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Editor's Notebook

Great Leap Forward?: Recall, Rebate Change Will Impact Tire Market. But How?

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Get used to seeing the word “China” in this issue. You can’t swing a useless semicolon without hitting it. It wasn’t intentional, just an odd confluence of events.

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Our cover feature, which looks at today’s new breed of imported tires, was decided some time ago. The recall and the change to China’s export taxes and the various items in Industry Report about China were pure happenstance.

But, this column isn’t about all that. Rather, it’s a step back to examine what the recall and value added tax changes will mean to your business.

As unfortunate as it is to Foreign Tire Sales – the New Jersey importer is facing bankruptcy – the recall should not be a surprise. No recall should be. The bad part is how FTS’ Chinese partner is reacting. Rather, avoiding.

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I doubt Hangzhou Zhongce Rubber Co., with its relationships with so many major tire brands, makes a bad product. I’m equally sure American private branders can vouch for their China-made tires. Mistakes happen, though, just as they do here. If Hangzhou Zhongce is guilty of anything, it is a lack of understanding about how things work here and about preserving valuable customer relationships.

The Chinese don’t like to be embarrassed, but they absolutely hate scrutiny. It’s not surprising that Hangzhou Zhongce has dug in its heels. But, with concerns about China-made goods – tainted dog food, toothpaste, exported food, toy trains, and now tires – HZ should be cooperating instead of posturing.

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To remain a viable exporter, China has to reach Western product safety standards. It cannot simply execute a few corrupt officials, as it has in recent weeks, for lapses in safety oversight. Nor can it troll Congress looking for relief.

American consumers demand tough laws to protect them from unexpected harm. As much as tiremakers loath the cost and complexity, they know such standards help more than hurt. None wants the negative publicity and added scrutiny a major recall brings.

That is not to say that Chinese-made tires – or those made in any other country – are slip-shod. But, smaller importers like FTS – and even the big boys – will have to tighten the reins on their Chinese partners, too. Otherwise these difficult recalls will happen again and again.

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The other lesson here is that insurance is a good thing. Importers need to make sure they’re covered and that their “partner” will back them up; if you’re a dealer, make sure the importer and wholesaler will stand behind their goods.

With imports making up 40% of all tires sold in the U.S. (China contributes nearly 32 million of them.), Americans wonder if these tires – be they from China, India or any other country – are subjected to the same rigorous testing as those produced by major names. It’s a very good question that deserves a realistic answer.

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State attorneys general are calling for investigations. Congress is looking for another “We did something” softball to hit. Expect a hard push to tighten safety standards on all imported goods, and higher costs for imported goods of all types.

At this writing, we still don’t have a complete dollars-and-cents idea of what China’s decision to reduce export tax rebates will mean. Other than higher prices, that is.

China taxes its exports (called a “value added tax”) but uses government-issued rebates – sometimes as much as 100% – to encourage economic growth. Huh, you say?

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China faced a classic economic Catch 22: it wanted to grow rapidly but had no real domestic consumer base to absorb the goods it could produce because it had few decent-paying jobs. No jobs, no money, no buying, no jobs.

Creating those much-needed jobs meant China needed customers, so it had to export heavily, then wait for the jobs to create a domestic consumer base. To keep things under control, the VAT rebate system was created. High rebates propped up goods China wanted to move; low rebates protected others. Kind of like how our Federal Reserve uses interest rates.

Domestic consumerism is growing nicely now, so the little export birdies are being pushed out of the rebate nest and will have to figure out how to fly.

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We do know that the cost of China-made tires will go up, but how much is anyone’s guess. Direct imports will be impacted, but so too will products carrying more familiar brand names.

How long will this rebate program last – a month, a year, forever? Will expected price increases be melded in with now-familiar “high cost of raw materials” price hikes? And, because not all the major names import from China, it will be interesting to see how the competitive balance shifts.

Some are quick to say the reduction in VAT rebates will close the pricing gap between China-made tires and the big brands, but that undefined “gap” may still be there once the dust settles.

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