Nexen aiming for US$2.5 billion sales by 2015

While most of the western world celebrated New Year at the end of December, both China and South Korea were making plans for their celebrations at the start of February, based on the lunar calendar. Back in 2010 Nexen Tire Corporation announced plans for a 1 trillion won (US$1.2 billion) investment in its largest factory yet in Changneyeong in the same region as its first plant (Yangsan), which along with the company’s second plant in Qingdao, China, continues to expand. Just before the oriental entrance into the new decade, Tyres & Accessories had the opportunity to visit Nexen on its home South Korean and adopted Chinese territory and saw how the company is implementing its plans to become a US$2.5 billion company in the next five years.

Large scale capacity expansion and increased marketing spending to support greater OE focus

When you look at the company’s growth during the previous six years, there is every possibility that the Nexen will achieve this goal. Before the company’s full year 2010 audited results were released financial analysts predicted the company would report sales in excess of 1 trillion won (£487.3 million; 563 million euros; US$800.8 million). In fact Nexen managed the best part of US$1 billion in 2010, for the first time in the company’s history. And in spite of the economic downturn in 2009, Nexen Tire broke its all it records with sales of $877 million the year before. According to the company, “this outstanding performance came from aggressive marketing strategy to US and European markets and uplifting brand power in Korean domestic markets.” And the compound annual growth rate the company has achieved between 2004 and 2010 (21.9 per cent) would seem to suggest that reaching annual sales of $2.5 billion in the next five years is within reach.

Most of the recent Nexen developments alluded to above – the new factory, the expansion plans and the sales target – have taken place since the company made a series of strategic appointments to its top level management last year. Nexen Tire elected Hyun-Bong Lee as Nexen Tire vice chairman and CEO along with the appointment of Byung-Woo Lee as vice president sales division – both during the first months of 2010. Hyun-Bong Lee was previously CEO of Samsung. More recently the company appointed Seung-Ku Lee as managing director of global marketing who joined from Samsung electronics. He brings 25 years of experience, latterly in executive marketing management positions to the new role, rolling off the trio of adjustments in the leading sales, marketing and corporate leadership positions.

Although in many ways Nexen and Samsung are difficult to compare, there are always going to be similarities in the way effective consumer products companies act – and therefore things that this instance of apparent experience transfer from Samsung to Nexen could indicate. It could well be that Nexen, currently Korea’s third largest tyre manufacturer after Hankook and Kumho, would like to replicate the achievement of the leading Korean blue chips that have successfully become global blue chips (such as Samsung and fast growing OEM Hyundai). What these manufacturers and their Korean tyre making counterparts have in common is that they continue to be able to offer good quality products that are increasingly competitive with other upper mid-range and premium products at competitive prices. This “more for less” approach has certainly served Hyundai well. During 2010 Hyundai/Kia leapfrogged Ford into fourth place in the global car sales tables having sold 5.74 million cars, according to the New York Times.

What is clear is that Korea’s oldest tyre manufacturer (in its original incarnation the company was founded in 1942 under the Woosung moniker) is seeking to strengthen its global position and extend its market influence. And this means becoming 10th in the world rankings, gaining greater domestic and OE market shares and producing upwards of 56 million tyres a year across all three of its factories by 2017.

Yang San – gearing up for global distribution

Nexen may currently be the third largest tyre manufacturer in South Korea, but its 1942 foundation purportedly makes it the oldest in the country. And despite its arguably slower rate of expansion than its two domestic competitors, the company has premium heritage in its blood that dates back to co-operations with at least one high profile manufacturer in or around the 1990s. Yang San is Nexen Tire’s global headquarters, from where the company has been operating since 1987. With the headquarters also housing research and development, manufacturing and large scale distribution operations, it is a good example of how the company’s corporate vision is being outworked throughout the business.

Currently the Yangsan site produces 57,000 mostly small and medium sized passenger car tyres (if the product sizes on the production schedule are at the larger end of the range this figure may equate to closer to 50,000 units). On average somewhere between 28 and 32 per cent of the factory’s tyre output can be classified as UHP tyres – something that Nexen’s Yangsan plant manager and senior production managing director Chang Soo Yang described as 16-inch diameter and above, below 55 series aspect ratio and over V speed rating.

Due to the fact that 70 per cent of the company’s output is destined for export markets where demand exceeds supply (the remaining 30 per cent is split 50:50 between domestic replacement market and almost exclusively domestic OE sales) there is virtually no seasonal fluctuation in production output. In fact demand currently outstrips supply to the extent that Nexen managed to avoid any cutbacks in production output during the recent recessionary period that saw many leading manufacturers reduce production, draw down stocks and lay off workers.

