The Chinese tyre industry’s current struggle for survival

China’s economy appears to have stalled since 2022. Recent data shows that the value-added of the manufacturing fell by 4.6 per cent year-on-year in April. An integral part of the national manufacturing machine, China’s tyre industry is also under pressure. “The most important task of our enterprise at this stage is to survive,” one Shandong tyre factory owner told Tyres & Accessories.

Specifically, slim profit margins – something small and medium-sized Chinese tyre manufacturers are widely known for – have become a wider industry dilemma. Data from China’s National Bureau of Statistics shows that Chinese tyre companies produced about 64.71 million tyres in April 2022, a year-on-year decrease of 21.3 per cent. China’s total tyre production was approximately 271.02 million units from January to April, down 8.4 per cent from the same period in 2021. Low profits and pessimistic economic operations have become an embarrassingly accurate portrayal of many tyre companies’ operations. “The current situation is that the domestic market is severely shrinking, and factory inventories continue to rise. We have to make appropriate adjustments to production plans and reduce production,” said one tyre company executive.

The downturn in the market is an important explanation as to why China’s tyre companies are in trouble. During the Chinese New Year in February 2022, tyre dealers embarked on a large-scale stocking exercise compared to the practice of previous years. Subsequently, the lockdown severely affected tyre sales. An all-steel radial tyre dealer specialising in selling a Chinese brand said: “In previous years, we could sell about 3,000 units a month, but this year’s monthly sales are only about 1,000.” The decline in sales means that dealers still hold extensive inventories and are less eager to buy from manufacturers. Meanwhile, the impact of the lockdown on the supply chain is apparent. The tyre makers have been unable to regularly supply dealers across the country due to logistical disruptions over the past few months. In general, the combination of market downturn and poor logistics has led to difficulties in the operation of tyre companies. T&A has learned that many Shandong tyre factories’ inventory had crossed the warning line.

In addition, rising prices of energy and raw materials have squeezed product margins to a certain extent, making some manufacturers unprofitable. Affected by many factors, such as the Russian-Ukrainian war, China’s energy prices have been high in the past few months. The market prices of raw materials such as natural rubber, synthetic rubber, steel cord, and carbon black have also increased significantly. Although tyre companies have stable supplies, their production costs are also much higher than in the same period in 2021.

Exports temporarily benefit tyre companies

Another industry source told us that poor logistics, which prevented goods from being delivered to ports, had reduced China’s tyre exports to a certain extent. Meanwhile, the sharp shipping costs have also caused the Chinese tyre industry to lose many foreign trade orders.

According to Chinese customs data, 35.05 million new pneumatic rubber tyres were exported in February 2022, down 15.6 per cent from the same period in 2021. This figure was 47.27 million and 46.18 million in March and April, respectively, down 7.3 per cent and 2 per cent year-on-year. It is worth noting that while the export volume of China’s tyres has declined, the export value has increased significantly. Taking the data of March 2022 as an example, the export volume of China’s new pneumatic rubber tyres fell by more than 7 per cent year on year, but the export value increased by 5.5 per cent to about 10.07 billion yuan. This shows that the export price of Chinese tyres has increased significantly compared with the same period last year. Some analysts believe that with the gradual end of the lockdown and the drop in shipping prices, China’s tyre exports, especially the export volume, still have great potential for improvement.

The rapid depreciation of the yuan (RMB) exchange rate after late April is also good news for China’s tyre exports. According to people familiar with the matter, some tyre factories in Shandong have received unexpected orders in May because of the yuan’s devaluation, which has given some hope to some tyre makers with high inventories and low operating rates. However, other people in the industry expressed their concerns: “The long-term devaluation of the RMB may have a certain impact on the Southeast Asian tyre factories belonging to Chinese companies.” In his view, the global market, especially the European and American markets, has not grown in demand for tyres, and the unexpected foreign trade orders obtained by Chinese factories are all transferred from Southeast Asian factories.

Short-term perspective versus long-term perspective

Therefore, in April 2022 and beyond China’s tyre industry is indeed facing difficulties. According to the China Rubber Industry Association statistics, 10 key tyre companies’ output fell by more than 10 per cent month-on-month, and their inventories increased by more than 40 per cent. During the same period, these enterprises’ operating rates for all-steel radial tyres and semi-steel radial tyres were only 66.1 per cent and 74.5 per cent. However, from a short-term perspective, China’s tyre industry has the possibility of recovery soon. The lockdown will eventually end, and logistics will return to normal. After the unblocking, the favourable economic policies introduced by the Chinese government are likely to be able to recover the current sluggish market. According to this scenario, tyre manufacturers are expected to reduce factory inventories shortly, thereby improving their operating conditions.

Meanwhile, many tyre companies have raised tyre prices to hedge against rising energy and raw material prices in the past few months. In the short term, the situation where production costs squeeze the profit of tyre products should improve.

From a long-term perspective, the rise and fall of China’s economy will ultimately determine the prosperity and depression of the Chinese tyre industry. Although the operation of tyre companies may improve quickly, it will become more difficult in a long time. Tyres & Accessories has learned that many tyre practitioners are pessimistic about the long-term trend of China’s economy in the future. An industry insider said: “The era of rapid economic development in China may be over, and tyre companies should be prepared for long-term hard work.” He said that it is easy to restore logistics, but the negative impact of the lockdown on Chinese consumption habits and confidence will not be eliminated in a short time. In addition, the increasingly complex and severe geopolitics between China and Western countries has also discouraged many people from being blindly optimistic about the Chinese economy. These pessimists believe that China will be in an economic depression for a long cycle of several years.