China and you: Expect more tire imports in the years to come
China exported an estimated 21 million consumer tires into the United States in 2005. Some of the passenger and light truck tires eventually were shipped to Canada, others to Mexico. But the overall effect on domestic supply is still profound, and will remain so as imports increase.
Given the right political and economic environment, it's inevitable that a country with 1.3 billion people -- more than four times the population of the United States -- will have a significant impact on American industries. That's what we have in China. The U.S. president and Chinese leaders are huge proponents of free trade. The tire manufacturers are taking advantage of it, too. And, apparently, so are you.
'Greater' China, greater products
Mainland China, or China proper, is part of an economic body known as Greater China, which includes Taiwan and Singapore. Mainland China, Hong Kong and Macau make up the People's Republic of China.
There are an estimated 300 tire manufacturing facilities in the country. Many are joint venture operations with foreign tire companies. Some 80 plants, many of which are located on China's eastern coast, make up the vast majority of output. Contrary to what you may have heard, the consumer products are both radialized and well-made.
Although tire production and sales figures in China can be sketchy -- our best guess is 90 million replacement consumer tire shipments in 2005 -- everyone agrees there will be rapid growth in the segment, especially with all the activity from foreign investors. The Freedonia Group Inc. estimates automotive aftermarket tire sales totaled $288.2 million in 2004, and forecasts sales of $523 million in 2009.
"I have seen the imported tire industry mature from Japan to South Korea to China, and today from China there are no bad tires produced, just good, better and best," says Larry Williams, CEO of China Manufacturers Alliance LLC (CMA). "(There is) very little stigma from 'Tires produced in China,' since most of the major manufacturers from around the world are in China with production facilities." CMA sells the Warrior, Bluestar and Dynastar brands in the U.S.
"The supply from China has and is changing quite rapidly," says Jeff Kreitzman, CEO of American Pacific Industries Inc. (API). "It is no longer about price. You must ensure that you provide top quality products on a timely basis." API distributes Wynstar (manufactured by Shanghai Michelin Warrior Tire Co.), Achilles and Pegasus. "We do have other products that we build for customers under their own brand names."
Kumho Tire Co. Ltd. is getting ready to begin construction on its third tire plant in China. The Changchun factory in Jilin Province tentatively will produce its first tire in 2007.
Dr. Sae-Chul Oh, CEO and president, says Kumho will have annual capacity of 31 million tires from its three Chinese plants in 2008, an increase of 82% over current capacity.
"Chinese companies have changed dramatically over the past several years," says Kyu Cho, president of Kumho Tire U.S.A. Inc. "Quality levels have improved in our factories to the point where there is little difference between China and Korea production. Close working relationships continue to evolve technology and communication."
Half of the independent tire dealers in the U.S. sell a tire made in China. Another 28% are thinking about it.
Nick Hodel, president of Northwest Tire Factory LLC, says between 7% and 8% of his group's purchases are Chinese tires, predominantly the GT Radial and Linglong brands. And the percentage is increasing.
There are 165 Tire Factory dealers representing 182 outlets in the Northwest. "We do it for competitive reasons," he says. "The quality is good. We've never had a problem with quality. I've been over there and they have high-tech equipment with low-cost people and they are very fair to their people."
American Car Care Centers Inc. President and COO Len Lewin says he is always looking at more supply from China for his 1,104-outlet network. "We're working on that all the time and they're very quick to respond to your needs (given the right volume). If we need an extra size, given the right volume they can get it to you quickly."
Not just commodity tires
"I agree with the general consensus that the majority of tires imported from China today are commodity sizes," says Don Brown, Asia Pacific market development manager for Performance Fibers Inc. "However, I do expect this scenario to change.
"Chinese tire producers who have the necessary technology are now exporting high performance tires to the U.S.A. and EU (European Union) and are enjoying the associated higher margins."
