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Moving Target: Dealers Need Sure Footing to Take Accurate Aim in New Tire World

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There’s a growing phenomenon imposing its will on the tire industry these days. It’s called “global warming,” but it has nothing to do with the weather. It has everything to do with “warming up” to imports and overseas suppliers.

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North American tire dealers – retail and commercial – have certainly seen their brand options increase dramatically in recent years, and some wholesalers have become either the “exclusive” distributor for certain overseas brands or have taken on multiple import lines themselves.

Why the increased interest in imported lines – particularly those made by Chinese producers?

As in real estate, there also are three important forces driving the tire market. However, in this case, the mantra is ‘price, price and price.’ And because Americans are more comfortable with the global marketplace, location – where tires are made – isn’t as much an issue today as it was 15 to 20 years ago.

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For a quick example, Wal-Mart used to tout its “All-American” product offering. Now Wal-Mart is one of China’s largest single trade partners – and price was the main driver of that change.

Many in the tire industry – participants and observers alike – will publicly declare that price is not an overriding issue, but their actions speak differently. If price weren’t a major consideration, why are tire companies importing to begin with? With more than 300 quantifiable tiremakers in China alone – all competing for the same business – price has to be an issue.

“Price is important,” says Aaron Murphy, vice president of China Manufacturers Alliance (CMA), a unit of Shanghai Tire & Rubber Co. that markets Bluestar, Dynastar and Warrior brands in the U.S. “But, many fall into a trap of thinking that the acquisition cost is all you consider when purchasing a line of tires. If consistent warranty problems or quality fluctuations arise, and your customers and consumers are not satisfied with the product you supply to them, your long-term costs and profitability will be affected dramatically.”

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Some observers feel that import tire quality issues are improving and, with careful monitoring, will continue to improve. In addition, they believe that consumers looking for the best deals have reluctantly accepted the fact that many of the tire products they buy are being imported.

However, the potential for disaster exists, as we have seen with the recent recall of Chinese made light truck radials (see sidebar).

Today, for the savvy tire dealer, careful consideration of all the issues that come with selling products sourced from outside the U.S. is becoming an integral element of the business plan.

Even the smallest, most independent tire dealer needs to think about this big issue. It’s a whole new tire world out there.

Recent U.S. Commerce Department data indicates that, in the first quarter of this year, more than $1.2 billion worth of tires were shipped into the U.S., an increase of more than $70 million from last year’s same timeframe.

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The trend has increased steadily from 2001, when a total of $1.7 billion in tires were shipped over the entire year. In 2006, there were $4.8 billion in tires shipped.

It is estimated that, by 2010, the world’s annual tire production will reach 1.7 billion units – up from 1.4 billion in 2004. Most of that growth will come from China, India and Eastern Europe.

CMA’s Murphy recognizes the validity of the import tire data. “When you look at imports themselves – from all countries – they are up in all tire categories by 3.1% over 2006,” he says.

Figures supplied by the RMA (essentially from the U.S. Commerce Department), say that total import shipments in 2005 (including OE and replacement markets) hit 140 million tires – more than 40% of the U.S. market of 341 million tires. In 2004, imports accounted for 34% of the market, and in 2003, they represented 31%.

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There’s anecdotal evidence to support those hard facts, too. Twenty years ago, no more than a dozen U.S. tire dealers carried Asian-made brands. Today, Asian brands are appearing in many retail outlets across North America: Kingstar, Maxxis, Federal, Wanli, Gateway and many more. Not to mention the “traditional” major brands dealers are familiar with: Toyo, Falken, Sumitomo, Hankook, Kumho and Yokohama. It’s easy to forget that those brands were once imported by the container-load and sold to wholesalers looking for price alternatives.

Profitability has never been a four-letter word in business, and in the tire industry, participants have much more to choose from today; never before has the industry been so global and open. Tiremakers from across Asia, India, Russia and further points east have North America clearly in their sights, and major tire players are looking at these regions as resources for low-cost tire production.

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Indian and Russian tire brands have already pushed their way into Europe. That means that, before long, more offshore options may well be making their way to North America, nipping at the heels of not only the established major brands but also the first wave of Chinese and Southeast Asian makes.

Still, a company cannot stay in business very long if its product – regardless of pricing issues – does not meet certain expected quality levels.

Aaron Murphy’s “law” – really a caveat – cautions dealers to do their homework when it comes to unfamiliar import lines.

“As tire factories have proliferated in size and type,” Murphy says, “the number, style and version of tires is overwhelming, and quality can be suspect in certain instances. When having a direct relationship with a manufacturer, your exposure to unwanted problems is limited. Warranty, quality of products, quality of skilled workers at the manufacturing facility, services by the manufacturer, liability coverage limits, product performance and others are all important factors when determining your sourcing strategy.”

