Investments Signal Maxxis’ Competitive Intentions

When financial analysts said that 2009 was a “banner year” for Cheng Shin Rubber Ind. Co., Ltd. in a report published back in May, the market watchers weren’t overstating the facts. But in 2010, when the 2009 results were made public, the Taiwan-based tyre manufacturer which is responsible for the Maxxis brand and Maxxis International companies, announced plans for two new factories, an international standard proving ground and some high profile OE contracts. It was also the year that saw the company move into 10th place in Tyres & Accessories’ annual ranking of tyre manufacturing companies. With all this in mind T&A recently visited Cheng Shin/Maxxis’ Kunshan tyre production plant near Shanghai, China and asked if 2010 was the real breakthrough for Maxxis? And if so what happens next?

Despite the company’s recent achievements and rapidly expanding size, up till now Cheng Shin has opted to focus on growing its business without generating too much extraneous noise or drawing too much attention to the Cheng Shin name around the world. Instead the emphasis has been on promoting its international export brand Maxxis through each of the distribution companies that are dotted around the globe. (According to the company, Maxxis has manufacturing and distribution operations in Asia, Europe, North America and the Middle East and employs more than 22,000 people, including engineers in five research facilities around the world) However, when the news that Cheng Shin recently broke into the T&A top 10 leading tyre manufacturers was published in May market observers from investment banks to wholesalers and distributors that hadn’t previously paid enough attention to the company sat up and took notice.

Parent company Cheng Shin Rubber invests in new factories, capacity expansion and new proving ground

The results of T&A’s enquiries of the company somewhat sum up this attitude of understated expansion. When we asked for comment on the above news, it drew the response from Maxxis International representatives in the UK that the company is investing in a new, state-of-the-art private proving ground in China in order to allow it to “expand its already strong research and development capability.” Then came the news of two more factories in China (see textbox).

Maxxis’s new proving ground facility is located in Kunshan, Shanghai. Work had originally been slated for completion by the end of 2010, but when T&A was there at the end of November the project was some way from complete. Cheng Shin’s research and development department now say the test track will be ready for some time around the third quarter of 2011 due to the addition of some new concepts into the facilities design which have been added to answer increased inquiries from OE accounts.

New proving ground aimed at OE, tyre developmentBut while construction of the proving ground may be taking longer than first expected, the fact that embankments have already been built up for the facility’s high speed loop and plans for a skid pan, wet braking, dry braking, wet handling, dry handling, braking noise and pass-by noise tracks are under construction means the 1.2 million square metre plot could steal a march from its competitors and be the first of this standard in China.

Talking to company representatives reveals that the company’s desire to extend and expand its OE presence (both in China and in mature markets such as Europe) has been a key driver behind the project. However, the fact that the tyre business is facing increasing legislative challenges such as the forthcoming spectre of tyre labelling means that a facility such as this will come in very handy. It could even offer a further income opportunity if the company found time to hire it out to competitors. No official figures quantifying how much the company has invested in the proving ground – and therefore would need to recoup – have yet been released.

Company to construct truck and bus radial tyre production line in 2012

In the meantime, while construction of the new proving ground is completed as described above, Cheng Shin/Maxxis uses a smaller portion of the Kunshan site as a temporary test track. However, T&A understands that when the new proving ground is completed at the end of 2011 the company will embark on a further construction project. This time the intention is to use the space previously occupied by the temporary test track as the location for the construction of a brand new truck and bus tyre production facility.

No details of exactly how many tyres will be made here, how much is being invested in the project of exactly when it will be constructed. However, with on-site mould making, power generation, compounding and R&D facilities, the company is obviously seeking to leverage all the synergies it can with this location.

Kunshan factory to expand production

The executives responsible for Maxxis’ Kunshan passenger car tyre production facility plant increase annual output to over 19 million passenger car radials a year during 2011. When you consider that currently the plant’s car tyre output totals around 18 million units a year, this increase of 10 per cent representatives a significant expansion and put it amongst the largest producing tyre factories in the world.

Touring the purpose-built production facility, which was constructed as a Greenfield site for a joint venture between Toyo and Cheng Shin that was ended by mutual consent roughly 18 months ago, it is clear that the production line has everything in the most time efficient place. The tyre manufacturing machinery may not be the newest automated technology available but, based on a two stage automated platform as it is, it is also not lacking. And throughout the line examples of the best European technology can readily be seen – take the fully automated cutting and butt splicing machines for example.

Commenting on Cheng Shin’s recent rapid growth back in May, Morgan Stanley’s Taiwan automotive industry analyst, Jeremy Chen, described the company’s 2009 financial results as “very strong.” He suggestion was that “the strength and growth of local tyre makers actually are a growing threat” to the premium manufacturers such as Michelin (for which Chinese sales were circa 5-10 per cent of overall sales) prior to recent investments. While the company remains some way off the size and scale of the top three or four tyremakers, recent investments in research and development equipment (in parallel with the development of the new proving ground) point in the direction the company is going.

A particular example of this is the company’s purchase of a Flat-Trac and Rolling Resistance machine at the Kunshan site. The more recent of the two, the Flat-Trac III was acquired with an investment of US$4 million and is apparently the only machine of this kind in China. And with less than 10 machines of this kind in the world – three of which are said to be owned by Michelin, this purchase alone signals the company’s intentions to compete with some of the best in the world. Then there is the High-speed uniformity tester, which is capable of testing tyre uniformity up to 200km/h and again is said to be the only one of its kind in China.

R&D is clearly a continuing priority for Cheng Shin. Tyres & Accessories understands that the company currently reinvests 3.5 per cent of its annual sales turnover on research and development. Analysts described the company’s 2009 results as indicated that it was “one of the best plays on China’s booming auto market.” 2010 is expected to be tougher with pressures from rising raw material costs, but there are no signs of cutting R&D spending or capital investment in the short term.