Is the sun setting in the East?

Much has happened in the European tyre market in recent times. Last year’s introduction of the REACH regulations has been of particular interest, as is the run-up to November 2012’s tyre labeling. The second of these has been interpreted by many Chinese tyre makers and distributors as being, in practical terms, a trade barrier intended to make entry into Europe more complicated and expensive. Yet the Chinese appear to be responding pragmatically to the ‘problem’ of Europe. During the CITExpo show in Shanghai the opinion was often voiced that no real problem as such exists, rather a challenge to overcome. And as hardly anyone in China doubts success in this area, in future established western manufacturers in our part of the world can expect the presence of even more competitive, driven Chinese companies.

Yet some of the conversations held with Chinese manufacturers and distributors during CITExpo were actually a little sobering for European visitors. For example, it emerged during a chat at the stand of a reasonably well-known distributor that some tyres may be shipped to Europe even if they don’t entirely comply with REACH standards. In the course of another conversation, this time with the general manager of prominent distributor, it became apparent that the person in question had heard nothing about the upcoming European labeling that will potentially decide a brand’s success or failure in the continent’s tyre showrooms. And some exhibitors had no qualms about displaying green-coloured tyres that – as was discovered upon further investigation – in no way meet REACH requirements on PAH content in oils.

Experiences such as these awaken a sense of doubt about the seriousness, professionalism and competitive ability of many Chinese manufacturers and distributors. And as a matter of fact, Chinese made truck tyres have become thin on the ground since the introduction of REACH regulations in Europe as the use of PAH-free oils during the production process negatively impacts upon the tyres’ cost-benefit ratio and has reduced their competitiveness against European manufacturers’ second brands. At present perhaps only a handful of Chinese manufacturers and distributors are present in Europe with REACH compliant truck tyres. The situation for passenger car tyres is slightly different, however, as the influence of expensive raw materials upon unit price is not so great – it is said to be five to ten per cent, depending on cost fluctuations, compared with up to 20 per cent for truck tyres – and therefore the introduction of REACH regulations a year and a half ago had less affect upon the import of Chinese-made passenger car tyres.

Now Chinese manufacturers and distributors face another complication from European lawmakers: On 1 November 2012 the European tyre label comes into force. High requirements in the area of fuel consumption, wet braking and noise emissions, displayed as consumer information at the point of sale, should make it easier for purchasers to tell the difference between ‘good’ and ‘bad’ tyres.

Allen Tsaur, vice-president and general manager of Cooper Tire & Rubber’s Asia Operation, estimates that only some 20 Chinese manufacturers and distributors will achieve satisfactory label results. Many Far East factories previously aimed to lure end consumers solely through price considerations`, but now measurable performance characteristics are being added to the mix. The expenditure associated with testing for the EU tyre label is considerable, and thus in many instances a reluctance even to undertake such testing exists, especially if the label stands to further reduce a Far East supplier’s competitiveness.

A number of these manufacturers prefer to think of the European standards as disguised trade barriers rather than measures intended to protect consumers or the environment. Comments comparing the “honesty” shown by the US with its anti-dumping duty in comparison to a lack of European courage to openly take such a step were heard more than a few times during the CITExpo exhibition.

One way or another, nobody can dispute the positive effect EU regulations have had upon products intended for sale in Europe; some find it is perhaps rather convenient that a number of Chinese manufacturers and distributors have also simultaneously suffered.

During CITExpo, many Chinese companies stated to Tyres & Accessories that they initially anticipate reduced turnover in Europe – the implementation of REACH has already served to hinder some Far East players in the truck tyre market, and poor label results will further cloud the outlook for good business. And through their inclusion in the type approval of new tyres within Europe, the tyre label categories will in future only increase in importance.

Yet it doesn’t seem likely that the new regulations will comprehensively lock Chinese tyres out of the European market, particularly in the long term. “Our business will be damaged at first, but at the end of the day it is a chance for all manufacturers,” explained David Sun from the Aufine Group, a well-known distributor with a high eight-figure annual turnover. Lofty requirements within Europe “sometimes influence our turnover volumes,” he adds, noting that the company recently ceased shipping truck tyres to Europe. “But in the long term it will help us to enhance quality…We don’t want to produce any tyres that will be dumped into world markets.”

Techking Tires’ general manager also approached the subject from a pragmatic perspective and compared it with pupils’ experiences at school: Children with a strict teacher are challenged to perform better than those with softer, more relaxed teachers, Tech Wang comments. This is perhaps a telling comparison – pupils typically learn a great deal of new things over the years, and often it only takes a few years before they are on a par with their teachers. “We Chinese manufacturers are fed up with competing on price,” stated Tech Wang from Techking Tires. This is the wrong kind of competition. Wang is also well aware that many European distributors only look after their Chinese business relationships in order to round out the lower end of their product portfolios, and not so that they can offer yet another mid-segment brand. Nevertheless, Wang considers REACH and the tyre label the right move as both serve to further improve tyre quality.

Thoughts about better tyre quality preoccupy many Chinese tyre makers and distributors and are a reason why they tend to view solving the perceived European trade barriers as a “challenge” rather than an “obstacle”. At any rate, Allen Tsaur, Cooper’s head man in China, does not believe that the bulk of Chinese firms will be kept out of Europe in the long term as a result of beefed up legislation. In the short term, yes. But the Chinese are used to playing according to rules they have little influence over.

As already mentioned, the cost of Chinese tyres will keep on rising due to the ever-higher demands the European tyre market places upon it. On top of this, the cost of other production factors has also markedly risen in recent times. For example, according to official statistics the rate of inflation in China hovers at around five per cent or more. Yet it is widely known that the cost of living in Chinese cities and urban areas – areas where tyre factories and other industrial facilities are located – has become much more expensive. A factory worker earning between 2,000 and 4,000 yuan (£200 to £400) a month can barely make ends meet in such regions, and as a result many manufacturers are experiencing a severe “flight from the city” amongst workers. Furthermore, tyre makers must keep on digging deeper into their pockets in order to keep pace with other industries. As Allen Tsaur reports, tyre manufacturers in China must increase their wages by at least ten per cent every year in order to keep their fully stretched factories operating smoothly – or else they must implement further automation. Both options drive product prices even hire, both at home and in the European market. The US tyre maker’s vice-president and general manager of Asia Operations is well aware that such factors gnaw away at the competitiveness of Chinese tyres in Europe and other regions and are placing margins under strain. Therefore those nameless and often interchangeable Chinese tyres that fail to make the transition to the mid-price segment here in Europe are attracting ever fewer price-driven customers.

Chinese companies, however, wouldn’t have the reputation they have if they hadn’t also demonstrated their assertiveness. And if only a few Chinese tyre makers were able to secure a long-term place in Europe, the local tyre market continues to be highly interesting for companies from the Far East.