Report: Latin American market proving 'challenging'

Akron, Ohio - The Latin American tire market could be summed up in one word – “challenging.”

That’s the assessment of a number of individuals and companies contacted by Tire Business, ERJ’s sister publication, recently in advance of the upcoming Latin American & Caribbean Tyre Expo in Panama.

Among them is Orlando Delgado, chief operating officer of Tire Group International LLC (TGI), who said the current economic slump in Latin America, combined with a glut of imported tires, is creating market conditions that cannot be sustainable for the long term.

“There is so much capacity and so much production coming out of Asia right now that it’s deflating prices,” Delgado said.

“It’s keeping prices down and – coupled with the cost of raw materials being…at very low figures – just further compounds the problem.

“What’s going on in the Latin American market is very similar to what I’m assuming is going on in other regions throughout the world, in that, a vast majority of the supply that is going into our respective regions is in fact coming out of Asia and predominantly out of China,” he added.

“From a macroeconomic prospective, most of the countries in Latin America, at least the larger ones, are dependent on oil exports. So with oil at record lows and with the US dollar appreciating in international markets, governments don’t have the funds they had before in order to establish certain works within the countries, infrastructure works, those are put on hold.

“And then that exact same tire that you were selling for $40 (€36) now, due to devaluations that are going on in each one of these markets throughout Latin America, it’s costing them significantly more. So it’s almost a perfect storm of macroeconomics factors as well as industry-specific factors.”

Miami-based TGI distributes tires from a number of Chinese manufacturers, as well as several private brands, to every country in Latin America and the Caribbean, except Cuba, primarily coordinating factory-direct container-load shipments from China to its customers. It does warehouse a small amount of Chinese products at its Miami warehouse, which are exported in parcels to Latin American and Caribbean customers that need smaller quantities.

In addition to representing some major tire brands in Latin America, TGI markets its own private label tire lines – Astro, Cosmo, Orion, Duramas and Industar – with offerings ranging from passenger to OTR sizes.

The distributor sells to about 80 countries worldwide.

“We will sell in other regions but our forte continues to be Latin America and the Caribbean,” Delgado said. “Sales this year more or less are in line with where we were last year, but it’s still quite a challenge in all the international markets, quite frankly.”

In Latin America, “the way that pricing is right now and capacity is right now, it’s just not sustainable long term,” he added. He gave the example of a commodity-sized truck tire that cost $199 about five years ago is now selling for $92.

“It’s just not sustainable business. How can you make money selling a truck tire for $92? It just doesn’t make sense…. This can’t continue much longer.”

All the countries are in a slump, with some faring better than others, he said.

“Mexico, specifically due to the (currency) devaluation, it’s almost off limits. It’s extremely difficult to be able to promote any product within Mexico. Brazil is another country right now that is extremely difficult to sell anything in due to some of the economic challenges that they’re facing.”

He noted that Brazil and Mexico represent more than 60 percent of the Latin American/Caribbean population and GDP, which means 60 percent of the entire market is struggling economically. He said the smaller countries are impacted by a trickle-down effect as well.

“What we’re trying to do, as best as possible, is making sure that we negotiate the best possible prices out of China so that we are competitive in the market and trying to diversify our portfolio by selling other categories as well.

“But in the meantime it’s just trying to wait out the storm as best as we possibly can because the industry right now — again, with excess capacity and low prices — that cannot be sustainable long term. It’s going to have to come to the point where there’s going to have to be some consolidation of manufacturers out of China in order to find that better balance between supply and demand — because right now the tables are tilting in favor of supply that there is significantly more supply than there is demand for tires throughout the international markets.”

Delgado said that with so much uncertainty in the market, consumers in Latin America are focusing more on a price point rather than an actual brand or a tier of product.

“Retailers, quite frankly, are the only ones that are benefitting from this because it’s a lowest price point product, which at the end of the day drives a little more consumer foot traffic to their stores. However the same thing still holds true, if they were buying a tire for $50 and selling it for $60, nowadays they’re buying that same tire for $40 and selling it for $50. Their revenue has probably decreased a little bit, but they should be making it up a little bit more in volume,” he said.

TGI has been preparing itself for an eventual turnaround in the Latin American market, he said.

“We’re trying to launch some of our private label products where we’re not going to be competing with somebody down the street selling the exact same brand tire…. We’re going to try to further establish our private label products and really put some marketing efforts behind them. Because this cannot be sustainable, even short to medium term, so we’re investing in our private label products to better position ourselves in the Latin American market when in fact the market corrects itself.”

He said TGI also is trying to solidify its distribution market in south Florida and looking at other opportunities to distribute tires in the US.

As far as exporting costs to Latin America, Delgado said that free trade agreements among Latin American countries, Asian countries and the US provide standard duties for importers across the board.

“However what we’ve seen over the last couple of years are a significant amount of anti-dumping duties and countervailing duties that are imposed in Latin America, specifically for Chinese branded products,” he said, noting that while the tariffs may not be high, anti-dumping duties can essentially make Chinese value-priced tires cost as much as premium tires.

“The antidumping duty is what’s really making it difficult for the Chinese to move product into Latin American countries.”

The leading tire makers active in Latin America are viewing the market with caution.