Hankook Tire Co. factories in the Jiangsu Province and the Economic and Technical Development Zone of Jiaxing are not only patterned after those in Korea, but also manufacture the same product. Their primary objective is not entry-level product.
"We employ the latest and best manufacturing equipment, techniques, raw materials and talent," says Bill Bainbridge, marketing director for Hankook Tire America Corp. "In fact, all of the management in China cut their teeth in Korea."
Other examples of non-commodity imports from China to the U.S. include Linglong ultra-high performance tires, which are available in up to 20-inch sizes -- with 22-, 23- and 24-inch sizes on the way. Manufactured by Shangdong Linglong Rubber Group Co. Ltd. in Zhaoyuan, they are distributed in the U.S. through ZTI Tires Inc. on the East Coast and LQJ Global Tire Inc. on the West Coast.
South China Tire & Rubber Co. Ltd. in Panyu has had success distributing its Wanli high performance tires through Zisser Tire Co. The Wanli brand accounts for 1% of the high performance tire market in the U.S., according to Modern Tire Dealer statistics.
Stamford Tyres Corp. Ltd., known as Stamford Tyres International Pte. Ltd. in Singapore and Stamford Tyres (China) Ltd. in China, will have 18- and 20-inch sizes available this spring.
High performance tires aren't the only high margin tires being exported from China to the U.S. Federal Tire Corp. is producing Couragia M/T light truck tires in Taiwan, and soon will begin manufacturing the Couragia A/T in China.
Two of the leading home-grown consumer tire companies in China are GITI Tire (Anhui) Co. Ltd. and Shanghai Tyre and Rubber Co. Ltd. Both are Shanghai-based manufacturers.
GITI produces the GT Radial and also manufactures tires for Nokian Tyres plc. It oversees five plants in China and one, P.T. Gajah Tunggal TBK, in Indonesia. The company established its first sales and marketing office in the U.S. last year: GITI Tire (USA) Ltd., based in City of Industry, Calif. It sells the GT Radial through a number of large distributors, including Max Finkelstein Inc., Martino Tire Co. and Northwest Tire Factory LLC, to name a few.
Shanghai Tyre also partnered with Groupe Michelin to form Shanghai Michelin Warrior Tire Co. in 2001. Michelin owns a 70% interest in the joint venture. (Michelin's other joint venture in China is Michelin Shenyang Tire Co. Ltd.) Another large Chinese company, Shandong Triangle Tire Co. Ltd., based in the Shandong Province, manufactures the Triangle brand.
Foreign companies have ownership in approximately 40 plants, which account for 70% of total production, says Performance Fibers' Brown.
Last month, Cooper Tire & Rubber Co. finalized its 51% ownership in the third largest tire manufacturer in China: Shandong Chengshan Tire Co. Ltd. The resulting companies, Cooper (Shandong) Passenger Tire Co. Ltd. and Cooper Chengshan (Shandong) Truck Tire Co. Ltd., give Cooper a major push toward its aggressive goal of being number one in the Chinese market.
Cooper is hoping to see some production from its joint venture radial passenger and light truck tire plant with Taiwan's Kenda Rubber Ind. Co. Ltd. -- Cooper Kenda (Kunshan) Co. Ltd. -- sometime this year.
Goodyear Tire & Rubber Co. has a joint venture plant with Dalian Rubber General Factory in Dalian. Continental AG, late to the game in comparison to its main competitors, has partnered with Qingdao Doublestar Tire Industrial Co. Ltd. in Jiaonan, Qingdao.
The four major Japanese tire manufacturers have a strong presence in China as well.
Bridgestone Corp. opened a tire plant in Wuxi, Jiangsu Province, in 2004. Bridgestone (Wuxi) Tire Co. Ltd. is the company's fourth in China.
Toyo Tire & Rubber Co. Ltd. has formed two joint venture partnerships -- Cheng Shin-Toyo Tire & Rubber (China) Co. Ltd. and Toyo Tire (Shanghai) Co. Ltd. Sumitomo Rubber Industries Ltd. began production at its plant in Changshu, Jiangsu Province, in 2004. It also has a joint venture with Hwa Fong Rubber Ind. Co. Ltd. of Singapore.
