhile, the EU has established the European Chemicals Agency (ECHA) in Helsinki of Finland to enforce REACH regulations, also effective on June 1, 2007. As a result, tire makers with products containing over 0.1% of listed hazardous chemicals in terms of weight should register such information in a central database run by ECHA.

　

Opposite to the earlier view which assumed a specific chemical is safe unless proven otherwise, REACH now assumes the vice versa-a specific chemical is unsafe unless proven the opposite. Products failing to qualify under the management system of REACH cannot be sold in the EU market, while such new regulations incur expensive testing costs and heavy responsibility on Chinese tire makers.

　　

The U.S. FMVSS119 emphasizes safety, while the EU REACH addresses environmental concerns, with the former weighing more heavily on Chinese tire makers. Chinese tire export has been growing at an annual clip of 20% in recent years, now accounting for 40% of the nation's total tire output, according to the China Rubber Industry Association. The U.S. overtook Japan to become the largest overseas outlet for Chinese tires in 2004, when Chinese tire exports to the market surged 38%.

China now exports more than 22.9 million car tires a year, accounting for 33% of its total tire exports.

In 2006, 196 Chinese tire makers were DOT qualified by the U.S. Department of Transportation to export tires stateside, 61 of whom obtained such qualification in the recent 18 months.

Tougher Standards May be Blessing in Disguise

Industry insiders note that the new testing standards will more heavily impact passenger-car and some light-truck tires bound stateside, notably such high-speed performance requirements on bias tire.

Officials of the China Rubber Industry Association remarked that implementing the stricter standards may not be necessarily bad for Chinese tire makers, as they would be forced to upgrade their products, such as refocusing on developing radial tires. Industry insiders, though, forecasted that some Chinese tire makers with smaller scale and weaker R&D capability may be forced out of the sector by such new standards.

Besides, Chinese tire makers may have a tough time passing on the higher costs caused by the new standards to clients, as prices have been raised a number of times in recent years to reflect higher material costs, including those for imported natural rubber, synthetic fiber, fuel, and shipment.

Tax-rebate Cut Pinches Profitability

The Chinese government across-the-board cut export tax rebates on July 1, 2007, including reduction of tax rebates for tires and other rubber products to 5%, a move expected to slash the aggregate profits of the Chinese rubber industry by three billion yuan annually, according to the China Rubber Industry Association.

Industry insiders noted that such tax-rebate reduction will impact the Chinese rubber industry, whose overall profitability now stands at a meager 2%, 60-70% of which comes from tax rebates, while tax rebates account for over 40% of profits in the tire industry. Industry insiders complain that some tire makers may go into the red following such tax-rebate cut due to incapability of developing higher-end products, such as eco-friendly, safety-oriented, and high-speed tires, while some tire exporters may retarget the domestic market, aggravating competition in China.

Global Tire Giants Rolling Into China

Recently, global tire giants have successively expressed interest to shift business focus to the Chinese market, stepping up production, procurement, and marketing. To date, over 20 foreign tire makers have set up operations in China, including the world's 10 leading makers, all of which have two to three joint ventures or partnerships in the country. These 10 companies now command 80% of the global market share.

In fact, these international tire giants had already established manufacturing facilities in China over 10 years ago with one production base and one partner, mainly as a beachhead into the Chinese market; but they have switched to multi-partnership models recently in order to fully cash in on the fast-developing market. In addition, they have been upgrading domestic procurement and sales channels in China, setting up retail outlets to maximize profitability, which differs from relying on Chinese tire makers for distribution dealerships.

As a result, foreign enterprises now dominate over 50% of the Chinese tire market, especially the high-end segment, with their profitability topping 20% or double that of their Chinese counterparts.