Pirelli & C. SpA, for example, said the outlook for the auto and tire industries in Latin America this year “remains negative” in line with zero-growth market expectations and increasing risks for a second year of recession.

In particular, Pirelli wrote in its 2015 annual report, the Brazilian economy “is about to experience another year of decline,” reflecting “strong political uncertainty, high interest rates and inflationary pressure….”

On a broader scale, demand in the region was “strongly affected by a slowdown in economic activity,” which led to lower vehicle registrations in almost all markets, Pirelli said. In Brazil alone, registrations fell 24 percent.

Pirelli reported revenue in South America in 2015 of $1.99 billion, down 7.9 percent from 2014. The region accounts for 29 percent of Pirelli’s global sales and 36 percent of its employees.

Group Michelin echoed Pirelli’s comments about 2015, noting that the truck market in South America plummeted 48 percent last year vs. 2014.

The Brazilian OE market fell 51 percent after truck and bus production was stopped, even in the heavy truck and trailer segments, as both domestic and foreign demand for Brazilian-made vehicles collapsed.

By category, Michelin estimated that aftermarket sales of passenger and light truck tires throughout the region ended 2015 up slightly (0.8 percent) at 75.2 million units, while replacement sales of truck tires fell 8.5 percent to 13 million units.

Shipments of OE consumer tires were off 19 percent to 15.5 million units and OE truck tire demand was off 47.6 percent.

Michelin does not report its revenues for Latin America separately.

Goodyear attributed the lower revenue to unfavourable foreign currency translation losses ($389 million) and lower sales in other tire-related businesses ($62 million.)

These declines were partially offset by improved price and product mix of $268 million, including a favourable shift to replacement products from OE.

Goodyear said its results in Latin America are highly dependent upon Brazil, which accounted for 39 and 55 percent of the business unit’s revenue in 2015 and 2014, respectively.

Venezuela, which won’t be part of the region’s accounting going forward, accounted for 33 and 16 percent of Latin America’s net sales in 2015 and 2014, respectively.

Bridgestone Americas Tire Operations (BATO), which operates eight tire plants and dozens of sales offices and dealer networks throughout Latin America and the Caribbean, said some markets in Latin America are experiencing slowing overall economic activity, along with some political instability, while other countries have a more stable government with economic growth.

“Market conditions, though, remain challenging throughout the region, which impacts the overall economy, and consequently the performance of the automotive and tire industries, with declines in vehicle production in many markets, causing an activity slowdown in consumer and commercial OEM and replacement tires market segments,” the company told Tire Business in answer to questions submitted via email.

In May, BATO parent Bridgestone Corp. divested its business unit in Venezuela, Bridgestone Firestone Venezolana CA, after deconsolidating the operations from its consolidated financial statements last year because “other-than-temporary lack of exchangeability between the Bolivar and the US dollar is restricting the subsidiary’s ability to purchase raw materials and pay dividends on a sustainable basis.”

“Despite these difficult market conditions, Bridgestone Latin America is continuously investing in talent development, technological innovation, and in our manufacturing plants, such as the recently announced investments in our plants in Argentina and Brazil, in addition to expansion of our product line-up, including tires that increase fuel efficiency, and a new advertising campaign being launched in July throughout the region,” a spokesperson for BATO told Tire Business.

Bridgestone’s presence in the region dates back more than 100 years to the former Firestone Tire & Rubber Co. in Argentina. Today it has six subsidiaries that make up the Latin American Tire division (BATO LA), which is part of Nashville-based BATO.

The company said it has more than 8,500 employees via corporate and sales offices located throughout the region. It also operates a network of outlets for consumer and commercial tires, including company-owned stores and dealer networks.

Bridgestone operates four tire manufacturing plants in Brazil, two in Mexico, one in Argentina and one in Costa Rica, along with proving grounds in Acuña, Mexico, and São Pedro, Brazil, according to the firm.

Through its Bandag do Brasil Ltda. and Bandag de Mexico, SA de CV, Bridgestone manufactures and markets precure retread materials for truck and bus tires.

Bridgestone has been touting its inaugural stint as a Worldwide Olympic Partner for the Olympic Games in Brazil this summer, marking “the first truly global marketing platform in our company’s history,” a company spokesperson noted.

“The Olympic platform provides an unprecedented opportunity for Bridgestone to engage with a wide range of internal and external stakeholders by: furthering the company‘s global and regional goals to build the brand, raising its profile and reputation, deepening and building new relationships, celebrating teammates, communicating with the boss and more.”

Cooper Tire & Rubber Co., which serves the region via sales agents in 21 Latin American and Caribbean nations, disclosed aggressive growth plans for the region in 2014 but did not comment specifically in its 2015 financial reports on its performance there last year.

In late 2015 Cooper struck a deal with Argentina’s Fate S.a.i.c. to work together, with Fate planning to distribute Cooper-branded consumer tires in Argentina starting immediately.

The companies also may work together on a variety of potential cooperative ventures, including tire production, offtake arrangements, and possible cooperation on research and development activities.

Sumitomo Rubber Industries Ltd., which opened a car and light truck tire plant in Fazenda Rio Grande City, Brazil, in 2014, did not provide sales data for South America in its 2015 financials.

The region is considered part of Sumitomo’s “others” category, which reported sales of $912 million last year.