The only fluctuation in Nexen’s export figures is the proportion sold to the US versus Europe the lion’s share of the 70 per cent export figure goes to the US/North American markets (35 percentage points) in 2010. After this Europe is the next large market, with 25 per cent of output ending up here. The Middle East/Africa and Asia Pacific regions account for the remaining 10 per cent between them. One reason for the dominance of the US market in 2010 was because of a favourable exchange rate with the Korean won, making the US an attractive destination both because of its apparently unrelenting demand for high performance sizes and because of the profitability on offer here. However, at the start of 2011 early indications show that percentage share could be moving back the other way this year. Company representatives told T&A that they still think the US has the “biggest and best UHP” market, but they are also clearly interested in developing their European presence too.

So, in order to meet this burgeoning demand and its medium and long-term goals, last year Nexen announced that it to make a series of investments in expanding its tyre manufacturing capabilities. The headline figures was of course the 1 trillion won plant in Changnyeoung, South Korea in a similar corner of the country to the existing Yangsan factory. However the company also plans to increase output at the Yangsan plant by around 10 per cent to 60,000 tyres a day, based on a 277 day working year this brings annual tyre output to about 16.62 million up from around 16 million in 2010.

Nexen’s production facilities

Source: Nexen Tire Corporation

In order to achieve this goal, which is driven by a desire to improve the quality and capabilities of its products in addition to realizing the firm’s corporate ambitions, the company recently invested in 10 new curing moulds at Yansang (brining the total to 237) and a new mixing system manufactured by HF (formerly known as Thyssen Krupp, Germany) optimised for the production of high silica compounds and an undisclosed number of quadrex extruders made by Berstoff (Germany).

However, once the expansion of Nexen’s Yansan plant is complete at the end of 2011 the factory will have reached its terminal capacity. Due to the fact that there is no more available land around the production site, further increases in capacity will be virtually impossible. And this provides another reason why the company has opted to build the new mega plant in Changnyeoung, South Korea.

Have been preparing for 2012 tyre labelling rules since at least 2009, the first step for company to meet and exceed these requirements was to reduce the rolling resistance of its compounds before enhancing other eco-characteristics. According to company representatives, the previous compound used at the Yangsan production plant had the unwanted side affect of slowing down production – which is another reason for the investment in new mixers and extruders here. Apparently producing the firm’s latest low rolling resistance compound using its legacy equipment was not as efficient as investing in the new system. Employing high technology quadruple extruders is also said to have dealt with the electro-static risks of producing high silica compounds. The quality of this equipment stands because – as Nexen representatives will tell you – the products installed are produced by Nakada of Japan and are some of the most advanced machinery of this kind in the world.

The quadruple extruders aside, as you will have noticed, Nexen opted to generally “buy European” when it came to purchasing the latest German built machinery to grace the Yangsan factory’s shop floor. The reason for this is twofold – firstly the quality and prestige associated with German-engineered manufacturing equipment is well known, but the fact this equipment was built within the European Union also meant that it was developed with all the forthcoming European regulations in mind, meaning it was well-suited to Nexen’s requirements of complying with current and future legislation.

Those of you that were not already aware may be surprised to learn that the Yangsan also has some run-flat tyre capacity, products made on this line were exported to the US for the first time last year. However the amount of capacity offered for this type of product is described as small and the new Changnyeoung plant is being geared up to offer much more of this after it goes live in 2012.

In line with Nexen’s wider corporate vision of increasing sales in general and OE sales in particular, the Yangsan firm is aiming to increase the total amount of tyre sales it generates largely by increasing the proportion of overall sales generated by the OE channel. Currently the company has OE contracts with some of the best known Korean car manufacturers – notably including OE on Kia’s trendy Soul model and supply to the Hyundai i30. However in the future the aim is to gain OE supply contracts outside the pool of domestic market OEMs alone.

Qingdao plant on track to produce 20 million tyres a year by 2017

While corporate presentations are often strong on vision and goal setting, the cynical amongst us may suggest that they can sometimes resemble wish-lists more than development road maps. However in Nexen’s case the existence of the company’s Qingdao, China production plant demonstrates the realization of some of the firm’s earlier targets. Having re-branded as Nexen at the turn of the millennium, the company initiated its globalization strategy in 2008 and the same year began producing tyres at the Qingdao site.

Now the Qingdao plant has been up and running for some time and is currently producing 6 million units a year. This is set to increase to 23,000 tyres a day by the end of May 2011, with further expansion continuing virtually every year until the long-term goal of 20 million units annual output is reached in or around 2017.