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Xinhau Economic News of Beijing recently reported that China had surpassed Germany in the first quarter of this year as the second-largest exporter of automotive parts to the U.S. China exported $1.94 billion worth of auto parts to the U.S., according to Commerce Department stats cited by the newspaper. Japan is still the export leader to the U.S., at $3.57 billion.

Importing products into the U.S. is certainly not a new phenomenon. What has caught people’s attention – inside and outside the tire industry – is China.

With 2006 production of 283 million tires, China’s tire industry is large and, bolstered by the rising fortunes of automobile manufacturers there, poised for even greater and faster growth. And, even as the domestic Chinese auto industry absorbs more locally produced tires, China’s exportation of tires is not expected to flinch – too much.

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Certainly, a large portion of China’s overall tire exports can be tied directly to large, multinational producers like Goodyear, Cooper, Bridgestone, Hankook, Michelin, Kumho and Yokohama, and North American private branders have also turned to Chinese producers to fill their product needs. Still, more and more less obvious brand names are making their way across the Pacific.

Some of the major Chinese manufacturers are Shanghai, which markets the Double Coin brand and distributes in the U.S. through CMA; Hangzhou Zhongce Rubber, owner of the Westlake brand and a source for a number of majors; Cheng Shin, based in Taiwan, which manufactures tires for the Maxxis brand in the U.S.; Triangle, which produces tires for GPX International Tire; and Guiyang Tyre and Jiangsu Tyre, which makes lines for American Pacific Industries.

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GITI Tire, headquartered in Shanghai, is one of China’s largest tire companies. GITI distributes its products through an extensive sales network in China and exports to more than 80 countries around the world.

CMA has been importing Double Coin tires into the U.S. since 1992. It also has a joint venture with Michelin called Shanghai Michelin Warrior, which produces both Warrior and Michelin brand tires for the Chinese domestic market.

“Double Coin, which is our brand, is developed and manufactured as a premium product and marketed as the premium tire from our factory,” Murphy adds. “It is our responsibility to grow the brand awareness, sales and market acceptance of Double Coin tires, which we do on a daily basis.”

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Jeff Kreitzman, president of American Pacific Industries (API), has been in the import tire business for 28 years. The self-proclaimed “MBA in Chinese tires” formed CMA and left that company four years ago to create API, which markets Achilles, Pegasus and Wynstar (made by Shanghai Warrior) brands.

Like Murphy, Kreitzman also offers buyer-beware counsel.

“China isn’t the end-all of end-alls,” he says bluntly. “It’s not so cheap any more. There are many inefficiencies that cause costs to go up. And, service from China isn’t that good.”

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Some of the inefficiencies that Kreitzman mentions occur in freight, electric power and labor. “China is unlike Japan or the U.S.,” he says. “Have you ever heard that a Michelin plant was shut down because of a power outage? Have you ever heard that a plant in the U.S. went down because workers went on holiday and didn’t come back? These things have happened in China.”

While China is the current recherchÉ entrÉe for the industry, there are other emerging markets starting to appear on the preferred menu.

One of those markets happens to be Russia. Today, Russia is growing and starting to become a possible alternative to Southeast Asian sources.

The major tire manufacturer there is Sibur-Russian Tires, which operates factories in six locations: Omsk, Uralsky (Ekaterinburg), Voltire (Volzhsky), Yaroslavl, Dniproshina and Rosava (Belotserkov). Combined, those facilities have an annual production capacity of 23.6 million tires.

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In a recent edition, Tyres & Accessories, a European trade publication, reported that Sibur-Russian is actively looking for a joint-venture partner and “is willing to forego majority status in the joint-venture bid… And, we are ready to give over operational control and technological oversight,” said business development director Igor Karavaev. Karavaev told Tyres & Accessories that the company’s intention was to become “one of the best in the world.”

According to the publication, Sibur-Russian Tires has “annual sales of around $800 million and debts of only $100 million…the company has a good credit rating and is willing to go to great lengths to achieve this end.”

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However, others have encountered some difficulties when working in Russia. In 2002, Continental AG announced it would spend almost $30 million in a joint venture with Moscow Tyre Plant. That plan fell apart, and there were later rumors that Conti would hook up with former Amtel Group (now Amtel-Vredestein).

Those discussions ended without resolution, but this past April, Continental acquired a controlling stake in Slovakian tiremaker Matador and by default became a partner to Sibur-Russia Tires via an already existing joint-venture Matador-Omskshina.

