The Market is Ripe for Korean Tyre Makers

2009 could be a breakthrough year for the Korean tyremakers. A collection of circumstances (some clearly the result of famed Far Eastern forward planning, and others distinctly more fortuitous), mean Kumho, Hankook and Nexen have found themselves poised to sell increasing numbers of replacement tyres in the UK and Europe. In addition, their successful efforts in the OE department – ironically helped along by the shaky macro-economic environment – mean this perfect storm of variables could leave the Korean manufacturers in an even stronger position when the dust settles. In the UK, a market where mid-range and economy tyres make up around 60 per cent of unit sales, official figures show that 4.7 million passenger car tyres of South Korean origin were imported last year. However, this cannot be the complete total because it only includes tyres imported from factories actually situated in South Korea. Owing to the fact that all three have significant manufacturing presences in China, and tyres often enter the market by “indirect routes,” it is likely the true total is a lot more.

One source told Tyres & Accessories as many as 6.5 million Korean tyres could be sold in the UK market each year – that’s more than 20 per cent of the market, based on T&A’s 2008 total market estimate of around 31 million units. Your first reaction may be to dismiss this as just the result some creative competitiveness, but don’t be too hasty. Consider the fact that Kumho openly stated it sold over a million Kumho-brand tyres in the UK last year, then add on Marshal sales, plus Hankook (and its related brands’), not to mention Nexen, Nexen-produced Roadstone and all three companies’ private brands. Complete this calculation and the 6.5 million unit figure doesn’t sound so unrealistic.

So, how did they get to this place? It appears the answer is at least partly price. In order to find out more about how this came to be, T&A extrapolated recent research by analysts at Encircle Marketing. According to their data, between September 2008 and August 2009 the average UK passenger car tyre – across all sizes and speed ratings – cost just under £80. The average price of tyres sold by the Korean manufacturers, however, was some 22 per cent less (£62). Look a little closer and the prices show that the three manufacturers’ are following quite different strategies. Hankook appear to be leading the pack in terms of pricing with an average tyre costing the best part of £69, followed by Kumho (£66) and Nexen (£54). In broad terms this pattern appears to be displayed across the market, with Hankook generally about 15 per cent lower than the market average, Kumho 5 per cent under this and Nexen up to third lower than the market average £80 tyre (see charts).

At this point, it is worth noting that while Kumho may not achieve the same price averages as Hankook, T&A research suggests it does have a volume (and therefore market share) advantage over its main Korean competitor. It is also difficult to ignore the apparent correlation between pricing and route to market – Hankook achieves the highest prices and has it own sales team, while Kumho and Nexen successfully sell through their wholesale partners (Kumho – Micheldever Tyre Services; Marshal – Bond International; Nexen – Stapletons Tyre Services; Roadstone – BITS).

External factors are helping all three tyre manufacturers along

Although the main reason for the Korean manufacturers’ strong position in the UK market is because of their successful fusion of oriental strategising and Western European deal making, external factors are also helping them along. (Continuously improving products, which consistently rank highly in magazine tyre tests and keen pricing must also be considered). The well reported de-segmentation phenomenon, where consumers have opted for a lower priced product than they perhaps would have bought pre-recession, appears to have had a particularly significant positive impact.

All three companies have also been actively seeking new OE business in recent years – in Hankook and Kumho’s cases with some high profile successes (Kumho – Mercedes A-Class; Hankook – Volkswagen) in the last year. In addition Korean media recently quoted Hankook’s vice-president as saying the company has been negotiating a supply deal with Toyota. Shares in Hankook Tire rose 5.94 per cent in response. Nexen too, while clearly adopting a majority replacement market position, has also capitalised on its domestic Korean connections and increased its OE sales with the increasingly influential Hyundai/Kia carmaker – now the fourth largest in the world.

While specific pull-through results are notoriously difficult to demonstrate, OE contracts certainly help the companies develop their positions in the medium and long term. In another example of how external circumstances have helped the Korean tyremakers’ existing strategies along, the UK government’s recently extended vehicle scrappage discount scheme appears to have propelled Korean brand car sales forward. In August the Hyundai i20 (with OE split between Hankook and Kumho) was the third biggest seller after market stalwarts the Ford Focus and Ford Fiesta. Kia, which names Nexen amongst its OE suppliers, has also seen significant increases in sales in recent months.

The US government’s recent decision to impose an additional 35 per cent anti-dumping duty on Chinese tyres imported into the United States is also likely to have an interesting side-effect in Europe, with manufacturers that had previously produced tyres destined for the US in China desperate to switch distribution to the equally profitable European market (for more on this see additional coverage elsewhere in this issue). However, the Korean tyre makers, which themselves have significant production capacity are less likely to be affected by because they have well established domestic sales networks and are expanding production outside of China. Take Hankook for example, when questioned on the subject, corporate communications team manager Calvin Pak told T&A: “approximately 50 per cent of Hankook’s China-made tyres remain in the country.”

And if Nexen’s recent decision to build an enormous factory on home turf and Hankook’s announcement that it is ramping up production in Hungary (full coverage of both these stories in October’s magazine) are anything to go by, the Korean manufacturers could be positioning themselves to step up supplies from non-Chinese plants to both US and Europe. In light of US government’s recently applied levy, it will be interesting to see if executives reverse Kumho’s decision to postpone its plans for a US production facility in White, Georgia.

As this issue of Tyres & Accessories goes to press, European carmaker’s association ACEA has written an open letter to the European Commission urging it to reassess the conditions of a forthcoming free trade agreement (FTA) with South Korea. According to the ACEA, the FTA will “have a significant impact on jobs and competitiveness in the EU.” In other words, it will help the South Korean manufacturers sell more of their economically priced cars. ACEA reported that the trade commissioner intends to initial the FTA in October.

ACEA data shows that the South Korean car industry is focused on exports, with a production of 3.5 million cars per year, of which 2.5 million (73 per cent) are exported. The EU is seen as a key target market for Korean manufacturers, with 700,000 cars in 2007, or 20 per cent of all EU car imports, and an average 10 per cent annual growth between 2000 and 2007. (Due to the economic crisis, ACEA reports that 2007 is a better reference year than 2008). Bearing in mind the fact that almost all Korean cars are fitted with Korean tyres from one of the three manufacturers, this also means more OE pull through. And when you consider that, according to Encircle Marketing’s latest selling way data, Korean tyres consistently account for 10 – 15 per cent of replacement tyre sales recommendations in the UK, Kumho, Hankook and Nexen still have plenty of scope for further growth.