Nokian Tyres’s Romania plant breaking ground in May 2023, 2-3 offtake deals to fill production gap

Nokian Tyres’s well-publicised exit from Russia has left it with a similarly well-reported production gap that continues to impact the company’s ongoing business. Speaking as part of the company’s first quarter 2023 results presentation, Nokian Tyres executives emphasised that “new capacity is our #1 priority” and shared further details of how they are planning to fill the firm’s production gap. We already knew that Nokian plans to expand its existing factories in Nokia, Finland and Dayton, USA as well as build a new factory in Romania and make off-take contracts with third-party manufacturers, what’s new is the detail and time frames associated with “building the new Nokian Tyres”.

First off, it is worth pointing out that the most senior executives are now directly acknowledging the scale of the battle of building the new Nokian Tyres. Specifically, CFO Teemu Kangas-Kärki admitted that “despite capacity expansions in Finland and the US and new contract manufacturing agreements, sales volumes will decrease in 2023.” Considering the fact that executives also described the current Nokian tyre production portfolio as “world-class” and the best it has ever been, that is not because of the products. Rather, reduced tyre sales volumes projections should be interpreted as a reflection of the reality that the company simply won’t be able to supply as many passenger car tyres as it sold in the past. And that all puts the spotlight on how Nokian is filling its tyre production gap.

The obvious solution is to expand tyre production at existing facilities. However, as we have seen before, that approach doesn’t offer enough capacity nor does it offer passenger-car-tyre-specific capacity to fill the production gap left by the exit from Russia. That leaves just two options: the new factory in Romania and off-take deals.

2 to 3 off-take deals

Up till now, Nokian Tyres has only really talked about one off-take agreement with one manufacturer – Sentury. As we pointed out at the time, that partnership was unlikely to be able to offer the complete 2-3 million tyres a year production capacity target. Now, Nokian executives are explicitly addressing that reality by offering further details of how its “virtual” manufacturing strategy will work.

Firstly, executives are talking about having between two and three off-take agreements. They conceded that there are “no unlimited sources” of production capacity and therefore the implication that those agreements will be with a total of two to three different tyremakers.

So far, two contract manufacturing deals are said to have been struck. We know the first one was with Sentury. The identity of the second tyremaker has not been revealed. However, Nokian’s close historic relationships with Bridgestone and Giti Tire suggest that those businesses would be at the front of the list of potential partners.

What Nokian’s senior executives did say was that the company’s off-take partners are “very serious” players making tyres for “other international businesses”, adding that all the partner operations will be audited on a regular basis.

Would Nokian ever consider buying its off-take partners? Not at this point, since executives want to focus capital on building their own capacity. However, CEO Jukka Moisio certainly didn’t close that door and appeared open to reviewing the company’s position in relation to mergers and acquisitions after the current investment phase.

Off-take capacity is expected to hit 1.5 million all-season and winter tyres during 2023 (presumably with). In 2024, that figure will rise to 3 million all-season, winter and summer tyres made in association with at least two contract manufacturing partners. In 2025 off-take capacity will also total around 3 million tyres across the summer, winter and all-season segments, made by two to three production partners.

At that point, the need for off-take capacity will be reviewed based on Nokian Tyres’s combined Dayton, USA; Nokia, Finland; and Romania production capacity. But is it worth pointing out that both the heading “contract manufacturing is an important part of our future production portfolio” and the language of “virtual manufacturing” suggest off-take could be more than a temporary capacity solution for the new Nokian Tyres.

Romania tyre factory groundbreaking scheduled for May 2023

Details of the tight schedule relating to the construction of the Romania tyre factory were also revealed. The new tyre plant will break ground in May 2023, with the first tyres set to roll off the production line by the second half of 2024 on the way to first phase annual production capacity of 6 million tyres a year. Another slide suggested that Romania will overtake Finland as the largest production base in 2027.

Not only does that suggest it will take around three years for Nokian Romania to go from the production of its first tyres to full speed, it lends support to the suggestions that company is earmarking that land for off-highway tyre production rather than for making passenger car tyres.

As far as costs and margins are concerned, completion of the new Romania factory is critical, with executives conceding that leaving Russia also means leaving the position of a 10 euro per tyre cost advantage. Moving forward, the Romania factory will offer the lowest cost per tyre produced. Nokian’s US and Finland operation are said to rank on the same level in terms of cost.

Nokian executives are confident that they will be able to meet its own “tight” deadlines. That confidence is based on the fact that so much is already in place. Indeed, the required machinery for the Romania factory’s installing phase, which naturally follows the ground-breaking and construction phases, was already ordered during 2022.

But it is not just about meeting the tight deadline for the construction of the factory. There is also the hard-to-predict lead time till the factory is fully up to speed matched with the available capacity at the contract manufacturers. That reality means Nokian is not only facing its own tight construction deadlines, but a complex logistical balancing act that is probably best described as a tightrope.