Amtel-Vredestein, created by the former’s 2005 purchase of Dutch tiremaker Vredestein Banden, has suffered its own growth troubles. Built out of a collection of once state-owned tire plants, Amtel spent millions on upgrades and acquisitions – including hundreds of retail tire stores across Russia. Financial results haven’t been that strong, and in recent months there has been an exodus of top management, including CEO Alexei Gurin.

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However, for the time being, it doesn’t appear that any U.S.-based manufacturers or wholesalers are taking big plunges into the Russian market.

“We haven’t seen any opportunities there yet,” says API’s Kreitzman of Russian makers. “Maybe there’ll be some opportunities down the road. Companies will always go where there is cheap labor, but you still have to ensure that you are getting a quality product for your customer.”

“Private brand tires are very important for manufacturing metrics and production,” says Murphy. “Marketing and sales of these tires are up to the owner of the brand, not particularly to the manufacturer.”

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Alternately, Goodyear, Bridgestone/Firestone, Continental and Michelin have cut back dramatically on their private label production business. That’s why private branders have seen the need to find sources of supply outside of North America.

Interco Tire Corp. of Rayne, La., is one of 35 private brand tire marketers in the U.S. Interco specializes in performance tires for use primarily on four-wheel-drive light trucks and ATVs. Warren Guidry founded Interco in 1975 after branching off from a family business started by his father in 1947. Warren’s son, David, joined the company in 1982.

But, regardless of the source or the brand, one of the main hurdles to successful importing is liability – on both sides of the fence.

“Sourcing high-quality tires from overseas manufacturers has become a factor with most private brand marketers,” Guidry says, citing the high cost of litigation and regulations.

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“We all want the lowest cost, but we absolutely cannot sacrifice quality,” says Guidry, who adds that, despite sourcing from overseas for years, he is constantly vigilant on product quality. No importer – or tire dealer – wants to be on the receiving end of a product liability lawsuit.

“CMA carries large amounts of product liability insurance as a security blanket for those who purchase our tires,” says Murphy. “We also employ U.S.-based insurance corporations and settling agents in case a product liability claim should occur. When necessary, we employ global coverage on product liability limits.

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“Product liability limits are extremely important in today’s economy. Many brokers/importers may not have the coverage limits necessary, based on the product lines they import. In addition, many do not employ U.S.-based settling agents.”

While sourcing from non-multinational manufacturers has been a cautious step taken by many, the major tiremakers have been able to control their overseas and joint-venture facilities in much the same way they conduct business in domestic markets.

Michelin, Bridgestone, Goodyear, Carlisle, Cooper, Continental, Hankook, Kumho and Toyo – just to name a few – have been, for the most part, quite successful in establishing offshore bases of operation. However, because of sensitivities to American labor and perception issues, most of the majors prefer publicly to sidestep the impact of imports on their businesses.

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Goodyear’s recent comments in its first quarter 2007 financials generally reflect the stance taken by several of the majors. Looking to reduce costs by $1 billion by the end of this year, Goodyear’s strategy includes a greater reliance on offshore – primarily from China – tire production.

“Our expected cost reductions over this period include between $200 million to $300 million of estimated savings related to our Asian sourcing strategy of increasing our procurement of tires, raw materials, capital equipment and indirects from Asia,” the company statement said.

“Concurrently, we plan to make investments in our existing facilities that will increase our production capacity in low-cost countries by one-third to support growth in emerging markets,” the statement continued. “These investments are part of our strategy to have approximately one half of our manufacturing capacity in low-cost locations within five years.”

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“One half” for Goodyear is a lot of tires.

Where is the future for the import business? Besides China and other aforementioned Asian countries, Brazil could be an option, but the past volatility of its currency has caused some concern.

“You still have India and Indonesia, and Vietnam is emerging,” said Kreitzman. “Everyone is still going to flock to China, but it’s not just an easy path. It’s not the Great Frontier.”

India could be a solid front-runner. Indian tiremakers have already established distribution across Europe. Language, cultural and technical infrastructure issues are not a dramatic a hurdle as they have been with China.

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“It’s not a matter of what’s better, Kreitzman said. “You have to look for solid opportunities. Look at costs, but you also have to look at a lot of other things – equipment, technology, etc. As a company our size, you want other options to manufacture our products. We have to leverage ourselves.”

CMA’s Murphy offers another alternative. “While you can manufacture things in China, the price of doing business there is getting more expensive. The dollar is no longer as strong as it once was.

“I think the next big market will be Africa,” he says. “It has a huge population base like China and many people below the poverty line. I also think Vietnam will do similar to what Korea and China have done but can capitalize on this industrial revolution. However, that could be five or 10 years as we evolve.”

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