In addition to the Chinese production base, Nexen runs five sales branches across China but centring on the large cities of the country’s Eastern seaboard. In 2010 47 per cent of the tyres produced at the Qingdao factory were delivered to customers in Europe, but this European export dominance is likely to change when Nexen’s new Cheongnyang factory comes on stream. Then Nexen will seek to leverage the contacts made by its sales branches and increase the proportion of Qingdao’s output sold to domestic Chinese customers. There is also likely to be an increase in the proportion of tyres sold to OE customers, in line with the company’s overall goal of increasing sales particularly quickly to vehicle manufacturers.

As far as tyre brands produced in Qingdao are concerned, the ratio of Nexen to Roadstone tyres produced in Qingdao is reportedly 90:10. No other private or exclusive brands are produced at the factory

Owing to the fact that the Qingdao plant was built as a greenfield site, the company has been able to construct a 680 metre long manufacturing hall that allows room for the most efficient installation of production equipment. Machinery is generally modern, with the building process in operation running at around 95 per cent automated. In addition Nexen Tire China president Lee Jae-Soo and the plant’s managers (Oh-Seok Gyu, vice general manager and Jeon Seung-Bae management support team manager) pointed out that three new tyre building machines have already been installed ready to enter operation in the next few weeks. These modern machines are expected to have a marked effect on the efficiency of production and further reduce the building processes reliance on workers.

The next upgrade in the building section will see the installation of VMI builders, which are likely to be installed by the end of May. Due to the fact that the Qingdao factory, like the Yangsan site does currently and the Cheongnyang plant will do when it is completed, produces tyres with high silica compounds, the company also invested in improved mixing equipment to enhance to company’s low rolling resistance capabilities.

When T&A visited the plant 84 banks of Mitsubishi double curing presses could be seen in operation, meaning up to 168 tyres can be at in some part of the vulcanisation process at any given time. A virtually empty second production hall could also be seen in the distance. This is designed to twin the existing production line and therefore double whatever the company manages to achieve from the first line. That said there is still space to build further production on-site.

As far as quality control is concerned, 100 per cent of Nexen tyres produced at Qingdao have to pass through rigorous manual inspects and fully automated uniformity testing. A further 15 per cent sample of production is also x-rayed.

Like Yangsan, Qingdao operates a very modern 100 per cent automatic warehousing system capable of storing up to 400,000 tyres thousands of rack units at any given time. In addition the plant stores a further 200,000 tyres in a semi automated warehouse alongside the automated stock system.

The Qingdao site is also home to a compact R&D centre, which Nexen calls its TNC. The 30 staff here work on the development of tyres for both domestic and export customers in conjunction with the company’s other sites and the lead research centre alongside the Yangsan factory in South Korea. Staffing levels and investment in R&D are expected to increase in line with the growth of the site’s production capacity and there is even talk of a possible addition of an on-site proving ground in the next five to 10 years.

During 2010 Nexen China completed its second phase of investment and achieved ISO 14001 and TS 16949. As important as these are, bearing in mind how historically export focussed Nexen is, the fact that the company’s Qingdao plant gained certification for the world’s largest tyre retailer in 2009 is probably just as much cause to celebrate. Company representatives didn’t explain whether or not they had opted to supply Wal-Mart from their Korean manufacturing base in light of the US government’s Chinese made tyre import tariff. However, with this certification it is at least possible. What is interesting to note from the break down of Nexen Qingdao’s export destinations is that the vast majority of tyres produced here are destined for Europe for sale via leading customers such as Stapleton’s and BITS, the exclusive UK Nexen and Roadstone distributors respectively (Deldo, Van den Ban and Reifen Gundlach as well as leading tyre retail chain Kwik-Fit are known to supply Nexen produced brands in each of the companies’ various markets).

After Europe the next largest export destination for tyres produced at the Qingdao factory is the Americas region (which includes North, Central and South America), followed by the Middle East and Africa (7 per cent) and Asia and Oceania (5 per cent). This leaves 18 per cent of production (1.1 million tyres) being produced for sale in the Chinese replacement market. However, once again, the supply from the new South Korean plant is likely to have a significant impact on where tyres produced in Qingdao end up. Chinese OE and replacement tyre markets, would seem to be preferred choice.

Targeting production of 56 million tyres, turnover of US$2.5 billion and increased OE sales would seem to be a tall order, but the company’s investments expansion and commitment to double marketing budgets over the coming years back up theses intentions. And a fusion of the kind of strategies that have served successful Korean companies outside the tyre sector looks likely to be the way the company plans to do it. In the years to come it appears that Nexen is seeking to learn from the successes of consumer focussed Samsung, while developing a continually closer relationship and fast growing OEM brands of the Hyundai Group.