Opinion: What next for the Chinese tire industry?

Article published in the September/October edition of European Rubber Journal magazine

At the height of the, now faltering, economic boom in China some economists foresaw a new world-order in which, rather than importing capitalism, that country would impose its way of doing business on the rest of the world.

While the argument had its merits, it ignored some fundamental flaws within the Chinese economy, with its heavy reliance on cheap labour and piecemeal adoption of international standards of environmental protection, health & safety and business transparency.

These inherent weaknesses have since been sharply exposed in many sectors of Chinese industry – not least its tire manufacturing sector.

Well before the current crisis triggered by the imposition of US import tariffs on its passenger car tires in late 2014, standards within the Chinese tire industry simply did not stack up against those of its international competitors.

Small manufacturers

While the largest Chinese players do operate at levels comparable to Western tire makers, the industry still carries a tail of 300 or more much smaller manufacturers supplying mostly cheap, hard wearing tires for the domestic market.

Even the biggest Chinese producers lack the scale, experience, expertise and financial muscle to compete at the top end of the global tire market, especially in the areas of research, product development, tire-testing and branding.

Chin’s tire industry is, therefore, heavily dependent on export markets, where it must, by and large, competes on cost – being unable to command the higher prices needed to support any added-value within its tires. And, as if to add insult to injury, the Chinese also lose out in their own lucrative domestic OE tire market to stronger Western brands.

Tariff trouble

Given these deficiencies, any significant drop in sales to its largest export market, the US, was always going to hurt. The country was the destination for 31 percent, by volume, of Chinese car tire exports and up to 60 percent of its truck & bus tires sold overseas.

Since the US slapped import duties on Chinese car tires, sales of the top 10 Chinese tire makers fell by around 18 percent in 2015 compared to the previous year. Meanwhile, at least five Chinese tire makers were reported to have gone bankrupt and sales among a top tier of Chinese tire machinery makers slumped by around 30 percent, ERJ figures also show.

Indeed, last year, the value of Chinese car tire and truck & bus tire exports worldwide fell by 19.2 percent and 15.6 percent respectively.

Now a decision by the US Commerce Department on 29 Aug to levy preliminary antidumping duties of up to 23 percent against Chinese truck and bus imports, looks sets to plunge the sector into further freefall.

China’s Ministry of Commerce (MOFCOM) has denounced the latest sanction as protectionist and “an abuse of trade”, and the China Rubber Industry Association (CRIA) is organising Chinese tire makers and importers to lobby and appeal against the tariffs.

Whatever happens next, China has acknowledged that its tire industry is churning out far more tires than the market needs.

Output from the Chinese tire manufacturing industry has more than doubled in the last 10 years: from around 250 million units in 2005 to 565 million units last year, the CRIA estimates. The figure is forecast to reach 572 million units this year.

At ERJ’s Future Tire Conference 2016 in May, CRIA secretary general Mary Xu, said that the Chinese government was trying to reduce tire production by around 40 percent in a bid to address overcapacity in the sector.

The main focus, she said, was on reducing the large number of smaller tire makers through the introduction of tough new requirements in terms of environmental impact, resource efficiency and the quality of tires being produced.

The measures will include the introduction of mandatory tire label regulations in China by 2019. This, said Xu, will show Chinese consumers which tire is better and help them choose tires that are most suitable for them.

Consolidation

The question is: to what extent will these measures address the issues of overcapacity and manufacturing/product standards in China, and how quickly?

Chinese authorities and industry leaders have been speaking of the need for consolidation of the tire manufacturing industry for many years now – with little obvious success.

While this move to weed out smaller, inefficient tire makers could well yield early results, the bigger goal of driving up the international standing of the ‘Made in China’ tire brand will take much longer to deliver.