Yokohama Rubber Co. has a Chinese joint venture with a Singapore trading company. The Hangzhou Yokohama Tire Co. passenger tire plant has an annual capacity of 1.4 million tires.
Both Sumitomo and Yokohama have announced plans to establish strong dealer distribution networks in the China aftermarket as well.
"Distribution remains a major challenge (in China)," says Brown. "The large producers are building company tire stores around the country that will also provide basic auto service. Imported tires remain the most expensive, while domestically produced tires from state-owned companies are the cheapest. Independent tire stores are generally small and sell many different brands."
The top five Taiwanese tire manufacturers are Cheng Shin Rubber Ind. Co. Ltd., Nankang Rubber Tire Corp., Federal Tire Corp., Kenda Rubber and Hwa Fong Rubber. Cheng Shin also operates a plant in Xiamen, China.
Extraordinary growth, but...
Despite its nearly double-digit annual growth, China has anything but a stable economy. Its banking system sometimes acts as a financing arm of the Chinese government. Intellectual property theft and counterfeiting remain problems.
China faces energy shortages. In the recent past, tire plants and automobile assembly facilities had to curtail production due to a lack of power, particularly in the Shanghai area and Guangdong Province, two of the fastest growing industrial areas in China.
The Three Gorges Dam project on the Yangtze River is expected to help the situation this year. China also is building many nuclear power plants.
"The situation is now greatly improving, since new power generating facilities are being built and reliance on coal is diminishing," says Brown. "More facilities are being fueled by hydropower and nuclear power. There are no major energy shortages forecasted for 2006 and wide-spread brownouts should be unlikely."
Labor cost remains the main difference between tire manufacturing in China and the U.S. Factory workers average close to $3,000 a year. In rural areas, per capita income is less than $1,000. In 2002, China's labor cost was 3% of the United States, or 63 cents an hour, according to Judith Banister, who works with Javelin Investments in Beijing, China's capital.
However, the plants are not as efficient on a global scale. Last August, BusinessWeek reported that it still takes $5 to $7 of investment to generate a dollar's worth of gross domestic product in China. That compares to $1 to $2 "in developed regions such as North America, Japan and Western Europe." They will have to work hard just to keep up with original equipment demand. There are eight cars for every 1,000 people in China, compared to 940 per 1,000 in the U.S. That will change as the Chinese population embraces 21st century reform.
According to the China Association of Automobile Manufacturers, domestic auto market demand will increase from 5.8 million vehicles in 2005 to eight or nine million in 2010.
And despite joining the World Trade Organization in 2001, China is still a communist country, which, among other things, advocates state-run businesses and tends to denounce private ownership. That's why so many foreign companies form joint venture partnerships. (If the joint venture is publicly traded, the Chinese partner has to have greater equity than all other partners.)
These problems won't disappear overnight. But the country and surrounding areas greatly influenced by China remain aggressive when it comes to business and growth. CMO magazine says China has put $15 billion aside "for acquisitions of leading companies and brands globally."
As for its own brands, the China Association of Rubber Industry and China International Engineering Consulting Corp. are working on a plan for the tire industry in China. The focus is on developing proprietary radial tire technology, says the Asia Pulse.
Those are long-term plans. In the short term, "China is not the locomotive," according to a recent issue of China Economic Quarterly. "Final demand in the world economy lies elsewhere, chiefly in the United States.
"Over the next two to three years, about half of China's GDP growth is likely to come from exports, meaning that any significant downturn in global import demand will have a substantial negative impact on Chinese growth."
Until that happens, China will continue to affect the tire aftermarket in the U.S. "China is getting like the U.S. -- it is selling to everyone," says one domestic tire distributor. "Also, their companies used to come to us. Now we go to them."