Tyres & Accessories – Now that President Barack Obama has stuck an added import duty on all passenger car and light truck tyres from China for the next three years, what happens next?

Chinese tyre manufacturers won’t want to sell fewer tyres each year. But U.S. importers, consumers and manufacturers are equally unlikely to want to pay or absorb the additional costs. Tyres & Accessories spoke to a range of U.S., Far Eastern and Chinese companies and found that manufacturers are having to rely heavily on production flexibility, while traders are now setting their sights on one market in particular – Europe.

The Chinese tyre trader: Best Choice International

Stephen Wu, managing director of Chinese tyre trading operation Best Choice International, reports that orders from the U.S. came to a virtual standstill in July. Their strategy is now openly towards producing more European market oriented products: “We stopped an SUV/LT project and waited for the decision. And we produced more European UHP tyre sizes, not U.S. sizes.”

Companies like Best Choice are now prioritising orders in other markets – especially Europe – where they aim to sell the most popular sizes, UHP and winter tyres. Best Choice is apparently interested in other markets as well, but Wu refused to give further details at this time. As far as Best Choice is concerned there is now zero chance of getting orders in the first year of the tariff, except in the 19-inch and over category. As a result competition is likely to be based on just two factors: price and delivery time.

Stephen Wu described the tariff as a political decision: “The tariff is contrary to free trade spirit. [It] harms not only Chinese, but also U.S. people. More people will lose jobs, than the number of people that keep jobs. It’s not economical. Why does Obama support it? I think he want to exchange for the support of worker unions on other issues. So the Chinese suppliers and the U.S. tyre importers and distributors become victims.”

The Korean manufacturer: Hankook

Despite the fact that Hankook shares fell some 8% in the immediate aftermath of President Obama’s levy announcement, Hankook believes the U.S.’s decision to place added tariffs on Chinese tyre imports will not affect Hankook Tyre’s overall sales or profitability.

In response to the tariff news, Hankook plans to sell Korea-made tyres to the U.S. market, with company representatives saying Hankook factories are flexible enough to make this switch at short notice. “Thanks to Hankook Tyre’s fully automated, flexible and standardised production operations around the world, each of our factories is able to adapt and manufacture products within very short notice. You can see our new Hungary factory as a good example. Our European production base was able to take over various current patterns right from the start without any problem and within very short time,” Hankook team manager corporate communications Calvin Pak explained. So there won’t be any availability issues in the US market? “Speaking solely for Hankook Tyre: I don’t think so, because most of the U.S.-sold Hankook tyre types are already made in Korea,” he continued.

Pak also ruled out suggestions that the company’s decision to expand its Hungary plant was related to the tariff issue. “The whole output from our Hungary factory is designated exclusively to the European market and will be sold in Europe. These products do not really fit to tyres required for U.S. vehicles and vice versa. The factory is already running at full capacity because the demand for Hankook Tyres in Europe is strong due to our high quality and increasing reputation with both OEMs and consumers…The Hankook tyre factory in Hungary is a strategic investment and long term commitment. As you know we announced our recently published second phase investment…in 2006 during the groundbreaking.”

Hankook’s two tyre factories in China produce approximately 26 million tyres annually. Roughly 3.5 million are then exported to the US for sale. About 2.7 million units of these are destined for the replacement market and 800,000 for OE. U.S. news reports suggest that 30% of Hankook’s total U.S. sales are made from tyres produced in China. A further 3.4 million tyres manufactured at Hankook’s Chinese plants currently come to Europe each year, with 2.7 million designated for the replacement market and 700,000 for OE. Approximately 50% of Hankook’s China-made tyres remain in that country.

So will European market distribution be affected by the changes in the international network of factories? “Hankook Tyre has a strong position in the Chinese domestic tyre market. We are a leading company in the Chinese local market in terms of market share, and because we have been conducting marketing activities for a long time, there will be no problem in expanding local sales and sell more China-made Hankook Tyres to the domestic Chinese market,” Pak explained, adding that Hankook aren’t worried about an influx of additional Chinese tyres into the European marketplace.

“Our position is much stronger than years ago. We have invested in brand reputation/image and the consumers nowadays respect Hankook Tyre as a young dynamic brand of high quality. Please do not forget that we today are manufacturing OE tyres to some of the most respected car manufacturers like Audi and Volkswagen directly to the companies’ head plants in Germany.

U.S.-designated China-made tyres will mostly not fit to European cars, so they cannot be simply shipped and sold to Europe. The production has to be switched to EU-standard products. Many of our competitors do not have a similar flexible production, equal to Hankook Tyre.”

Chinese manufacturers

China’s largest tyre manufacturers are generally unwilling to speak out in reaction to the levy news, instead preferring to let industry body China Rubber Industry Association (CRIA) speak on their behalf. In an open letter of complaint sent to President Obama on Sept. 12, CRIA “strongly protested” the ruling and questioned the figures it is based on.

They believe Chinese-made tyre imports into the U.S. increased just 2.2% in 2008 and actually dropped 16% in the first half of 2009, meaning there hasn’t been a significant increase.

In addition, the association requested that the Chinese government take “anti-sanction measures on U.S. products,” a disclosure that is likely to have been influential in the Chinese government’s decision to launch its own counter attack.

The open letter was signed by representatives of South China Tire & Rubber Co. Ltd., Hangzhou Zhongce Rubber Co. Ltd., Aeolus Tyre Co. Ltd., Shandong Linglong Rubber Co. Ltd., Nanjing Kumho Tire Co. Ltd., Giti Tire (China) Investment Co. Ltd., Shandong Yongtai Chemcial Group Co. Ltd., Fullrun Tyre Corp. Ltd., Sichuan Tyre & Rubber Co. Ltd., Beijing Capital Tire Co. Ltd., Hankook Tire China Co. Ltd., Sailun Co. Ltd., Qingdao Yellow Sea Rubber Co. Ltd., Qingdao Doublestar Tire Industrial Co. Ltd., Triangle Tyre Co. Ltd., and Guizhou Tyre Co. Ltd.

However, after Wall Street Journal published an article entitled “Giti Treads Back Home,” suggesting Giti Tire will now focus on domestic market sales following the import ruling, company representatives kept their options open. Herve Richert, Giti Tire’s director of international sales and marketing, said the company will continue taking a long term perspective and remains committed to serving customers in all markets and segments it is presently involved in “we do not intend to engage in any dramatic shift of focus,” he said.

However, if Giti’s financials are anything to go by, there are real advantages to selling more tyres on the domestic Chinese market. According to the Wall Street Journal, Giti’s gross profit margin on its domestic sales averaged 25.2% in the first half of 2009, compared with 18% for its exports.

Chinese companies and those producing in China have only two options: Pull out all the stops and sell into any market where they can get a good price or build up sales in the domestic market. In either case competition is likely to be fiercer than ever with more rivals than before.

Then there is the as yet unanswered question of whether or not the European Parliament will implement anti-dumping measures of its own. Member states are unwilling or unable to do this unilaterally, but the jury is out as to whether they will corporately and if so in what timescale.

Given Europe’s recent track record, using legislative measures as a kind of back door levy is much more likely. If rules demanding high quality standards can be brought in, such as the S-mark laws, perhaps the numbers of cheaper products can be limited. The problem for the European Parliament here is time.

With the U.S. tax lasting just three years, judging by the snail’s pace at which the European legislature normally moves, the levy period would be over by the time any new rules are introduced. So for European tyre buyers the laws of supply and demand would seem to suggest now is a good time to source Chinese products.