SRI to “optimise” tyre business portfolio

Tyre-related business profit at Sumitomo Rubber Industries (SRI) stood at 67.9 billion yen in 2016 and was still a respectable 41.4 billion yen in 2021, but last year dropped to 12.3 billion yen (£76.2 million; US$92.1 million). It’s therefore no surprise that SRI believes it has been investing too much capital in unprofitable businesses, and the company intends to change this. For the Tire business, this means a 30 per cent cut in consolidated SKUs, structural reforms and a redirection of personnel and resources into profitable areas. North America has been singled as a particular focus.

Sales revenue within SRI’s Tire business amounted to 939.9 billion yen (£5.8 billion; $7.0 billion) in 2022, up 18.2 per cent on 2021. But with Tire business profit down 70.3 per cent year-on-year and declining by 55.6 billion yen (£344.6 million; $416.2 million) between 2016 and 2022, driven in no small measure by worsening business profit in North America as well as a break-even point pushed ever higher by rising fixed and variable costs, SRI has announced a number of changes.

All options under consideration

For North America, this entails a “revamping” of profit structure, including an “overhaul” of the region’s production system. SRI has set out these planned measures in a newly-published Mid-Term Plan, explaining that it will work to improve profits in the region from now through to 2025 by “overhauling our production system.” We asked SRI what this overhaul entails and a representative within its head office in Japan explained that the company plans to improve productivity by implementing measures to prevent breakdowns caused by aging equipment, improving connections between processes and increasing the number of automated tyre-building machines in use.

In addition to “continually working to improve profitability” at its factory in Buffalo, New York, SRI’s roadmap for “rapidly improving profitability” in North America through 2025 sees it prepared to “consider all possible options to overhaul our profit structure in the region.” SRI does not elaborate on these options or what they may involve.

Last year’s sales volumes in North America only reached 82 per cent of 2021 levels and SRI is bracing itself for a further decline in 2023, with forecasts suggesting volumes will be eight per cent down on 2022. In spite of lower volumes, SRI managed to improve its product mix by “cutting back on the sales of low-profit products and taking other measures” and also by “proactively raising” prices.

The company also points to growing market share for passenger car and light truck tyres in North America. It reports that its piece of the pie has risen two percentage points since 2016 and stood at 4.8 per cent last year, with sales of the Falken Wildpeak series more than trebling during this period.

New plant in the Americas

Producing tyres close to where they’ll be sold is important for SRI as this offers a way to “mitigate the risks of tariffs and freight shipping costs.” Therefore, and notwithstanding lower overall sales volumes in recent times, the company intends to boost its manufacturing capabilities within the region beyond the 3,810 tonne per month production capacity that the Buffalo plant will possess by December 2023.

“With efforts to enhance our investment capacity already underway, we are actively looking into our options for a new production base in the region beyond 2026,” states SRI in its Mid-Term Plan. The tyre maker is not ready to reveal the locations on its shortlist, but SRI’s representative in Japan named “North America.” If we allow ourselves a spot of speculation, it’s conceivable that anyone wishing to lift profits would look closely at a country with lower manufacturing costs than the USA. At any rate, SRI says it is “in the process of conducting various case studies” at the moment and isn’t yet ready to share other details about the future plant, such as the type of tyres it will produce.

Revamping structures

At a global level, SRI intends to “optimise” its Tire business portfolio through “selection and concentration” while “pushing ahead with structural reforms where necessary” to ensure all business lines generate revenues. The company will shift personnel and resources toward growing and profitable lines of business and actively invest in these. The aim of these measures is to lower the business’s break-even rate and reinforce its “foundation for profitability.”

As of 2021, SRI estimates that 40 per cent of its Tire division’s invested capital went into businesses that delivered suboptimal profits or businesses needing structural reforms, and just 60 per cent in growing and profitable businesses. SRI’s representative in Japan told us that the company is currently “looking into each business” as part of its business portfolio management, but refrained from providing information about specific businesses requiring structural reform. Nonetheless, by 2025 SRI wants to rebalance its share of capital invested in growing and profitable businesses to 70 per cent.

The Japanese company’s Mid-Term plan shares an intention of “revamping groupwide production allocation” through the use of DX Management in order to optimise production and logistics. While it is tempting to interpret this measure as making cuts at some production sites and investments elsewhere, the SRI representative emphasises that “as of now, SRI does not have any specific plans to cut a certain production site and/or business line.”

Other changes on the cards related to “revamping management and organisational structures” include a 30 per cent reduction in consolidated SKUs. The company believes fewer SKUs will result in greater efficiency within its production, sales and inventory operations. SRI also aims to optimise raw material costs to “swiftly and flexibly” cope with “soaring market prices.”

Hitting key targets beyond 2026

The latest Mid-Term Plan outlines SRI’s efforts to hit five key targets, and it reports having already achieved one of these, sales revenues of 1 trillion yen (£6.2 billion; $7.5 billion). The company anticipates reaching the other targets “beyond” 2026: Business profit of 100 billion yen (22 billion in 2022) and a business profit rate of seven per cent (2.0% in 2022); ten per cent return on equity (1.8% in 2022); debt-to-equity ratio of 0.6 (0.7% in 2022); six per cent return on invested capital (1.7% in 2022).