Bridgestone’s Russia plant means more competition for Nokian and others

Bridgestone’s decision to open a tyre manufacturing plant in Russia is likely to result in more intense competition between the non-domestic tyremakers in general as well as Nokian in particular. The news also appeared to dash hopes that Bridgestone (Nokian’s biggest single shareholder) might buy it out at some point (see below).

Now that Bridgestone has shared details of its plan to build a passenger car tyre ready to produce tyres in 2016, the race is on to assess the impact of the move on the current market situations. Indigenous tyremakers such as Nizhnekamskshina aside, there are two reasons why this announcement means more intense competition than ever between the likes of Pirelli, Yokohama, Continental and especially Nokian (for which Russia is a key profit centre) and Bridgestone.

This is firstly because there are doubts about the future outlook for the Russian market. According to financial analysts at Morgan Stanley, the Russian market is “deteriorating as we speak” driven down by decelerating car sales and slowing economic growth. At the same time, the fact that European tyre markets are – as the ETRMA, third party data providers and the analsyts say “structurally and cyclically challenged”, there are very limited options of where to sell when a competitor gains share and when the distribution chains says its inventories are “definitely not low”.

This in turn puts pressure on prices and in turn on the margins of those competing for the same share. This factor is particularly marked for Nokian, which generates greater than 40 per cent and perhaps as much as 50 per cent of its margins in Russia.

As the Morgan Stanley analysts wrote in their investors note dated 15 April 2013, this may not be a short term issue for Nokian. While there is a few years before Bridgestone Russian capacity comes on stream, the company is facing clear risks both in the short and medium-term. Nokian’s saving grace is the fact that it has a strong distribution network in Russia and former soviet states. As the analysts observed, this thesis could be wrong if “Nokian leverages its distribution network in Russia beyond…expectations and maintains its share and pricing power”.

Nokian shares fall following news of Russian plant

Of course the proof of any financial thesis is in the eating. According to financial news sources, Nokian shares fell 3.8 per cent Bridgestone announced the Russian factory news. However, this is likely to have been due to the fact that Bridgestone is Nokian’s largest single shareholder rather than the complexities of tyre market positioning. Indeed, it appears that some of those hoping that Bridgestone was angling for a Nokian buy-out at some point have become disillusioned and exited their positions. However, it has to be said that the decline in share value can also – to some extent – be explained by shorting recommendations from some market watchers.

“Some investors had hoped that Bridgestone would at some point buy Nokian Renkaat out. But now as they chose to make its own greenfield investment in Russia, that scenario has become very unlikely,” said Reuters quoted analyst Sauli Vilen from Inderes Equity Research as saying, adding: “Another negative thing for the stock is of course the increased competition in the future.”

Having said that Bridgestone currently continues to own 15 per cent stake in Nokian.

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