By David Shaw, ERJ staff
Shanghai, China -- Chinese people - like people the world over - like to make a good impression. There's also a sense here in China that impressions of China and Chinese politics are distorted by the Western media, whom the Chinese regard as biased and open to influence from business and industry.
As a journalist, I can make no comment on that. I can say, after talking to some of the leaders of China's tyre and rubber industry, that this impression that the West misunderstands China is deeply-held and widespread.
When you come to us -- say Chinese businessmen -- to buy and sell goods or services, you only have to make the effort to understand one culture - that of China. When we sell overseas, or buy from you, we have to learn the culture of the United States; of India; of Germany; the UK, Brazil and every other culture and language around the world.
A second issue that the tyre industry struggles with is low prices and tight margins. Sometimes we westerners say that Chinese tyres are inferior. In an effort to create a good impression, many Chinese will evade the issue or offer a partial response. But dig beneath that initial reaction and there is an admission that this is true-at least in the medium term.
The reason for this is the low price of Chinese tyres. One former tyre engineer told me that if a Chinese company were to make a tyre using the same materials and processes as Michelin, for example, they would rapidly be out of business. The costs would be higher than the selling price.
The same engineer admitted that mixing in China is at a level comparable with mixing in the west from 30 or 40 years ago. Silica mixing is also in its infancy here.
While few at a more junior level were prepared to admit it, the director of China's top rubber university said that China will take 10 years or more to catch up with the west in this area as well as many others. The director of the tyre branch of the China Rubber Industry Association (CRIA) acknowledged that the gap between Chinese tyres and western ones remains wide, though it has narrowed.
Furthermore, many Chinese tyre makers feel somewhat under siege, as demand from Europe has fallen due to the economic crisis, while exports to the US remain subdued, thanks to the tariffs imposed by President Obama. Furthermore, growth in China's domestic market has slowed, leading to reductions in order books and factories running at reduced capacity.
Suppliers into China's rubber industry have seen volumes reduced compared to a year ago. This is largely due to the slowdown mentioned above. Uncertainty over EU Labelling requirements adds a further -- albeit minor-level of uncertainty to the mix.
The result is that as annual demand growth slows from 20 percent or more, to below 10 percent, China's tyre makers now have time to develop their technology. And this is precisely what is happening - at least among the larger, more export-oriented companies.
It will be a long process, but the managements within the tyre makers recognise the reality of global tyre markets, as do their representatives in the CRIA and in government.
Key limitations include a lack of experience and understanding of modern mixing and processing methods; lack of up-to-date technology and, critically, limited awareness of quality management and quality control at the shop floor level.
To overcome this, Chinese tyre makers are recruiting compounding engineers; process engineers and chemists and researchers from more advanced tyre makers, and they are transferring technology into the Chinese companies. Similarly, Western materials and machinery suppliers are working with those same development scientists to improve the materials, compounds and equipment which can deliver the high quality they seek.
However, this all adds cost. Furthermore, there is more cost associated with testing and quality control and developing distribution networks and branding.
Inevitably, the cost of making tyres in China is going to increase, and the tyre makers are struggling with the best way to manage that cost increase.
Where big-name tyre makers can progressively pass those costs on to their customers through price increases, many Chinese tyre makers are competing at the bottom end of the market which is extremely price-sensitive. A price increase often results in reduced sales.
So managements have to make a decision whether they will attempt to remain the cost leader, which will result in minimal improvements in quality, or whether to attempt moving their brand quality upmarket with the consequential increase in costs and reduction in margins.
There is only one viable strategy: move upmarket, but in stages, as margins permit. All the top tyre makers in China recognise that, and they are being encouraged in that process by government, by their fellows and by their view of the global market.
So while I do not anticipate any significant reduction in output from China; I believe Chinese companies are in the process of switching track, building R&D experience, while reducing their efforts to rapidly increase production capacity.
Furthermore, there are over 100 tyre makers in China of which some are slow and ill-informed about the global situation. There can be little doubt that the industry will see significant consolidation over the coming 5 years.