Investment Bottleneck in Russian Tyre Industry

Investors have ploughed hundreds of millions of euros into the Russian tyre industry in recent years, of which the largest part has been invested in machinery and equipment. Market leader Harburg-Freudenberger from Hamburg in Germany has been operating its own distribution subsidiary in Moscow since earlier this year. This is responsible for the co-ordination of all activities on the growing Russian tyre market. In particular it is the high performance PC tyre sector where machinery and equipment suppliers see a lack of sophistication on the part of the domestic manufacturers.

“Harburg-Freudenberger was able to preserve its contacts” during the breakdown of the Soviet Union, explains sales director Jens Ritter in an interview with Tyres & Accessories. The traditional German company, which was listed until last year as ThyssenKrupp Elastomertechnik, had good contact with Russian tyre manufacturers and the central Muscovite research institute for the tyre industry decades ago.

Now, with its new distribution subsidiary and its technical support representatives who are trained in Germany and travel in Russia, Harburg-Freudenberger expects that its position on the Russian market will become even stronger. During the past three years the German manufacturer of machinery and equipment has sold more than 100 curing presses to Russian and Belorussian manufacturers and thus can call almost every local tyre manufacturer its customer. Further orders have been written and further tenders have been made, says the sales director, whose career with Harburg-Freudenberger spans 22 years. Also during the past three years, some 20 tyre building machines have been sold into Russian tyre factories and there have been negotiations on the installation of more tyre building machines.

In particular it is the larger manufacturers such as Sibur-Russian Tires, Amtel-Vredestein or Nizhnekamskshina that have had the resources to fund such projects. Either these companies have “a very, very good financial structure” in their own right (such as Amtel for example), or they have financially strong corporate mothers such as Gazprom (Sibur) or Tatneft (Nizhnekamskshina) that are supplying the necessary liquidity to fund expansion and/or modernisation projects.

Although tyre manufacturers in Russia show a certain readiness to invest in their facilities, there seems to be a backlog in high performance PC tyre production, Jens Ritter believes. In the recent past both Nokian and Michelin have to build new PC and light truck tyre factories in Russia to serve the domestic market, each producing about two million tyres annually. Amtel is currently implementing its second expansion phase in its state-of-the-art tyre factory in Kirov (a further two million units added), while Sibur is expanding the capacity in its Yaroslavl tyre factory by another one million for production of its new tyre brand Cordiant.

It should be remembered that, only last year, 8.2 million tyres had to be imported to meet domestic Russian demand, accounting for around a quarter of the Russian tyre market of 35 million passenger car tyres. According to Jens Ritter, the growing demand is partly caused by an increasing number of Russians who drive Western cars. On the streets of Moscow today there are almost as many Mercedes and BMWs stuck in the rush hour traffic jam as traditional Volgas and Ladas. The market expert from Harburg-Freudenberger reckons that the investment bottleneck is high, saying: “It is certainly some hundreds of millions of dollars.”

However, investments are not only necessary for passenger car tyre production facilities, as experts also point to backlogs with truck tyres. To counter this, Nizhnekamskshina, for example, has announced that it will finally begin the construction of its 180 million dollar truck tyre factory. Talk during the Moscow Tires & Rubber show was that Pirelli would become Nizhnekamskshina’s joint venture partner. Both companies have already co-operated on several occasions. At Belshina in Belorussia big money is also being invested in truck tyre production. Most of the sums that are being invested are aimed at strongly increasing product quality over what was the norm in former Soviet times, Jens Ritter continues. “Russians prefer Western technology,” he says. However, Harburg-Freudenberger doesn’t sell tyre building machines for truck tyres. In general there is no significant competition for the market leader.

That there is an inequilibrium regarding investments in the Russian tyre factories is also confirmed by Matador Machinery from Slovakia. “Up till now nobody is investing in truck tyre production,” Karol Vanko says. The director of Matador Machinery still isn’t convinced that Nizhnekamskshina will actually start with the construction of its new factory. The Russian manufacturer has been talking about this investment now for a number of years, Mr Vanko points out.

However, he strongly recommends a policy of catching up on modernisation projects as soon as possible in order to prevent foreign competitors gaining market share with high-tech products. “I’m afraid it will be too late if we wait.” The Yaroslavl tyre factory (belonging to Sibur-Russian Tires) traditionally is the only one in Russia in which modern, all-steel belted radial truck tyres can be produced. On the Russian commercial tyre market Sibur-Russian Tires is the clear market leader with a market share of about 39.9 per cent (Sibur’s figure). With an increasingly improving road infrastructure in Russia and the growing need for road transportation, demand for modern truck tyres will increase. If there’s no domestic supply, then products will inevitably come from abroad. However, Karol Vanko understands the situation of the Russian tyre manufacturers in that first they have to absorb huge current economic and technological investments before they can embark on yet another big investment programme.